Financial service providers – regulatory framework for insolvency and liquidation proceedings notified


The Insolvency and Bankruptcy Code, 2016 (“Code”) as enacted, specifically excludes Financial Service Providers (“FSPs”) from the definition of corporate debtor. Therefore, any proceeding under the Code, ideally, could not be initiated against an FSP.

In light of the current crisis in the Indian financial sector, in particular the Non- Banking Finance Companies and Housing Finance Companies, on 16 August 2019, the Ministry of Corporate Affairs along with the Insolvency and Bankruptcy Board of India (“IBBI”), had formed a sub-committee to set up the regulatory framework for the insolvency and liquidation proceedings with respect to FSPs in furtherance to their being notified under Section 227 of the Code. Pursuant to the deliberations of the sub-committee, on 15 November 2019, the IBBI formulated, notified and made effective the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”). As a first step, on 18 November 2019, NBFC having an asset size of more than INR 500 crore were notified as the first FSPs under the Code.

Who are FSPs?

Financial Service Provider is a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator.

Financial Services includes any of the following services, namely:

  1. accepting of deposits;
  2. safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
  3. effecting contracts of insurance;
  4. offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
  5.  rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of:
    1. buying, selling, or subscribing to, a financial product;
    2. availing a financial service; or
    3. exercising any right associated with financial product or financial service;
  6. establishing or operating an investment scheme;
  7. maintaining or transferring records of ownership of a financial product;
  8. underwriting the issuance or subscription of a financial product; or
  9. selling, providing, or issuing stored value or payment instruments or providing payment services;

Financial Sector Regulator means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government;

Corporate Insolvency Resolution Process and Liquidation of FSPs

Application of the Code: Provisions of insolvency and liquidation as set out in the Code, apply mutatis mutandis to the corporate insolvency resolution process (“CIRP”) of an FSP, as well as its liquidation, voluntary or otherwise, as notified pursuant to the FSP Rules by the Central Government.

Who can file and when: CIRP can be initiated against an FSP which has committed a default, where the amount of such default exceeds one lakh rupees. Provided that any application for CIRP against an FSP can only be initiated if the application is made by the sectoral regulator and such an application shall be treated as an application by a financial creditor under Section 7 of the Code. Even an application for voluntary liquidation requires the regulator’s prior permission.

Key Features:

  1. Filing process: The Application is to be filed in Form 1, along with a fee of INR 25,000. A copy of the said application is also be forwarded to the registered office of the FSP.
  2. Supporting Documents: The application is to be accompanied by a written consent and declaration furnished by the proposed Administrator in prescribed Form 2 and all documents referred to in the application and proof of payment of fee.
  3. Interim Moratorium: An interim moratorium prevails from the date of filing of the application till the admission or rejection of the application by the Adjudicating Authority (“AA”). The interim moratorium prohibits institution or continuation of suits or proceedings against the FSP, transfer, encumbrance, alienation or disposal by FSP, enforcement action in respect of the property of FSP. The interim moratorium and moratorium shall not apply to third party assets and properties in custody of the FSP, inclusive of funds, securities and other assets as may be prescribed.

    During the interim moratorium period and during the CIRP period, the license or registration which authorises the FSP to engage in the business of providing financial services will not be suspended or cancelled. During liquidation, such license or registration cannot be cancelled or suspended unless an opportunity of being heard is provided to the liquidator.
  4. Admission of the Application: On admission of the application, the AA appoints an administrator to exercise all the powers and functions of the interim resolution professional, resolution professional or the liquidator in the insolvency or liquidation proceedings. Moratorium as applicable under the Code, commences and continues for 180 days, extendable up to 270 days from the date of admission of the application.
  5. Committee of creditors: Upon admission of an application and assessment of claims received against the FSP, a committee of creditors is constituted, consisting of financial creditors of the FSP. Once the committee is constituted, the FSP is required to take its permission for specified activities, including raising any interim finance, creating security interest over its assets, recording change in ownership, amending constitutional documents, changing its management.
  6. Advisory Committee: The appropriate regulator may, constitute an Advisory Committee comprising of 3 or more members, qualified under the FSP Rules, within 45 days of the insolvency commencement date, to advise the Administrator in the operations of the FSP during the corporate insolvency resolution process. The terms and conditions of the members and the manner of conducting of their meetings and observance of rules of procedure are to be determined by the appropriate regulator. It is pertinent to note that the compensation paid to the members of this committee shall be part of the insolvency resolution process costs.
  7. Resolution Plan: The AA assisted by the Administrator and committee of creditors, arrive at a plan for resolution of insolvency of the FSP. If a resolution plan is not arrived at within the time prescribed in the Code or is rejected by the AA, the AA has the power to direct liquidation of the FSP. The resolution plan which is to be furnished for an FSP shall have to fulfil not only the mandatory contents as prescribed in Section 31 of the Code, but also include a statement explaining how the resolution applicant satisfies or intends to satisfy the requirements of engaging in the business of the FSP, as per extant laws.
  8. Permission of the regulator: Once the committee of creditors approves the resolution plan, the regulator’s no objection is to be obtained. The appropriate regulator would also be required to issue a “no-objection” on the basis of the “fit and proper” criteria applicable to the business of the FSP to the resolution plan. No order of dissolution or liquidation of an FSP can be passed unless the regulator has been given the opportunity of being heard. The Administrator can be appointed or replaced only with an application to be filed before the AA by the regulator.
  9. Withdrawal of Application: Withdrawal of the application may be permitted by the AA before its admission on a request made by the appropriate regulator.

These notifications augment the intent of the Code, that an FSP is a special category of entity and they ought not to be dragged into insolvency without there being a strong reason and involvement of the concerned regulator. With the notification of the FSP Rules, this interpretation is further strengthened and another layer of protection i.e., notification as FSP by Central Government, has been added for the FSP Rules to apply to an entity. Furthermore, the FSP Rules have also taken into consideration the continuation of the license and registration of FSPs in order to enable them to remain going concerns while their CIRP is ongoing. Given that an FSP is likely to have an interface with public, even the resolution applicants are required to be adequately equipped to engage in the business of an FSP, to further enable the “going concern” aspect. In our view, these steps are aimed at implementation of the intent of the Code, and bring clarity to the letter and spirit of the insolvency regime.

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