Money & Banking

Insolvency process can now be undertaken against systemically important financial service providers

Our Bureau New Delhi | Updated on November 15, 2019 Published on November 15, 2019

Centre gives its nod for insolvency process against systemically important entities if they are triggered by RBI or SEBI

The Centre has now allowed the insolvency and liquidation process to be undertaken against systemically important financial services providers (FSP) so long as such proceedings are triggered by the concerned regulator (Reserve Bank of India or SEBI).

The Corporate Affairs Ministry has now put in place a generic framework for insolvency and liquidation proceedings of systemically important FSPs, while making it clear that banks are not covered under this framework.

The FSPs or categories of FSPs will be notified by the Central Government under Section 227 of the Insolvency and Bankruptcy Code (IBC) from time to time in consultation with the appropriate regulators, for the purpose of their insolvency and liquidation proceedings.

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The new rules on insolvency and liquidation proceedings of financial service providers – now notified by MCA – specify that the provisions of IBC relating to CIRP and the liquidation process would mutatis mutandis apply to a process for a FSP. There are, however, some modifications, including the stipulation that the CIRP of an FSP can be initiated only on an application by the appropriate regulator. Also, the FSP will have to obtain the prior permission of the appropriate regulator for initiating voluntary liquidation proceedings. The new rules also provide that an interim moratorium would commence on and from the date of filing of the application for initiation of CIRP by the regulator, till its admission or rejection by the Adjudication Authority.

The MCA has also made it clear that the licence of the FSP cannot be suspended or cancelled during the interim moratorium or the CIRP

Expert take

Ashwin Bishnoi, Partner, Khaitan & Co, a law firm, said: “With the enforcement of the IBC and removal of certain provisions of the Companies Act, 2013, there was a legal vacuum on how to take NBFCs into insolvency. Thus, IL&FS relied on a queer provision of the Companies Act. With this notification, the Government is bringing much needed certainty to the insolvency process for financial service providers”.

Published on November 15, 2019
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