Status as on- 13/12/2019
Recently, Reserve Bank of India has instituted an Insolvency proceedings against DHFL one of the most prominent and well-known NBFC in the Indian market. Let’s analyze it.
Not long-ago Non-Banking Financial Sector (NBFC) commonly referred to as the ‘Shadow Banking Sector’ was on the rise. It facilitated smooth flow of credit in the market and it provided credit majorly to SME’s and MSME’s. But the situation has drastically changed in the last few years. The reliance of the NBFC sector over short-term lending and extra-commercial borrowings left it exposed. The default made by Infrastructure Leasing & Financial Services Limited (IL&FS) drastically changed the dynamics of the Indian economy. The government was forced to re-examine its liquidity norms to cure the possible defects in it.
Government paid attention to this and came up with two possible remedies. Firstly, in 2019 by amending the Reserve Bank of India Act, 1934, where, it inserted Section 45-IE to empower the RBI to replace the existing Board of Director of a NBFC if it is in public interest. Secondly, by way of Ministry of Corporate Affairs, it issued a notification dated 18th November, 2019, which empowered the RBI to institute an Insolvency proceedings against a NBFC with asset size of Rs.500 crore or more.
DHFL proved to be one of the first victims of the above-mentioned changes. For instance, firstly RBI on 20th Nov, 2019 superseded the Board of Directors of the DHFL on grounds of governance concerns and secondly, its instituted insolvency proceeding against DHFL which got admitted by NCLT Mumbai on 2nd Dec, 2019. Thus, making DHFL the first financial services firm that will undergo insolvency proceedings.
Therefore, it seems that the government came up with a plan to remedy the situation, especially post IL&FS case. However, they excluded NBFC with asset size less than 500 crore from purview of this change to prevent a situation of panic. But the main question that still remains that to what extent will these changes stand the test of legality before the Courts. As a matter of fact, the institution of Insolvency proceedings against DHFL will result in Courts to venture out over new dimensions of prospective rights and liabilities of the financial service providers. Thus, one can expect possible landmark judgments that would make a larger ramification. It will possibly raise an alarm for NBFC with asset size more than 500 crore to ensure that they are complying with the master directions issued by the RBI and prudential norms issued by it in respect of stressed asset.
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