A legal commentary highlights the Insolvency and Bankruptcy Code’s exclusion of financial service providers and calls for urgent legislative intervention to create a resolution regime for distressed financial firms.
Call for Legislative Overhaul to Address Failing Financial Firms
A recent commentary underscores the absence of a dedicated resolution mechanism for failing financial service providers (FSPs) under India’s Insolvency and Bankruptcy Code, 2016 (IBC). While the IBC revolutionized corporate insolvency by empowering creditors to resolve distressed non-financial companies, it explicitly excluded FSPs, leaving a critical regulatory gap.
The article notes that the IBC’s commercial-centric model was not designed for financial institutions, where systemic risk, depositor protection, and regulatory stability are paramount. Without a tailored insolvency framework, the failure of banks, NBFCs, or insurance firms often results in ad hoc interventions by regulators—such as moratoriums or amalgamations—without statutory clarity or predictable timelines.
The author advocates for urgent legislative intervention, proposing a model akin to the Financial Sector Insolvency and Bankruptcy Code (drafted by IBBI's Technical Committee) that integrates with existing regulators like RBI, SEBI, and IRDAI. For legal practitioners, such a regime would introduce complex, multi-jurisdictional restructuring mandates, demanding new expertise in financial regulation and cross-sector compliance.
