Financial service provider
Section 3(17) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) defines the expression ‘financial service provider’ as a person engaged in the business of providing financial services in terms of authorization issued or registration granted by a financial sector regulator.
Financial service
Section 3(16) of the Code defines the expression ‘financial service’ as including any of the following services-
- accepting of deposits;
- safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
- effecting contracts of insurance;
- offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
- rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of-
- buying, selling, or subscribing to, a financial product;
- availing a financial service; or
- exercising any right associated with a financial product or financial service;
- establishing or operating an investment scheme;
- maintaining or transferring records of ownership of a financial product;
- underwriting the issuance or subscription of a financial product; or
- selling, providing, or issuing stored value or payment instruments or providing payment services.
Financial Service regulator
Section 3(18) of the Code defines the expression ‘financial service regulator’ as 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;
Power of Central Government to notify financial service providers
Section 227 of the Code provides that notwithstanding anything to the contrary examined in this Code or any other law for the time being in force, the Central Government may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed. This section came into effect from 01.05.2018.
Rules
Section 239(zk) of the Code gives powers to the Central Government to make rules for the manner of conducting insolvency and liquidation proceedings under section 227. By virtue of this power the Central Government came up with a new Rule called as ‘The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, vide Notification No. GSR 852 (E), dated 15.11.2019. These rules came into effect from 15.11.2019.
Applicability
These rules shall apply to such financial service providers or categories of financial service providers, as may be notified by the Central Government under section 227, from time to time, for the purpose of their insolvency and liquidation proceedings under these rules.
Features of these rules
The features of these rules are as below-
- These rules provide for the insolvency and liquidation process of the financial service providers.
- The expressions ‘corporate debtor’, contained in the Code shall mean ‘financial service provider’.
- These rules introduced ‘administrator’ to be appointed by the Adjudicating Authority. No qualification has been prescribed for the post of administrator by the rules.
- The administrators will look after the functions of the interim resolution professional, resolution professional or the liquidator for the purpose of insolvency and liquidation proceedings of the financial service providers.
- The expressions ‘insolvency professional’, ‘interim resolution professional’, ‘resolution professional’ or ‘liquidator’ as contained in the Code shall mean ‘administrator’.
- The provisions of the Code relating to the provisions of the corporate insolvency resolution process of the corporate debtor shall mutatis mutandis apply to the insolvency resolution process of the financial service provider.
- Only the appropriate regulator can initiate the insolvency proceedings against the financial service provider.
- These rules pave the way to appoint an Advisory Committee by the appropriate regulator.
- Interim moratorium shall commence from the date of filing of the application till the admission of rejection of the application.
Initiation of corporate insolvency resolution process
- No corporate insolvency resolution process shall be initiated against a financial service provider except upon an application made by the appropriate regulator.
- The application shall be dealt with in the same manner as an application filed by a financial creditor under section 7 of the Code.
- On the admission of the application, the Adjudicating Authority shall appoint an administrator as proposed by the appropriate regulator.
Moratorium
- Interim moratorium shall commence from the date of filing of the application till the admission of rejection of the application, which will have the effect of the provisions of section 14(1) (2) and (3) of the Code.
- During the interim moratorium the licence or registration granted to the financial service provider who is subject to insolvency proceedings.
Advisory Committee
- The appropriate regulator shall appoint an advisory committee within 45 days from the commencement of the insolvency resolution process to advise the administrator in the course of insolvency resolution process.
- The Advisory Committee shall consist of 3 or more members.
- The members shall be of the persons of ability, integrity and standing and who have expertise or experience in finance, economics, accountancy, law, public policy or other profession in the area of financial services or risk management, administration, supervision or resolution of a financial service provider.
- The terms and conditions of the Members of the Advisory Committee and the manner of the conducting the meeting and the observance of the rules of procedure shall be such as may be determined by the appropriate regulator.
- The compensation paid to the Members of the Committee shall form part of the insolvency resolution process costs.
- The Administrator shall chair the meetings of the Advisory Committee.
Resolution plan
- The resolution plan shall include a statement explaining how the resolution applicant satisfies or intends to satisfy the requirements of engaging in the business of the financial service provider, as per laws of the time being in force.
- On the approval of the resolution by the Committee of Creditors, the administrator shall seek ‘no objection’ of the appropriate regulator to the effect that it has no objection to the persons, who would be under the control or management of the financial service provider after the approval of the resolution plan.
- The appropriate regulator shall, without prejudice to the provisions contained in section 29A of the Code, issue ‘no objection’ on the basis of ‘fit and proper’ criteria applicable to the business of the financial service provider.
- If the appropriate regulator does not give ‘no objection’ within 45 days from the date of receipt of such application, it shall be deemed that ‘no objection’ has been granted.
Filing of application
- No procedure has been prescribed for filing of application before the Adjudicating Authority.
- Till such procedure is notified, the application may be filed before the Adjudicating Authority under Rules 21 to 24 and Rule 26 of Part III of the National Company Law Tribunal Rules, 2016.
- An applicant shall after becoming aware, notify the Adjudicating Authority of any winding up petition presented against the financial service provider.
- The application shall be made in Form – 1 prescribed in the rules.
- The fee payable is ₹ 25,000/-.
- The consent of the proposed administrator shall be in Form – 2 shall be attached.
- The documents specified in Form 1 shall also be attached with the application.
- The application, along with the required documents, shall be filed in electronic mode when such facility is made available by the Adjudicating Authority.
- On filing the application, a copy of the application shall be forwarded to the registered office of the financial service provider by speed post or registered post.
- The Adjudicating Authority may admit an application to be withdrawn before its admission on the request made by the applicant.
Liquidation process
- The provisions of the Code relating to the liquidation of the corporate debtor shall apply mutatis mutandis to the liquidation proceedings of the financial service provider subject to the following conditions-
- the licence or registration obtained by the financial service provider from the appropriate regulator shall not be suspended or cancelled during the liquidation process, unless an opportunity of being heard has been provided to the liquidator;
- the Adjudicating Authority shall provide an opportunity to the appropriate regulator or being heard before passing-
- liquidation of the financial service provider under section 33 of the Code; and
- dissolution of the financial service provider under section 54 of the Code.
Voluntary liquidation process
- The provisions of the Code relating to the voluntary liquidation of the corporate debtor shall apply mutatis mutandis to the voluntary liquidation proceedings of the financial service provider subject to the following conditions-
- the financial service provider shall obtain the prior permission of the appropriate regulator under section 59 of the Code;
- the affidavit shall include a declaration that the permission of the appropriate regulator has been obtained;
- the Adjudicating Authority shall provide an opportunity to the appropriate regulator of being heard before passing dissolution order under section 59 of the Code.
Assets of third parties
- The moratorium shall not apply to any third party assets or properties in custody or possession of the financial service provider, including any funds, securities and other assets required to be held in trust for the benefit of third parties.
- The administrator shall take control and custody of third party assets or properties in the custody or possession of the financial service provider, including any funds, securities and other assets required to be held in trust for the benefit of third parties only for the purpose of dealing with them, in the manner, as may be notified by the Central Government under section 227.
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