The MCA has extended the insolvency framework applicable to corporate debtors under the Insolvency and Bankruptcy Code, 2016 to financial service providers (as may be notified by it). Currently, the framework has been made applicable to systemically important Non-Banking Financial Companies.

To provide a robust mechanism to resolve the ongoing distress in the financial services sector, the Ministry of Corporate Affairs (MCA) notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (FSP Rules) on 15 November 2019.

The FSP Rules extend the existing insolvency framework applicable to corporate debtors under the Insolvency and Bankruptcy Code, 2016 (Code) to financial service providers (FSPs). The category of FSPs which will fall within the ambit of the FSP Rules will be notified by the Central Government from time to time (in consultation with appropriate regulators). Currently, the MCA has notified this framework for all systemically important NBFCs, including housing finance companies (Notified NBFCs).

Under the FSP Rules, an FSP can be referred to insolvency only by the 'Appropriate Regulator' that has been notified for that category of FSP (and not by a financial or operational creditor). The Central Government has the power to notify the 'Appropriate Regulator' for different classes of FSPs. A number of modifications have also been made to the Code to provide special powers to such Appropriate Regulator in respect of a corporate insolvency resolution process (CIRP) of an FSP. The Reserve Bank of India (RBI), has been notified as the 'Appropriate Regulator' for the Notified NBFCs.


Key Changes to the Code

The insolvency resolution process for FSPs is broadly similar to the CIRP for other corporate debtors – with a few key modifications. These changes are summarised below:



Insolvency Procedure as Applicable to FSPs

Insolvency Procedure as Applicable to an Ordinary Corporate Debtor


Right to initiate Insolvency Proceedings

Only an Appropriate Regulator of the concerned FSP may file an application with the National Company Law Tribunal (NCLT) on the occurrence of a financial default.

Insolvency proceedings can be initiated by a financial creditor, an operational creditor or the corporate debtor itself.


Voluntary Liquidation Process

Voluntary liquidation process can be initiated only with the approval of the Appropriate Regulator.

No such requirement.


Management during the CIRP

Administrator - The Appropriate Regulator is required to recommend an individual to act as an 'administrator' (Administrator) of the FSP. On admission of the application, the NCLT is required to appoint such Administrator as the individual controlling the affairs of the FSP during the CIRP.

This Administrator has the same duties, powers and responsibilities as the resolution professional or liquidator.

Advisory Committee – In addition, the Appropriate Regulator may constitute an 'advisory committee' (comprising 3 or more members) to advise the Administrator on the operation of the FSP. The members shall have expertise or experience in finance, economics, accountancy, law, public policy or any other profession in the area of financial services or risk management, administration, supervision or resolution of an FSP.

The committee of creditors does not have any right to recommend or seek the appointment or replacement of the Administrator or any member of the Advisory Committee.

Management is controlled by the interim resolution professional, resolution professional or liquidator (depending on the stage of the insolvency proceeding).


Interim Moratorium

An interim moratorium in respect of the FSP will commence from the date of filing of the application. This (in effect) extends the moratorium applicable during a CIRP, to the period during which the NCLT is considering the application.

Moratorium only commences upon admission of the insolvency application.


Approval of Resolution Plan

The committee of creditors has the right to approve the resolution plan in accordance with the Code.

Once approved, the Administrator is required to obtain a 'no-objection' from the Appropriate Regulator, before submitting the plan to the NCLT. The Appropriate Regulator will issue such 'no-objection' if the bidder/ resolution applicant satisfies its 'fit and proper' test. If a specific rejection is not issued by the Appropriate Regulator within 45 days of application, then the no-objection is deemed to have been provided.

No requirement to obtain an approval or no-objection from regulatory bodies, before submitting the plan to the NCLT.

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