Government Lays Down Rules For Resolution Of Stressed Financial Firms

The new rules will apply to systemically important financial service providers other than banks, the government said.

DHFL board on a building in Mumbai. (Source: BloombergQuint)
DHFL board on a building in Mumbai. (Source: BloombergQuint)

The Indian government has announced a framework for resolution of stressed financial institutions, in the absence of a full-fledged law to deal with insolvency of banks and non-bank lenders. The new rules, issued under the Insolvency and Bankruptcy Code, 2016, will apply to systemically important financial service providers other than banks.

“The Ministry of Corporate Affairs has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 today to provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers other than banks,” the government said in a notification on Friday.

The rules come against the backdrop of emerging strains across non-bank lenders. While some of these lenders, such as Dewan Housing Finance Corporation Ltd., have defaulted on their dues, resolution has proved to be difficult as the Insolvency and Bankruptcy Code does not apply to financial institutions. A Financial Resolution and Deposit Insurance Bill, which has been in the works for a few years, is yet to be finalised.

The rules notified today will act as an interim resolution framework for financial service providers.

The process laid down is as follows:

  • The resolution process of a financial service provider will be initiated only on an application by the appropriate regulator. The permission of the regulator would also be required for initiating voluntary liquidation proceedings.
  • An administrator will be appointed on the recommendation of a regulator. This administrator shall have the same power as a resolution/ liquidation professional.
  • The regulator can constitute an advisory committee of three or more experts to advise the administrator in the operations of the financial institution during the resolution process.
  • An interim moratorium shall commence on the date of initiation of resolution process till admission or rejection by adjudicating authority.
  • The licence or registration of the financial institution for providing financial services will not be suspended or cancelled during the interim-moratorium and the resolution process.
  • Provision of moratorium shall not apply to third-party assets or property, including any funds, securities or assets held in trusts.

Once the resolution plan by the Committee of Creditors is approved, the administrator will have to seek ‘no objection’ from the regulator for the new management of the firm. The regulator shall issue the no objection on the basis of ‘fit and proper’ criteria applicable to the financial service provider.

The gazette notification of the rules clarifies that the regulator will not be constrained by section 29A when issuing the no objection.

If the regulator does not refuse a no objection certificate within 45 days of receipt of application from the administrator, it shall be deemed that ‘no objection’ has been granted.

The current norms are a good stand-in for the proposed FRDI norms. The government has placed the onus of reference on regulators, which is an important move to ensure that no financial services provider faces unnecessary insolvency proceedings. It seems that the process would be similar to any corporate insolvency process being conducted right now, except the regulator would be closely involved with the resolution process.
Abizer Diwanji, Head-Financial Services, EY

Who Will The Rules Apply To?

The government, in its statement, does not specify which financial services companies the rules will apply to, except to say that banks would not be subject to the interim framework.

“The rules shall apply to such financial service providers or categories of financial service providers, 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.

Bhargavi Zaveri of the Indira Gandhi Institute of Development Research said that while some financial service providers lend themselves to a resolution under the Insolvency and Bankruptcy Code, some don't.

“Like for banks and insurance service providers the cost of collective action is too high and going through IBC mechanism might not work. For them the scheme outlined in the FRDI could have worked, though that bill has been withdrawn,” Zaveri said. “But for some other financial services companies like brokerages or mutual funds, the IBC should work,” Zaveri added. She was, however, not in favour of giving discretionary powers to a regulator to take these decisions.