Summary: The insolvency of Dewan Housing Finance Corporation Limited (DHFL) provides an important example of India’s special framework for resolving distressed financial institutions. Section 227 of the Insolvency and Bankruptcy Code, 2016 permits the Central Government, in consultation with the appropriate financial sector regulator, to notify categories of financial service providers for insolvency and liquidation proceedings. The Financial Service Providers Rules, 2019 established a special procedure, while the November 2019 notification covered NBFCs, including housing finance companies, with assets of ₹500 crore or more. DHFL became the first financial service provider to undergo insolvency under this framework after RBI intervention. The NCLT approved the resolution plan submitted by Piramal Capital and Housing Finance Limited on 7 June 2021. Although the resolution provided a mechanism for dealing with the company’s financial difficulties, it also highlighted concerns regarding depositor recoveries, creditor treatment, transparency and timely regulatory intervention. The article examines these concerns alongside the proposed Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, which was withdrawn in August 2018, and therefore does not constitute existing law. It also considers financial resolution systems in the United States, United Kingdom and European Union. The discussion emphasises the need for clear regulatory powers, accountability, creditor coordination and practical safeguards for depositors while assessing whether India requires a broader financial resolution framework.
Introduction
Financial institutions plays an vital role in the country’s economy. Banks, (NBFCs) and housing finance companies provide loans to the companies and their businesses. Huge people are depend on these financial institutions for their business and financial needs. Thus clearly says, when a financial institution fails means, the impact is not just limited to the company. It can also affect depositors, employees, creditors etc in the financial system.
The Insolvency and Bankruptcy Code, 2016 (IBC) provides a process for dealing with the insolvency of companies. However, financial service providers wants special treatment because of its tremendous impact. Section 227 of the IBC allows a special provision for the the Central Government to notify certain financial service providers for the insolvency and liquidation proceedings.
The insolvency of Dewan Housing Finance Corporation Limited (DHFL) was an essential test of this framework. It point outs that the IBC can helps to resolve a failing financial institution, but it also claims questions about the protection of depositors and the need for proper framework .
Section 227 and Financial Service Providers:
Section 227 of the IBC deals with the insolvency and liquidation of financial service providers. It is the special provision which give the Central Government power to notify the financial service providers and categories of such providers for this purpose after consulting the appropriate financial sector regulator.
The IBC was mainly drafted to deal with companies which cannot repay their debts or condition in default. Clear view is that, the failure of a financial institution is completely different from the failure of an ordinary company. A financial institution may handle their public deposits and provide loans to the many customers and also have connections with other institutions. Its sudden default can affect lot of people who have a little control over the institution’s decisions.
To address this issue, the Central Government made the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, on 15 November 2019. These Rules provide the special procedure to deal with notified financial service providers.
Under this framework, the appropriate regulator proposes the appointment of an administrator and the Adjudicating Authority appoints the administrator. The administrator performs the subsequent functions which involved in the insolvency process. An advisory committee can also be formed to assist the administrator.
In November 2019, the Central Government notified the certain categories of NBFCs, including housing finance companies with assets of ₹500 crore or more under this category.This made it good to deal with eligible financial service providers through a process absolutely suited to their special position in the financial system.
Lessons from DFHL case:
Dewan Housing Finance Corporation Limited was a housing finance company which provides loans to people including middle and lower income households. It faces a serious financial difficulties after concerning about the financial sector increases in the following IL&FS crisis in 2018. A lot of questions were also raised about its financial position, management and irregularities.
Social Reports and allegations about the company creates concern among the creditors and depositors. The company’s payment is in difficulties which showed that how the failure of a financial institution could affect the company not only large lenders but also ordinary people who had invested their savings in fixed deposits.
On 20 November 2019, RBI superseded DHFL’s board and appointed an administrator. The RBI, then started an insolvency proceedings under the special framework for the financial service providers. On 3 December 2019, the National Company Law Tribunal (NCLT) admitted the insolvency application.
DHFL is the first financial service providers company undergo insolvency under this special framework. During the process, the administrator viewed on the company’s financial position and the claims of the creditors. Allegations of fraudulent transactions are also investigated and the relief which was soughted out under Section 66 of the IBC in relation to alleged fraudulent trading also focused. Allegations should not be treated as facts unless the court proves them.
This case demonstrated the importance of early regulation and proper examination of financial records also the legal process for dealing with a failing financial institution.
Resolution of DHFL and the Problems Faced by Depositors:
Piramal Capital and Housing Finance Limited emerged as the successful resolution applicant. The NCLT approved its resolution plan on 7 June 2021 and the acquisition was completed later in 2021.
The resolution helps to provide a suggestion for the company and its creditors. It also pointed out that the insolvency framework could be used to deal with a large and trouble housing finance company rather than leaving the institution without a clear vision of resolution process.
However, the final stage of a resolution process does not automatically mean that each creditor receives the full amount owed to them. Creditors may receive less than their original claims which depending on the available assets and the terms of their approved plan. DHFL’s depositors and other creditors also faced concerns about on how much of their money they may recover.
This is one of the important lesson of the DHFL case. Depositors may put their savings in a financial institution believing that their money is quite in safeplace. When the institution fails prove that , they may have limited bargaining power and also not fully able to understand the risks which are involved. They can also face some delays before receiving any kind of recovery.
At the mean time, the law also considers the rights of all creditors and their value need to preserved. Giving one sector complete priority without considering their legal rights of others may create further difficulties. Thus, a fair resolution system should balanced the interests of the depositors and other creditors in the wider financial system.DHFL case shows that resolving the company is only part of the problem. This process must also address on how the ordinary depositors are to be treated ans how quickly they receive information and how theirinterests are been considered during insolvency.
The FRDI Bill and it’s framework:
The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 was introduced to make a broader framework to deal with the failure of financial institutions. It also proposed a system for an early intervention and resolution among different categories of financial service providers along with a framework which involving deposit insurance and resolution powers.
The proposal attracted to the public concern, particularly on the proposed bail-in mechanism. A bail-in generally means under specified legal conditions the certain creditors’ claims can be written down or converted into equity to help them to be stabilise on a failing institution. This is different from a bail-out, where external financial support is provided in nature. A bail-in does not actually mean that every depositor would automatically lose their actually savings, also people were concerned about theirs how such powers might affect their money.
Due to these concerns which are raised, the FRDI Bill was withdrawn in August 2018. It is important to remember that the Bill is not an existing law. Therefore, it will be incorrect to say that DHFL was resolved under the FRDI Bill or else , that the Bill currently provides a legal protection to the depositors.
The withdrawal of the FRDI Bill does not remove the need for a proper system to handle the failure of the financial institutions. India still needs a timely one and an organised way to deal with such failures while it protecting the depositors and also maintaining public confidence in the financial sector.
The DHFL experiences on making this question relevant. The Section 227 provides a special route for notified the financial service providers and also India can still examine on whether a more comprehensive financial resolution framework is needed. Such a framework need not simply reproduce on the withdrawn of FRDI Bill. Instead, it should learn from the concerns which are raised and provide a clearer safeguards for the depositors and other affected persons.
Lessons from Other Countries:
Other countries have developed the special systems to deal with the failing financial institutions.
In the United States, the Dodd–Frank Act which provides a special resolution process for certain systemically important financial companies. The United Kingdom has a special resolution regime for banks under the Banking Act 2009. The European Union also has a framework under the Bank Recovery and Resolution Directive.
These systems recognise that the failure of a financial institution may create many problems beyond the institution itself. They also provide the legal powers and procedures to intervene and manage a failing institution and also reduce the risk of wider financial disruption.
India cannot simply copy these systems because its financial sector, legal structure and regulatory needs are different. However, these examples show that a country can also create special resolution arrangements while setting the rules for how the powers must be used.
For India, the main lesson is that financial resolution should not only depend on dealing with the debts of the failed company. It should also consider the financial stability, accountability and the protection of people whose savings are involved.
Suggestions:
The DHFL experience suggests that India should continue examining whether its present framework is sufficient to deal with different types of financial institutions. Any future reform should focus on the following areas.
- Depositor protection: Clearly explain the protection available to depositors and its limits.
- Early action: Regulators should identify financial problems and act before they become worse.
- Coordination: Clearly define the roles of regulators and insolvency authorities.
- Transparency: Establish clear rules for treating creditors and protecting depositors.
Accountability: Take legal action against those responsible for fraud or misuse of funds after proper investigation.
Conclusion
Section 227 of the IBC and the Financial Service Providers Rules, 2019, provides an important legal route to dealing with the notified financial service providers. The DHFL case which shows that this special framework that can be used to resolves a major housing finance company.
However, it also highlights the difficulties that are faced by depositors and the limits of treating the resolution as only a matter of settling the creditors’ claims.
The FRDI Bill was withdrawn in 2018 and that cannot be treated as current law. Still, these issues will raised the remain relevant discussions about the financial stability and depositor protection.
India should therefore be examine the need for a comprehensive financial resolution framework that provides clear powers, early intervention and coordination between the authorities and it’s proper safeguards for depositors.
The main lesson from the DHFL case is that resolving a financial institution is not enough on its own. The process must also be fair, transparent and sensitive to the people affected by its failure.
A well designed framework which can help to protect the public trust while allowing failing financial institutions to be dealt with in an orderly manner.
