Insolvency and Liquidation Proceedings of Financial Service Providers Rules, 2019

Providing a Legal Framework for Resolution of Financial Service Providers under the Insolvency and Bankruptcy Code

India does not have a comprehensive framework for the resolution of distressed Financial Service Providers (FSPs). The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) sought to establish a consolidated framework for this but it has not been enacted yet.  As a result, the resolution framework for financial firms is scattered across various statutes with disparate powers conferred on several financial sector regulators. 

The Insolvency and Bankruptcy Code, 2016 (IBC) specifically excluded FSPs from within the purview of ‘corporate persons’ that can be resolved under it. This is because the business of financial services is structured differently in comparison to other businesses in that many FSPs often handle large amounts of consumer money and some of them are systemically important as their failure might disrupt the financial system and adversely impact the economy. Such FSPs are best resolved under a special resolution regime.

In recent times, instances involving financial distress among a class of FSPs demonstrated the need for an insolvency and liquidation mechanism for FSPs to avoid a legal vacuum until enactment of a comprehensive framework (like the FRDI Bill). Accordingly, in light of the power conferred on the Central Government under Section 227 of the IBC, which empowered the government to notify FSPs or categories of FSPs for the purpose of their insolvency resolution and liquidation under the IBC (in consultation with the appropriate financial sector regulators), the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules) were notified to provide an enabling framework with appropriate modifications to the regular processes under the IBC. Most notably, an application under these Rules can only be initiated by the FSPs primary regulator. Currently, only non-banking finance companies of a certain size can be resolved under these Rules.