NBFCs can go for insolvency resolution post-MCA notification

The Reserve Bank of India (RBI) can now direct resolution of non-banking financial companies (NBFCs) with assets worth at least Rs 500 crore under the insolvency law to help in addressing defaulting cases in the Non-Banking Financial Companies sector, according to a ministry of corporate affairs (MCA) notification.

"The insolvency resolution and liquidation proceedings of the categories of financial services providers (Non-banking finance companies which include housing finance companies) with asset size of Rs 500 crore or more, as per last audited balance sheet) of financial service providers shall be undertaken in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 with the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019", said the notification.

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Earlier last week, On Friday, the ministry had notified the framework for dealing with systemically important financial service providers (FSPs), excluding banks, under the Code wherein sectoral regulators can seek resolution of stressed entities.

The introduction of the "generic framework" comes amidst the ongoing liquidity crisis in the NBFCs that has also sparked concerns about the overall stability of the financial sector.

Section 227 of the Code enables the central government to notify, in consultation with the financial sector regulators, FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings.

Significantly, the corporate insolvency resolution process for an FSP would be initiated "only on an application by the appropriate regulator".

"The rules shall apply to such FSPs or categories of FSPs, as will be notified by the central government under Section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings," the ministry said on Friday.

Corporate Affairs Minister Nirmala Sitharaman had said there would be something similar to the insolvency law for the financial sector and till that time but the new provision would take care of financial institutions.

"In an environment where it may be necessary to invoke something akin to Insolvency and Bankruptcy Code (IBC) and in the absence of IBC like provision for the financial services sector we have brought out this notification under Section 227 within the IBC which can be used. Post this, it is up to the RBI to take a call on this."Whether we will have something equivalent to IBC for financial sector, we will address that in future. We want to bring something equivalent to IBC for the financial sector. Till such time, this will take care of financial institutions," she said.