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Rules notified to bring financial firms under IBC

Topics Covered:

  1. Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

 

Rules notified to bring financial firms under IBC

 

What to study?

For Prelims: Overview of the new rules and IBC.

For Mains: Need for and significance of inclusion of other firms.

 

Context: The Centre has issued rules that provide a framework for bringing ‘systemically important financial service providers’ under the purview of the Insolvency and Bankruptcy Code (IBC).

  • The Ministry of Corporate Affairs has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.
  • These rules aim to provide a generic framework for insolvency and liquidation proceedings of systemically important FSPs other than banks.

 

Background:

Section 227 of the [Insolvency and Bankruptcy] Code enables the Central government to notify, in consultation with the financial sector regulators, financial service providers (FSPs) or categories of FSPs for the purpose of insolvency and liquidation proceedings, in such manner as may be prescribed.

 

The new rules:

  • As per the new rules, only a regulator will be allowed to refer a non-bank lender or housing financier to a bankruptcy tribunal, unlike in the case of companies that can approach a tribunal on their own, or can be dragged into one either by lenders or operational creditors such as material suppliers.
  • The bankruptcy tribunal will appoint an administrator who will try to stitch together a turnaround plan.
  • The administrator will be nominated by the regulator, such as the Reserve Bank of India (RBI) in the case of non-bank lenders and housing financiers.
  • The registration or the licence of the financial services provider will not be suspended or cancelled during the bankruptcy resolution process.
  • In case a turnaround of the financial institution is not possible, before deciding to liquidate it, the tribunal will listen to the views of the regulator.

 

Significance:

The introduction of an interim framework for resolution of financial service providers under the IBC is a timely and important step for resolution of financial service providers permitting an interplay between regulators, creditors and the NCLT (National Company Law Tribunal) for appropriate actions.

These rules are likely to help out distressed shadow banks and housing financiers, which have been battling a liquidity crunch for a year.

 

Sources: the Hindu.

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