The speed with which the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) was enacted; the Financial Resolution and Deposit Insurance (FRDI) Bill, 2016 (hereinafter referred to as “FRDI Bill”) will soon see the light of day. Both the Code and FRDI Bill is expected to provide a comprehensive resolution mechanism for our economy. In our earlier write-up titled “Financial Resolution and Deposit Insurance Bill: Implications for NBFCs”, we in detailed discussed the implication of FRDI Bill on NBFCs.
Objectives of the Code and FRDI Bill
The Code was drafted by the BLRC with an objective to resolve insolvency and bankruptcy on the following grounds:
Low time to resolution;
Low loss in recovery;
Higher levels of debt financing across a wide variety of debt instruments.
The objective with which the Code is enacted is restricted to corporate person and its creditors; however, the objective of FRDI Bill is to provide a holistic remedy for economy. FRDIC provides to pursue following objectives:
Contributing to the stability and resilience of the financial system;
Protecting consumers up to a reasonable limit; and
Protecting public funds, to the extent possible.
Applicability of FRDI Bill
The Code applies to corporate persons (as defined under section 3 (7) of the Code) which does not include financial service provider (as defined under section 3 (17) of the Code). Consequently, financial service providers registered with financial sector regulators do not get covered under the Code. Does this mean that a financial service provider cannot file a case under the Code? The answer is clearly no. Financial service provider can file an application under the Code against the defaulting entity; however, at present there does not exist any comprehensive statute under which an application can be filed if there is a default made by a financial service provider. FRDI Bill intends to provide a specialised resolution mechanism to deal with a bankruptcy situation in banks, insurance companies and financial sector entities.
Lots of questions may arise on the intent of the FRDI Bill. Whether FRDI Bill intends to cover a financial service provider, such as an NBFC whose failure will be insignificant for the economy or too-big-to-fail (TBTF) entities whose failure will not only be significant but will also be dangerous for the economy.
It is pertinent to note that section 227 of the Code empowers the Central Government to notify the financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings to be conducted under the Code. Therefore, the intent of the law seems to exclude the insignificant financial service providers from the purview of the FRDI Bill.
It will be a debacle if small NBFCs and MFIs were to be treated at par with TBTF entities for which the bill is drawn. If potential issues with IDBI are taken at par with a failure to honor its commitments by one of 12000 odd NBFCs in the country, it would defocus the regulators from the issues relating to larger entities.
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This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.
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Vinod Kothari & Company
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