Resolution Regime for Systemic Financial Firms: The IBC Way or the Other Way?

– Sikha Bansal, Partner and Timothy Lopes, Manager | resolution@vinodkothari.com

Every economy has entities that carry with them systemic risk, which is essentially the risk that failure of such entities could result in financial contagion through a sort of domino/cascading effect on the economy. The contagion effect multiplies manifold if such an entity has cross-border operations and linkages. These entities are considered systemically important and are universally termed as being ‘Too Big To Fail’.

Going by the definitions of ‘corporate debtor’ and ‘corporate person’ a ‘Financial Services Provider (FSP)’ is not a Corporate Debtor. An FSP is one which provides ‘financial services’. ‘Financial services’, in turn, has been defined to include a list of services like accepting deposits, offering various services pertaining to financial products. Hence, the entities which provide such a financial service cannot be ‘resolved’ or ‘liquidated’ under IBC, except in case an entity (or a class of such entities) is notified under section 227 by the Central Government. The Central Government has thus notified non-banking financial companies including Housing Finance Companies having asset size of ₹ 500 crore or more as FSPs (Notified NBFCs). The insolvency resolution and liquidation process of FSPs, as notified separately through rules, is different in certain aspects as it needs regulatory involvement at different stages.

In this article, the authors discuss the need for a specific framework for insolvency resolution of systemic financial firms and study whether the present framework for insolvency resolution and liquidation of FSPs is sufficient. The authors also present a view as to how the construct of the definition of ‘FSP’ is quite specific and is different from the popular meaning assigned to typical financial entities engaged in lending activities. As such, notifying all NBFCs (with or without asset thresholds), without any regard to the function or activity being carried out by the NBFC, may not sync with the design and intent of IBC.
The article also explores a global perspective on the coverage and scope of the resolution framework for financial firms.

The article has been published in the IBBI’s Annual Publication titled ‘IBC: Idea, Impressions and Implementation’ and can be accessed on the link here, from page 157 onwards.