The CENTRE is expected to notify rules under Section 227 of Insolvency and Bankruptcy Code which will allow the National Company Law Tribunal to order a resolution plan for non-banking finance companies (NBFCs) too. At present, under IBC, financial institutions cannot be taken for resolution to NCLT.
A source in the government, who did not wish to be named, told The Indian Express, “The government is working to put in place regulations under the IBC to ensure resolution of stressed NBFCs and HFCs.” Cases including that of DHFL is expected to gather pace once the section and rules are notified.
The notification will allow existing consortium of lenders and the existing resolution professional to take the financial service provider or the NBFC to the NCLT and seek a resolution plan that is binding on all parties.
In the case of DHFL, while most stakeholders agreed for resolution, some bondholders and mutual funds were not in favour and had sought repayment of their full dues and filed cases in courts, sources familiar with the development said.
Once banks take an NBFC for resolution to the NCLT, cases filed by disparate creditors against the NBFC get nullified, paving the way for faster resolution. “What is currently holding up resolution in cases like DHFL, is that different creditors pursue recovery in their own ways. For instance, many bondholders move debt recovery tribunals fearing a haircut. Under the NCLT mechanism, once a resolution plan is decided upon, creditors cannot go to separate forums for relief,” a source said.
Section 227 of the IBC states: “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.”
Sources said the government has held consultations on this issue with financial regulators. The Ministry of Corporate Affairs is expected to put in place a set of rules that would be notified soon.
On Thursday, the Financial Stability and Development Council Chaired by Finance Minister Nirmala Sitharaman too discussed issues concerning NBFC and credit rating agencies. Since the existing mechanism of Inter Creditor Agreement has not been successful in finalising resolution plans for stressed NBFCs, resolution via the NCTL mechanism is being seen as binding on all creditors.
DHFL, with outstanding loans of around Rs 78,000 crore (as per the debt resolution plan in July 2019), has been facing liquidity pressure since the IL&FS crisis hit the NBFC sector in September 2018. A series of debt defaults by IL&FS had spiraled into a broader liquidity crisis for the markets putting pressure on several NBFCs.
Various stakeholders have been in contention over the payments received from the company. While mutual funds approached the courts to recover their dues, after banks took the bulk of Rs 1,300 crore that the company paid between June and July 2019, the Bombay High Court has restrained Dewan Housing Finance Corporation from making further payments or disbursements to any lender. While bondholders have exposure of around Rs 40,000 crore to DHFL, banks have exposure of around Rs 27,000 crore.
DHFL has been facing stress to honour its debt repayments started selling profitable subsidiaries to raise funds. DHFL and promoter firm Wadhawan Global Capital sold about 80% combined stake in education loan company Avanse Financial Services Ltd to private equity major Warburg Pincus. Wadhawan Global Capital also sold its entire 70% stake in Aadhar Housing Finance to Blackstone. DHFL also exited the affordable housing finance company by selling its entire 9.15% stake.