The Centre had recently issued rules that provided a framework for getting a ‘systemically important financial service providers’ under the Insolvency and Bankruptcy Code (IBC). The said rules shall be applied towards such financial services provides to be notified through the Central Government from time to time.
The Ministry of Corporate Affairs had notified the Insolvency and Bankruptcy Rules, 2019 recently with the purpose of giving a general structure for insolvency and liquidation actions of systemically significant Financial Service Providers (FSPs) other than banks. The Rules shall be applied towards such FSPs or categories of FSPs, as notified through the Central Government as per section 227 periodically while consulting with appropriate regulators, relating to the insolvency and liquidation actions.
After consultations with the central bank, The Ministry of Corporate Affairs recently had issued a notification stating the categories of financial service providers (FSPs) that could be taken up for resolution as per the general framework of the Insolvency and Bankruptcy Code, 2016.
The Insolvency and Bankruptcy Code, 2016 furnishes a consolidated structure for reorganization, insolvency resolution, and liquidation of corporate individuals, limited liability partnerships, partnership corporations as well as individuals in a time-bound method. According to Section 227 of the Code which allows the Central Government towards notifying, in consultation with the financial sector regulators, financial service providers (FSPs) or categories of FSPs relating to the motive of insolvency and liquidation actions, in such a way as might be set.
The Reserve Bank was recently looking for resolution of non-banking financial companies who have assets worth of minimum Rs 500 crore under the insolvency law, which is a move that is likely to assist in addressing despairs in the NBFC sector.
The ministry also notified the structure for dealing with systemically important FSPs, which excludes banks, under the Code where sectoral regulators could look for resolution of stressed firms.
The structure of the general framework comes against the background of the continuing liquidity disaster in the Non-banking financial companies (NBFCs) which has generated concerns relating to the complete firmness of the fiscal sector.
The ministry stated in a notification that the Non-banking finance companies (which comprise housing finance firms) who have their asset size of Rs 500 crore or above, according to the latest reviewed balance sheet, would be able to be considered for insolvency resolution and liquidation actions under the Code.
As per Section 227 of the Code, it allows the central government towards notifying, in discussion with the financial sector regulators, FSPs or categories of FSPs relating to the purpose of insolvency and liquidation actions.
Also, the corporate insolvency resolution process for an FSP would be started only by an application by the appropriate regulator.
The ministry also stated that the rules would be applicable towards such FSPs or categories of FSPs, as shall be notified by the central government in accordance with Section 227 periodically in discussion with appropriate regulators, relating to the purpose of their insolvency and liquidation actions.
However the special framework in accordance with Section 227 of the Insolvency and Bankruptcy Code, 2016 shall not be applicable to the Banks. The government would notify particular categories of FSPs which does not come under the systemically important category as well as would be determined under the normal provisions of the Code as generally applicable towards corporate debtors.
Also, the Finance Minister Nirmala Sitharaman stated there would be something the same towards the insolvency law for the financial sector and till then, the new provision shall manage the financial institutions.
The FM Nirmala Sitharaman stated the notification has been imposed because there was no system like the IBC that was intended exclusively for financial institutions. Nirmala Sitharaman also specified that this notification had brought a situation where it may be essential to raise IBC-like actions on a financial institution, but where there are no special arrangements for financial institutions.
The Minister also stated that it was up to the Reserve Bank of India in order to decide which financial firms shall be taken up under these rules. Though, FM Nirmala Sitharaman also stated that the government has been considering bringing out a set of guidelines solely for financial corporations as well.
The said Rules shall be coming to effect from the date of their publication on the official gazette.
The said Rules are available at www.mca.gov.in and www.ibbi.gov.in
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