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On November 18, 2019, the Ministry of Corporate Affairs in consultation with Government of India and RBI has issued a notification. It notifies the rules under Section 227 of the Insolvency and Bankruptcy Code (IBC), 2016. It enables the National Company Law Tribunal to pass an order of faster resolution plan for Non-Banking Financial Companies (NBFCs).
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The Government sets up regulations under the IBC to ensure the resolution of stressed HFCs and NBFCs. MCA notification will permit the existing consortium of lenders and the current resolution professional to undertake the financial services of NBFC to the NCLT. Have a look at the crux of the notification:
- As per the new IBC provisions (Non-Banking Financial Companies) NBFCs and (Housing Finance Companies) HFCs with assets worth Rs 500 Crore shall be taken for debt resolution & liquidation proceedings.
- Further, this step will help NBFCs to overcome the problem of the liquidity crisis.
- As per a source “, once banks take upon NBFC for the resolution to the NCLT, all the cases filed by disparate creditors will get nullified.”
- The action which boosts such resolution in cases like DHFL is that different creditors pursue variant recovery methods.
- For instance, several bondholders move to debt recovery tribunals in fear of a haircut. However, once insolvency resolution plan came into effect under the NCLT mechanism, no creditors can go to separate forums for relief.
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NBFCs and HFCs Response to the MCA Notification
Though many NBFCs embrace the insolvency resolution with open arms, others show their disapproval. In the case of DHFL (Dewan Housing Finance Corporation Ltd.), most stakeholders were in favour of the resolution, but some bondholder’s exhibits dissent. Besides, they sought repayment of their full dues and filed cases in courts, sources familiar with the said development.
As per the reports of the debt resolution plan 2019, DHFL with outstanding loans of about Rs 78,000 Crore has faced liquidity pressure since the IL&FS crisis hit the NBFC sector in September 2018. A list of debt defaults by IL&FS has risen into a broader liquidity crisis for the markets that put pressure on several NBFCs.
Lately, NBFCs and HFCs have been facing much stress to honour its debt repayments, and thus they started selling profitable subsidiaries to raise funds. DHFL and promoter firm, Wadhawan Global Capital, has sold around 80% of its combined stake in education loan Company namely, Avanse Financial Services Ltd. Moreover, the Wadhawan Global Capital has also sold its 70% of stake to Aadhar Housing Finance and Blackstone group. Hence, one can foresee that insolvency resolution will bring a positive change for NBFC and HFCs.