The Insolvency and Bankruptcy Code, 2016 (‘IBC’) initially excluded Financial Service Providers (‘FSPs’) from its scope. However, section 227 of the IBC empowered the Central Government, in consultation with the appropriate financial regulator, to bring FSPs, or categories thereof, within the purview of the IBC.
On November 15, 2019, the Central Government exercised this statutory power and issued the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (‘the Rules’).3 The Rules enable such FSPs or categories of FSPs, as may be notified by the Central Government under section 227 from time to time, to be resolved under the IBC, albeit with certain procedural modifications under the Rules.4 Immediately afterwards, the Ministry of Corporate Affairs extended the Rules to Non-Banking Finance Companies (‘NBFCs’) including Housing Finance Companies (‘HFCs’) with asset size of Rs. 500 crore or more.5 In parallel, the Reserve Bank of India (‘RBI’) superseded the board of Dewan Housing Finance Corporation Ltd. (‘DHFL’), appointed an administrator as well as an advisory committee.6 The RBI then initiated an insolvency proceeding under the IBC against DHFL.7 Subsequently, the National Company Law Tribunal (‘NCLT’) admitted the insolvency application filed against DHFL making it the first FSP to be brought under the ambit of the Rules.8 These developments come at a time when several other FSPs such as Punjab and Maharashtra Co-operative Bank Ltd. (‘PMC’), and Infrastructure Leasing and Financial Services (‘IL&FS’) have also experienced acute financial distress.
Initially, Indian policymakers had envisaged that a separate law – the Financial Resolution and Deposit Insurance Bill, 2017 (‘FRDI Bill’) – would deal with resolution of FSPs. It was expected that the IBC and FRDI law together would provide a comprehensive resolution mechanism for the economy.9 The FRDI Bill was introduced in the Parliament on August 10, 2017 and was referred to a Joint Parliamentary Committee. However, there was considerable controversy in the public domain about the bail-in clause in the bill. Apprehensions were raised that this clause would essentially permit use of depositors’ money to bail out banks.10 Moreover, there were concerns regarding the adequacy of deposit insurance cover as well as the application of the resolution framework to public sector banks. Due to these controversies surrounding the bill, the government withdrew the FRDI Bill in July 2018.11 It is unclear whether the FRDI Bill will be reintroduced anytime soon.
The lack of an appropriate legal framework for resolution of FSPs also resulted in some anomalous outcomes. For instance, the NCLT in Apeejay Trust v. Aviva Life Insurance Co. India Ltd., held that an operational creditor who has a claim in respect of license fees and service tax amounts could trigger the IBC against an insurance company since the claim of the operational creditor did not arise from any financial service (contract of insurance) provided by the FSP.12 Such ad hoc judicial innovation runs the risk of rendering the Indian insolvency jurisprudence unpredictable in its application to FSPs.
In this contemporary context, this paper analyses the potential implications of these policy developments on resolution of FSPs in India within a conceptual framework. It is structured into the following five parts. Part 1 captures the evolution of the law and institutions dealing with resolution of FSPs globally and in India. Part 2 provides the theoretical rationale for a special law for resolving FSPs like banks and Systemically Important Financial Institutions (‘SIFIs’). It highlights the unique features of such FSPs, the potential limitations of the IBC in addressing these unique features, and the applicability of a special resolution law on different types of FSPs. Part 3 explains the critical features of a special resolution regime, the functions of a resolution authority and the powers of the resolution authority before and during resolution. It also addresses issues related to cross-border resolutions and the resolution of public sector banks and cooperative banks. Part 4 discusses some of the controversial provisions in the FRDI Bill, 2017, which led to its withdrawal. Part 5 summarises the conclusions arrived at from the study.
Contributed by: Pratik Datta, Senior Research Fellow; Varun Marwah, Research Fellow; Ulka Bhattacharyya, Research Fellow
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