Insolvency Securities

Bringing NBFCs within the ambit of IBC: A quick fix solution?

By Kritika Dobhal

On November 29, 2019, the Reserve Bank of India [“RBI”] initiated Corporate Insolvency Resolution Process [“CIRP”] against Dewan Housing Finance Limited [“DHFL”], making it the first Non-Banking Financial Companies [“NBFC”] to be brought within the ambit of Insolvency and Bankruptcy Code, 2016 [“IBC”]. This was made possible due to the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 [“FSP Rules”]. By another notification dated November 18, 2019, it was specified that the FSP Rules would, for the time being, only be applicable to NBFCs, including housing finance companies, with assets of Rs. 500 crore or more. However, there is a need to dig deeper into why Financial Service Providers [“FSPs”] were excluded from the IBC in the first place.

The Initial Perspective

Post the Global financial crisis of 2008, nations across the world realized the need for a separate framework for resolution of financial institutions. For example, in the United Kingdom, the Banking Act of 2009 provides a Special Resolution Mechanism for banks, investment firms, banking group companies, etc. The reason, inter alia, is the dependency of other businesses on these financial firms and the domino-effect of their failure. It was realized that a normal insolvency proceeding is not viable for a financial firm, primarily because, while a default in payment can trigger a normal insolvency proceeding, in case of financial firms, the Regulator cannot wait till failure of payment obligations to the depositors. Further, the financial stability of the economy is highly dependent on the stability of the financial firms. The Financial Stability Board [“FSB”] adopted the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ in 2011 to stress upon the resolution of financial institutions in an orderly manner while maintaining continuity of their vital economic functions.

Following this, India, being a member of the FSB, established the Financial Sector Legislative Reforms Commission [“FSLRC”]. The FSLRC released a draft Indian Financial Code [“IFC”] in 2013 which envisaged the establishment of a Resolution Corporation [“RC”] to overlook the resolution and recovery of a financial firm. While the adoption of IFC was pending, the Bankruptcy Legislative Reforms Commission [“BLRC”] was established. In the BLRC report, two different institutional mechanisms were envisaged: (i) IBC proposed by BLRC; (ii) and the RC under FSLRC.  In fact, in its problem statement, BLRC recognized that IFC was drafted to improve the “resolution capability” of financial firms. Therefore, FSPs were excluded from the definition of ‘corporate person’ under Section 3(7) of IBC.

What is an FSP?

An FSP is a person providing financial services under the authorization or registration of a Financial Sector Regulator [“the Regulators”]. These Regulators include the RBI, the Securities and Exchange Board of India [“SEBI”], the Insurance Regulatory and Development Authority of India [“IRDAI”], etc. The term ‘Financial service’ has been defined in Section 2(16) of IBC. Thus, an FSP could not be a Corporate Debtor and an insolvency proceeding could not be initiated under IBC. However, an authority has been reserved under Section 227 of IBC, with the Central Government, to bring any category of FSPs within the domain of IBC. 

The initial stance of exclusion of NBFCs from IBC was clarified in the case of Mayfair Capital Private Limited. TheNational Company Law Appellate Tribunal [“NCLAT”] had set aside the insolvency proceedings initiated against M/s Mayfair Capital Pvt. Ltd. on the ground that the company is an FSP. It reiterated that IBC being a consolidating legislation, is exhaustive in nature and the exclusion of FSPs from its purview is deliberate. This case was followed by the case of HDFC Ltd. vs. M/s RHC Holding Pvt. Ltd. where the application of HDFC to begin CIRP against RHC Holding was rejected. The Company was in the business of, inter alia, granting debts or loans in group companies and was registered as a Non-Deposit Accepting NBFC with the RBI. National Company Law Tribunal [“NCLT”] gave a wider import to the definition of FSP and held that there is no distinction if the company extends financial services only to its group companies and there is no “public element involved”. This decision was upheld by NCLAT in July, 2019. HDFC had submitted that the legislative intent was to only exclude FSPs which provide financial services as laid down in Section 2(16) and since the debtor did not render any of the specified services, it can be brought under IBC. NCLAT rejected this argument and held that the list in Section 3(16) is an ‘inclusive list’ and not an exhaustive list.

The Shift in Perspective

Due to this strict stance taken by the tribunals, the creditors were left with no framework for speedy recovery. This was especially felt after the Infrastructure Leasing & Financial Services Limited [“IL&FS”] crisis surfaced and had to take the route of schemes of arrangement. Therefore, when this was followed by the DHFL debacle, instinctively, the Central Government utilized its power under Section 227, and notified the FSP Rules.

Key Attributes of the FSP Rules:

As per the FSP Rules, in the case of FSPs, the CIRP can only be initiated on an application made by the Regulator. This is followed by the appointment of an Administrator by the NCLT, on the proposal made by the regulator. The administrator will have the same functions as a resolution professional, or the liquidator. The Regulator may also constitute an Advisory Committee, within forty-five days of the insolvency commencement date, to advise the Administrator on the operations of the FSP during the CIRP. Further, there is also a provision for interim moratorium from the date of filing an application, till its admission or rejection. During the interim moratorium or the CIRP, the license or registration for NBFCs will not be suspended or cancelled.

Regarding the resolution plan, it shall include a statement explaining how the resolution applicant intends to satisfy the requirements of engaging in the business of the FSP as per laws for the time being in force. Upon approval of the resolution plan by the committee of creditors, the Administrator is required to seek a No-objection certificate [“NOC”] from the Regulator to the effect that it has no objection to the persons who would be in control or management of the FSP after approval of the resolution plan. This NOC would be granted based on ‘fit and proper’ criteria applicable to the business of the FSP and not on the basis of Section 29A of IBC. If no-objection is raised within forty-five (45) working days from receipt of such application, the NOC shall be deemed to be granted. With regard to the liquidation procedure, it is pertinent that the license or registration of FSP shall not be suspended or cancelled during the liquidation process, unless an opportunity of being heard has been provided to the liquidator. Further, NCLT shall provide the regulator an opportunity of being heard before passing an order for (i) liquidation under Section 33, and (ii) dissolution of FSP under Section 54 of IBC.

With regard to the voluntary liquidation, the FSP is required to obtain prior permission of the Regulator for initiating the proceedings under section 59 of IBC. NCLT is required to provide the Regulator an opportunity to be heard before passing an order for dissolution of the FSP.

Lastly, the provisions of moratorium in Section 14 would not be applicable to any third-party assets or properties in custody of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties. The administrator shall take control of such third party assets.


This act of bringing NBFCs within the domain of IBC is a welcome step, especially for the Creditors to recover their debts. However, it defeats the object of establishing a separate framework for resolution of FSPs as envisaged in FSLRC and BLRC. This instinctive, desperate step by the Government reminds us of the considerable and bold step that was the Financial Resolution and Deposit Insurance Bill, 2017 [“Bill”]. The Bill was drafted on lines with the resolution mechanism envisaged in the draft IFC. It faced a huge backlash due to the infamous Buy-In clause (In the Bill, the Bail-In provision was defined as the writing down or modifying the unsecured debt of the FSP), and was eventually withdrawn by the Central Government in 2018. The role of RC, inter alia, acts as an administrator once the financial firm reaches the threshold of critical threat to viability. It would then formulate plans to revive the financial firm and keep it as a going concern. If the firm were to fail regardless, RC would then act as a liquidator. The Financial Sector Development and Regulation [“FSDR”] Bill was introduced in 2019, which is drafted in line with the FRDI Bill, but drops out the controversial Bail-In Clause. The FSDR Bill defines ‘Systemically Important Financial Institutions’, which have a higher threat to the stability of the economy. The fate of FSDR Bill is yet to unfold, however, the concerns over the savings of small depositors have already been raised.

To conclude, while the FSP rules are a welcome step, the Central Government must not lose sight of enacting a separate consolidated framework for early recognition and resolution of FSPs, in line with the objective of FSLRC.

The author is a seventh semester student, pursuing her law degree from the National Law University, Jodhpur.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s