Overview & Coverage

The FSP Rules state that the provisions of IBC relating to the corporate insolvency resolution process (“CIRP”) of the corporate debtor mutatis mutandis apply to the insolvency resolution process of a FSP subject to certain key modifications, which are:

• The CIRP of an FSP shall be initiated only by an appropriate regulator (RBI in the present scenario);
• On admission, an administrator is appointed who is the equivalent of a resolution professional under IBC;
• An interim moratorium shall commence from the date of filing of the application till its admission or rejection by the NCLT;
• The provisions of moratorium shall 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; and
• Upon approval of the resolution plan, the Administrator shall seek ‘no objection certificate’ (“NOC”) from the appropriate regulator to primarily ascertain the ‘fit and proper’ test.

Limited implementation

The only case where the FSP Rules have been applied is where the RBI initiated insolvency proceedings against DHFL in December 2019. The practical impact of this is too soon to assess.

All other stress in the sector, be it of marquee NBFCs, cooperative banks or of other banking companies, are being resolved through private negotiations, regulatory intervention and in some cases, government action.

Implications

Given that FSPs have a connected and integral part to play in the maintenance of financial stability of the economy, the protection of the rights of their deposit holders, if any and the protection of the linked economy that they service (as more often than not they are the bankers / service providers to various corporate debtors, who may be in stress themselves) is also paramount. It has been publicly announced that the FSP Rules are “an interim measure” and thereforewhile the lone case may be a case study, the other FSPs such as banks, insurance providers, clearing corporations, stock exchanges, etc. are matters of a different study altogether.

As we continue in lock down, it may be an appropriate time to revisit the principles of Resolution Corporation and look for a holistic solution to the inevitable stress and not let problems dictate the solution in the days to come. Each FSP in isolation may not necessarily be “too big to fail” but they certainly are big enough to not be in a vacuum of lack of a holistic unified regulation.

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