Sectoral regulators empowered to petition insolvency of financial services providers: Central Govt notifies insolvency rules

Vinod Kothari


The Central Govt on 15th November notified rules of procedure for insolvency proceedings for financial services providers, thereby indicating that the resolution and liquidation process for financial services entities has been taken out from the proposed enactment dealing with distress of financial entities. Notably, the actions in case of distress of financial services firms is not limited to insolvency – regulators take prompt corrective action, depending on the severity of the distress.

The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 [FSP Rules] are applicable to categories of financial services providers (FSPs) as notified by the Central Govt in terms of section 227.

Whereas in normal insolvency cases, the IBC process provides for appointment of a resolution professional or liquidator, in case of FSPs, the Rules provide for appointment of an Administrator.

As per the FSP Rules, the appointment of an Administrator in case of an FSP can be done only on application by the relevant sectoral regulator. Thus, direct applications by financial or operational creditors are ruled out. The Administrator shall also be proposed by the relevant sectoral regulator only.

The moratorium in case of FSPs, unlike in case of normal companies where it commences on admission, starts form the date of the application itself. That is to say, the FSP is put into protective safety net of the law immediately, without having to wait for admission. During such interim moratorium, the FSP shall continue its business uninterrupted.

The sectoral regulator may also appoint an Advisory Committee consisting of 3 or more members, to advise the Administrator. In essence, the concept of creditor-driven resolution is completely inapplicable to FSPs.

It appears from a reading of Rule 5 (d) that the concept of “resolution applicant”, that is, a bail-out suitor, who proposes to bail out the FSP by submitting a resolution plan, has been retained. Of course, the bail-out proponent has to prove himself to be “fit and proper” as per the conditions of the sectoral regulator, and has to be approved by the latter.

The liquidation and voluntary winding up of FSPs shall also be covered by the Rules. Even in case of liquidation, the license or business of the FSP shall not be suspended or cancelled without the opportunity of hearing to the liquidator.

The Rules fill the hiatus left in the Scheme of the law, whereby IBC proceedings were not applicable to FSPs, and at the same time, the Financial Resolution and Deposit Insurance Bill has still not seen the light of the day.

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