The government on Friday notified the insolvency and bankruptcy law for financial service providers (FSPs). The new law to be called Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules) provides a framework for insolvency and liquidation proceedings of systemically important FSPs other than banks.
While the basic character of the insolvency law for FSPs will remain the same, respective regulators will have a significant say in the overall process including the final approval of the resolution process.
According to the rules, the insolvency proceedings against a financial service provider can only be initiated by an appropriate regulator. The regulator could be Insurance Regulatory and Development Authority of India (IRDAI) for an insurance company, the Securities and Exchange Board of India (SEBI) for mutual funds, etc.
Once the application has been admitted, the adjudicating authority will appoint an individual as an administrator, who will have the same duties, functions, obligations, responsibilities, rights, and powers as an insolvency professional, interim resolution professional, resolution professional or liquidator (as the case may be) has.
The concerned regulator may constitute an Advisory Committee of three or more experts to advise the administrator in the operations of the FSP during the resolution process. A moratorium will start the day an application is filed to initiate the insolvency process - the way it happens in the case of insolvency proceedings of other debtors. The moratorium will continue until its admission or rejection by the adjudicating authority. However, the moratorium will not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.
L Viswanathan, Partner, Cyril Amarchand Mangaldas, says: "The introduction of an initial moratorium on filing of a petition is welcome. This will help in avoiding unnecessary litigation and will discourage stakeholders from rushing to multiple fora on a default. The framework also excludes from the moratorium and the resolution assets held by financial service providers in trust for others in recognition of the rights of bona fide third party purchasers."
The administrator should take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them as per the rules notified by the government.
The licence or registration which allows the financial service provider to run its business will not be quashed during the insolvency process.
Once the resolution plan has been approved by the committee of creditors, the administrator will have to seek 'no objection' from the concerned regulator.
In the case of liquidation also, the adjudicating authority has to give the regulator an opportunity of being heard before passing an order for liquidation or dissolution of the FSP.
"The framework strikes a good balance with initiation of resolution to be led by the regulator including appointment of an administrator and leaving the resolution to the approval of committee of creditors with suitable measures for engagement with the regulators for their approval in a timely manner on aspects that require their approval. The advisory committee envisaged under the Rules could also play a useful role," says Viswanathan.
The government will soon notify specific categories of FSPs that do not fall under the systemically important category and will be resolved under the normal provisions of the IBC.