DHFL becomes 1st financial services firm to be taken to NCLT

The Reserve Bank of India (RBI) has referred Dewan Housing Finance Corp. Ltd (DHFL) to the National Company Law Tribunal (NCLT) for insolvency proceedings, making it the first financial services player to go NCLT for a possible debt resolution. DHFL has a debt of Rrs.83,873 crore. As per the statutory inspection of DHFL conducted by the National Housing Bank, the DHFL showed a serious deterioration in its finances. It had public deposits of Rs.6,188 crore as on 6 July 2019, down from Rs.10,166.72 crore as on 31 March 2018.

Key Highlights

RBI has filed an application for initiation of corporate insolvency resolution process against DHFL under Section 227 of Insolvency and Bankruptcy Code (IBC), 2016 read with Rules 5 and 6 of Insolvency and Bankruptcy Rules, 2019.

R. Subramaniakumar, the RBI-appointed administrator for DHFL, will take over lender’s affairs once his appointment is approved by National Company Law Tribunal (NCLT).

New Powers Granted to RBI

DHFL is first financial services firm to be sent to bankruptcy tribunal after government notified the rules for referring financial services providers (FSPs) on 15 November 2019. Thereby now, unlike insolvency proceedings for companies from other sectors, a Financial Services Providers (FSPs) creditor/debtor cannot approach tribunal- the firm has to be referred by a regulator.

Under new powers granted to RBI in Union budget, the central bank can take over administration of privately-held financial services companies. Moreover, RBI can also remove auditors, call for an audit of any group company, and have a say on compensation of top management of an Non-Banking Financial Companies (NBFCs). As per new FSP insolvency rules, an interim moratorium will start from the date of filing of application till its admission/ rejection.

Way Forward:  Most likely this model will be followed for other NBFC as well because currently there is a lot of discussion about other NBFCs not being in a position to meet their debt servicing obligations. This could also be a used as a tool for RBI to ensure timely resolution for large NBFCs with significant public investments.

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Month: Current Affairs - November, 2019