Resolution of DHFL’s distress: A shot in the arm for IBC financial services provider’s rules

By Anchal Jindal

The resolution of insolvency crisis of Dewan Housing Finance Corporation Limited (DHFL), a non-banking financial company, is a big shot in the arm of Insolvency and Bankruptcy Code and its Financial Services Provider (FSP) rules.

In 2018, when the giant non-banking financial company IL&FS collapsed causing disturbing chimes throughout the lending industry and thus banks turned out to be substantially more basic of their loaning to DHFL making it one of the top India’s defaulters owing approximately Rs 1,32,328 Crore to its lender including banks and mutual funds and became the first financial service provider in India to land into the corporate insolvency resolution process under the provisions of the Code.

On 20 November 2019, RBI exercised its powers under Section 45 IE 5(a) of the RBI Act, 1934 owing to governance concerns and defaults by DHFL in meeting various payment obligations. RBI supplanted the top managerial staff of DHFL inferable from administration concerns and defaults by the company in meeting various payment obligations.

On 29 November 2019, RBI exercised its powers under FSP Rules and filed application before NCLT, Mumbai for initiation of CIRP against DHFL under Section 227 read with Section 239(2)(zk) of Code read with Rule 5 and Rule 6 of FSP Rules. Interim Moratorium began as soon as the application to initiate CIRP was filed against DHFL.

Regulatory Provisions

Section 227 of The Insolvency and Bankruptcy Code 2016 deals with the “Power of Central Government to notify Financial Service Providers etc.” which states that:

“Notwithstanding anything to the contrary contained 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.”

Explanation: For the removal of doubts, it is hereby clarified that the insolvency and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.

The Ministry of Corporate Affairs (MCA) through its notification dated 15 November 2019, exercised its power as granted under Section 227 read with Section 239(2)(zk) of the Code, notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019 (FSP Rules) to provide a framework for insolvency and liquidation proceedings of FSPs other than banks. Further through notification dated 18 November 2019, MCA in consultation with RBI notified that insolvency and liquidation proceedings of Non-Banking Finance Companies (which include Housing Finance Companies) with asset size of Rs 500 Crores or more (as per last audited balance sheet) will be undertaken in accordance with the Code, FSP Rules and applicable regulations.

Section 3(16), 3(17), 3(18) of the Code defines Financial Services, Financial Service Providers and Financial Service Regulator respectively. For the purpose of FSP Rules the provisions relating to insolvency and liquidation proceedings; the term “Corporate Debtor” shall mean “FSP” and the term IP/IRP/RP/Liquidator shall mean “Administrator”.

FSP Rules at a Glance

• Only RBI for NBFCs can file an application as petitioner against a FSP and will be deemed as application filed by FC u/s 7 of the Code.

• An additional interim moratorium shall commence on and from the date of filing of application for initiation of CIRP. The interim moratorium shall be in effect till the application is admitted or rejected. After the Adjudicating Authority admits the initiation of CIRP application, the moratorium u/s 14 of the Code shall apply.

• Prohibition on suspension or cancellation of license or registration which authorises the FSP to engage in the business of providing financial services during the interim-moratorium, CIRP and liquidation proceedings

• Non applicability of moratorium on such assets that are in the custody or possession of the FSP including any funds, securities and other assets required to be held in trust for the benefit of third parties.

• Administrator chairs the meetings of the Advisory Committee.

• Administrator is duty-bound to take control and custody of third-party assets or properties in custody or possession of the FSP.

• An Advisory Committee comprising of three or more members to advice the administrator shall be constituted by the appropriate regulator within 45 days of the commencement of the insolvency commencement date. The terms and conditions of the members of the Advisory Committee shall be determined by the appropriate regulator.

• Application by appropriate regulator shall be made in Form 1 accompanied by a fee of Rs 25,000 along with a written consent and declaration in accordance with Form 2 from proposed Administrator.

• Up on the admission of application, AA will appoint the Administrator as proposed by appropriate regulator, who shall act and have same duties, functions, obligations, responsibilities, rights and powers of an IP.

• In respect of the resolution plan, an Administrator is required to seek ‘No Objection Certificate’ from RBI who on the basis of ‘Fit and Proper’ criteria will issue the certificate without prejudice to the provisions contained in Section 29A of the Code. Where an appropriate regulator does not refuse ‘no objection’ on an application made within forty-five working days of receipt of such application it is deemed that ‘no objection’ has been granted.

• Provisions laid out under Code & Regulations related to liquidation/voluntary liquidation of the corporate debtor shall apply mutatis mutandis to the liquidation/voluntary liquidation process of a FSP and Adjudicating Authority is under an obligation to provide the appropriate regulator an opportunity of being heard before passing an order for dissolution of the FSP.

Resolution of DHFL Crisis

Upon admission of the application by NCLT, Mumbai Bench, R Subramaniakumar (Former MD and CEO of Indian Overseas Bank) was appointed as the Administrator and RBI appointed a three-member Advisory Committee to assist the Administrator.

On 4 December 2019, the Administrator called for submission of claims from creditors of Corporate Debtor, DHFL and included public depositors as class of creditors under Section 21(6A)(b) of Code.

Also Read: Piramal Group’s letter to creditors of DHFL protesting Adani’s ‘unsolicited’ bid

On 30^th December 2019, Advisory Committee allowed DHFL to commence with the disbursement of loans to the tune of Rs. 500 Crores per month.

In October 2020, Piramal Enterprise, Adani Group, US-based Oaktree and Hong Kong-based SC Lowy submitted bids for DHFL.

In January 2021, CoC of DHFL voted in favour of a ₹37,250 Crores takeover bid submitted by the Piramal Group and as per the resolution plan, Piramal will pay Rs 12,700 Crores upfront to DHFL’s lenders and five years down the line, DHFL’s lender will be able to recover over Rs 37,000 Crores.

As per the plan submitted by Piramals, the bidder will delist the shares of the home financier and merge it with Piramal Capital Housing Finance Ltd. The plan is expected to lead to major losses for DHFL stockholders as it does not envisage any offer to buy out the shares held by these investors, unlike a regular delisting process.

Recently in February 2020, DHFL received RBI’s nod for the resolution plan offered by the Piramal Group and the plan will now be filed before NCLT, Mumbai Bench for the approval.

Piramal Group merger with DHFL will be effective from the date the NCLT, Mumbai Bench, approves the resolution plan, thus adding 4,500 employees to the group and investing Rs 10,000 Crore of Piramal Capital’s equity in the merged entity.

Anchal Jindal is a Company Secretary. She works as a Senior Associate with Areion Group