Couple of years ago, the Banking and Finance sector got a surprise (pleasant for some) when the Government announced the withdrawal of the controversial Financial Resolution and Deposit Insurance bill. This decision continues to haunt the sector as there continues to be a gap in the framework governing the stress in financial services providers (“FSPs”). Till the advent of Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”), the Insolvency and Bankruptcy Code, 2016 (“IBC”) did not extend to FSPs. Even today, the FSP Rules are applicable only to notified non-banking finance companies (“NBFCs”) which are NBFCs (including housing finance companies) with an asset size of over INR 500 crores. The regulatory framework if any other FSP were to face liquidity issues or fail remains primarily with the respective regulators. The IL&FS crisis and the continuing stress in the banking and NBFC sector are a direct indication of the incipient stress, necessitating the immediate need for a holistic regulatory framework for all types of FSPs.
The FSP Rules state that the provisions of IBC relating to the corporate insolvency resolution process (“CIRP”) of the corporate debtor mutatis mutandis apply to the insolvency resolution process of a FSP subject to certain key modifications, which are:
The only case where the FSP Rules have been applied is where the RBI initiated insolvency proceedings against DHFL in December 2019. The practical impact of this is too soon to assess.
All other stress in the sector, be it of marquee NBFCs, cooperative banks or of other banking companies, are being resolved through private negotiations, regulatory intervention and in some cases, government action.
Given that FSPs have a connected and integral part to play in the maintenance of financial stability of the economy, the protection of the rights of their deposit holders, if any and the protection of the linked economy that they service (as more often than not they are the bankers / service providers to various corporate debtors, who may be in stress themselves) is also paramount. It has been publicly announced that the FSP Rules are “an interim measure” and thereforewhile the lone case may be a case study, the other FSPs such as banks, insurance providers, clearing corporations, stock exchanges, etc. are matters of a different study altogether.
As we continue in lock down, it may be an appropriate time to revisit the principles of Resolution Corporation and look for a holistic solution to the inevitable stress and not let problems dictate the solution in the days to come. Each FSP in isolation may not necessarily be “too big to fail” but they certainly are big enough to not be in a vacuum of lack of a holistic unified regulation.
Contributed by: Veena Sivaramakrishnan, Partner; Saurav Roy, Associate; Jasraj Narula, Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
The Bar Council of India does not permit solicitation of work and advertising by legal practitioners and advocates. By accessing the Shardul Amarchand Mangaldas & Co. website (our website), the user acknowledges that: