The Insolvency and Bankruptcy Code, 2016 ('IBC') does not provide a mechanism for insolvency resolution of financial service providers such as non-banking financial companies, insurance companies, pension funds and mutual funds ('FSPs'). However under Section 227 of the IBC, the Central Government, in consultation with regulators, is empowered to notify FSPs or categories of FSPs in respect of which insolvency and liquidation proceedings may be conducted under the IBC. In exercise of these powers, the Central Government today notified rules governing the insolvency resolution of a sub-set of FSPs ('Rules').
The Ministry of Corporate Affairs has also made a press release along with the rules ('Press Release') which adds clarity on the nature of FSPs the Rules are likely to apply to. As per the Press Release, insolvency of resolution of FSPs will be governed in the following manner:
i. The Rules provide a modified framework under the IBC for insolvency resolution of systemically important FSPs excluding banks.
ii. For FSPs which are not systemically important, the IBC shall apply as it is without any modifications.
iii. It appears that the intention is to keep the insolvency resolution of banks outside the purview of IBC altogether, but the Press Release is silent on whether a new resolution mechanism is being considered for banks.
Under the Rules, the Central Government is empowered to notify FSPs or categories of FSPs to which the Rules will apply. At present, no such notification has been made by the Central Government. However, as mentioned above, the Press Release indicates that the Rules will only be notified for systemically important FSPs.
The Rules lay down a modified IBC process applicable to FSPs, which, among other things, provide for:
(i) initiation of corporate insolvency resolution process ('CIRP') of an FSP only upon application by the appropriate financial sector regulator;
(ii) appointment of an administrator having the powers and duties of an insolvency professional under CIRP under the IBC;
(iii) an ad-hoc advisory committee constituted by the appropriate financial sector regulator to assist the administrator, where deemed necessary by the regulator;
(iv) a more enabling moratorium to commence from the date of application for insolvency by the relevant regulator, but which does not cover within its ambit third party assets / properties in custody of the FSP (including funds, securities and other assets);
(v) approval of the successful resolution applicant by the relevant financial sector regulators on the basis of the relevant 'fit and proper' criteria and subject to compliance with Section 29A of the IBC; and
(vi) non-termination of the license or registration of the FSP during CIRP or liquidation.
Further provisions with respect to liquidation and voluntary liquidation under the IBC are also made applicable to FSPs with certain modifications.
Published November 15, 2019
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