Govt puts in place norms for resolution of fin service providers under insolvency law

The government on Friday put in place a framework for dealing with systemically important financial service providers, excluding banks, under the insolvency law wherein sectoral regulators can seek resolution of stressed entities. The introduction of the "generic framework" comes against the backdrop of ongoing liquidity crisis in the Non-Banking Financial Companies (NBFCs) that has also sparked concerns about overall stability of the financial sector.

Corporate Affairs Minister Nirmala Sitharaman said there would be something similar to the insolvency law for financial sector and till that time the new provision would take care of financial institutions. The corporate affairs ministry has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules).

It will provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks, an official statement said. Sitharaman, who is also the Finance Minister, said the Code is there for companies but nothing for insolvency resolution of financial firms.

"In an environment where it may be necessary to invoke something akin to IBC and in absence of IBC like provision for the financial services sector we have brought out this notification under 227 within the IBC which can be used. Post this it is up to the RBI to take a call on this. "Whether we will have something equivalent to IBC for financial sector we will address that in future. We want to bring something equivalent to IBC for the financial sector. Till such time this will take care of financial institutions," she said here.

Section 227 of the Code enables the central government to notify, in consultation with the financial sector regulators, FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings. Significantly, Corporate Insolvency Resolution Process (CIRP) for an FSP will be initiated "only on an application by the appropriate regulator".

Corporate Affairs Secretary Injeti Srinivas said the special framework provided under Section 227 for financial service providers is essentially aimed at serving as an interim mechanism to deal with any exigency pending introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers. Separately, the government will notify specific categories of FSPs that do not fall under the systemically important category and would be resolved under the normal provisions of the Code as ordinarily applicable to corporate debtors, he said in the statement.

"The rules shall apply to such FSPs or categories of FSPs, as will be notified by the central government under section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings," the statement said. Financial sector regulators -- Reserve Bank, Sebi, Irdai and PFRDA -- can seek resolution for entities coming under their purview.

The licence or registration which authorises the FSP to engage in the business of providing financial services will not be suspended or cancelled during the interim-moratorium and the CIRP, the statement said. On admission of the application, the adjudicating authority will appoint an individual as the administrator. The name of the individual would be proposed by the appropriate regulator in the application for initiation of CIRP.

The regulator concerned can also constitute an advisory committee of three or more experts to advise the administrator in the operations of the FSP during the CIRP. "An interim moratorium shall commence on and from the date of filing of the application for initiation of CIRP by the appropriate regulator till its admission or rejection by the adjudicating authority.

"The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties," the statement said. For initiating voluntary liquidation proceedings, an FSP should seek prior permission from the appropriate regulator.

Earlier this month, a senior official said the government was mulling a special window to address debt woes of stressed non-banking financial companies under the insolvency law.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)