The Centre is exploring the possibility of bringing certain financial service providers within the ambit of the Insolvency and Bankruptcy Code (IBC) to help deal with exceptional cases and make them go through their insolvency and liquidation proceedings, a top government official said.

“We are in consultation with the regulators (RBI) to see if a separate special framework could be worked out to bring specified financial service providers under IBC.

“We will be looking to invoke Section 227 of IBC for this purpose,” Injeti Srinivas, Secretary, Ministry of Corporate Affairs (MCA), told BusinessLine . Pending the proposed Financial Resolution and Deposit Insurance (FRDI) Bill — which was withdrawn from the Lok Sabha in August 2018 after a lot of furore from the general public — the thinking in the MCA is that invoking Section 227 of the IBC may provide a temporary window to avert the collapse of specific financial service providers (such as NBFCs) or bring easy settlements.

Section 227 of the IBC provides that the Centre — in consultation with the appropriate financial sector regulators — can notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under the IBC in such a manner as may be prescribed.

In recent years, several top-notch NBFCs have had to face blow out-like situations, causing concern among the investing fraternity, especially retail investors. The lenders, too, were put to a lot of hardship with their inability to recover their exposure to such entities.

A large proportion of the funds mobilised included non-convertible debentures (NCDs) raised from public markets. Although the IBC was enacted in 2016 to address insolvency situations, there was no specific window to cover financial services providers.

Now, the government is looking to move to cover such situations and bring even financial services providers within the ambit of IBC, which will allow creditors (both secured and unsecured) to drag such companies to the National Company Law Tribunal (NCLT).

Experts’ take

Rajesh N Gupta Managing Partner, SNG & Partners, a law firm, said that well-known NBFCs have experienced huge stress, which has caused potential loss not only to banks and financial institutions but also the private investors and lenders who have subscribed to debentures and other instruments.

“At this juncture, to secure the interest of institutional lenders as well as individuals and private entities who have significant exposure on NBFCs, it is imperative that Central government brings them within the purview of IBC. If this is not done, aggrieved individuals will rush to different platforms seeking relief under civil and criminal laws, which will only add to the woes,” he said.

Saurav Kumar, Partner, IndusLaw, a law firm, said that Section 227 empowers the Central government to notify certain categories of financial services provider for the purposes of their insolvency and liquidation under the code. However, such powers can be exercised only with respect to NBFCs that are financial services providers, he said.

“All NBFCs may not be financial services providers and, therefore, they may already come under the ambit of the IBC. However, for the other NBFCs that are financial services providers, given the current stress in the financial market, the Central government needs to find good reasons to notify such NBFCs to be brought under the IBC at this stage,” Kumar added.