NEW DELHI : The government on Friday issued fresh rules under the Insolvency and Bankruptcy Code (IBC) that are likely to help out distressed shadow banks and housing financiers, which have been battling a liquidity crunch for a year.

The ministry of corporate affairs said that financial services providers, or classes of such entities, will be covered by a special window under the bankruptcy code, which will be notified from time to time. The decision will be made after talks with the concerned regulators.

The move is likely to help distressed Dewan Housing Finance Corp. Ltd (DHFL) to draw up a resolution plan under IBC. Potential investors may prefer the protection offered by the legal process.

As per the new rules, only a regulator will be allowed to refer a non-bank lender or housing financier to a bankruptcy tribunal, unlike in the case of companies that can approach a tribunal on their own, or can be dragged into one either by lenders or operational creditors such as material suppliers.

The bankruptcy tribunal will appoint an administrator who will try to stitch together a turnaround plan. The administrator will be nominated by the regulator, such as the Reserve Bank of India (RBI) in the case of non-bank lenders and housing financiers.

The new rules say that the registration or the licence of the financial services provider will not be suspended or cancelled during the bankruptcy resolution process. In case a turnaround of the financial institution is not possible, before deciding to liquidate it, the tribunal will listen to the views of the regulator.

The new rules address an important regulatory gap by bringing in certain classes of financial institutions under the scope of IBC.

According to a 7 June RBI circular, banks could review defaulting accounts for a month and decide the strategy, and had six months to take defaulters to the bankruptcy court. But since non-bank lenders were not covered under IBC, there was ambiguity on how to deal with these entities. A court-monitored procedure for resolving their distress will now enable new investors to back a turnaround plan, as it will offer them legal protection from any risk associated with investing in a bankrupt firm.

Experts welcomed the move. According to L. Viswanathan, partner at Cyril Amarchand Mangaldas, the new rules under IBC was a timely step for resolution of financial services providers, permitting an interplay between regulators, creditors and the National Company Law Tribunal (NCLT) for appropriate actions.

“This interim framework is a constructive development for resolution of financial service firms. It is a unique model where the regulator, the creditors and the adjudicating authority (NCLT) have clearly defined roles to play, possibly the first of its kind," said Viswanathan.

Non-banking financial companies (NBFCs) and housing finance companies have been under stress ever since Infrastructure Leasing and Financial Services Ltd (IL&FS) defaulted on loan repayments last year, which subsequently, prompted the Centre to replace the company’s board of directors with members chosen by the government.

According to industry watchers, the failure of IL&FS acted just as a trigger to set off a liquidity crisis, at a time when the NBFC sector was already reeling under toxic levels of stress.

The central government has, meanwhile, taken a series of steps in recent months to make it easier for NBFCs to get access to funds.

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