NEW FRAMEWORK TO BAIL OUT STRESSED FINANCIAL COMPANIES LIKELY TODAY
An inter-regulatory panel of the FSDC will meet at the RBI headquarters on Friday to discuss the new framework
Amid the crisis at DHFL, financial sector regulators are planning a new framework for resolving stressed financial
conglomerates. The new framework, which the regulators will discuss at a meeting in Mumbai on Friday, would help adopt a uniform approach to bailing out such companies. The process is hampered now because of a lack of coordination and interregulatory issues. Sources in the know of the developments said the Financial Stability and Development Council, which includes the chiefs and senior officials of the RBI, Sebi, and the Insurance Regulatory and Development Authority of India, would meet at the RBI headquarters.
Amid the crisis at Dewan Housing Finance Corporation (DHFL), financial sector regulators are planning a new framework for resolving stressed financial conglomerates.
The new framework, which the regulators will discuss at a meeting in Mumbai on Friday, will help adopt a uniform approach to bailing out such companies. The process is hampered now because of a lack of coordination and inter-regulatory issues.
People in the know of the developments said the Financial Stability and Development Council (FSDC), which includes the chiefs and senior officials of the Reserve Bank of India, the Securities and Exchange Board of India, and the Insurance Regulatory and Development Authority of India, will meet at the RBI headquarters.
If the framework is implemented, standard operating procedures (Sops) will be set up for the parent company to bail out its stressed subsidiary company. At present, there is no role defined for the parent if the subsidiary defaults or faces liquidity stress. Further, the regulators will appoint a senior financial expert on the panel of the stressed firm for monitoring resolution.
Sources said the regulators would identify the companies that would come under the new mechanism and require a lifeline. “It will be on a case-to-case basis; not every finance company would come under this. The regulator will decide certain parameters, based on which financial conglomerates would be shortlisted,” said a regulatory official privy to the development.
This mechanism will not cover companies already under insolvency or had initiated a resolution process under the Insolvency and Bankruptcy Code (IBC), sources said, adding that DHFL and other systemically important non-banking financial companies (NBFCS) might not come under this new framework.
Another source said if an arm of a conglomerate defaulted, not only the regulator concerned but all the regulators should step in and proceed with resolution. At present, each regulator is bound by its laws and acts in accordance with its sectoral regulations.
Sources said regulators might advise the parent company of the particular subsidiary to bail out the stressed arm. They also may give exemption. For instance, when LIC became a majority stakeholder in IDBI Bank, the latter faced Sebi’s takeover code hurdle.
Legal complications may arise if the parent tries to bail out its group company since the balance sheet of each company is different. “When a company is in stress and looking for a resolution plan, all regulators should make joint efforts if there is scope for revival. Currently, there is a lack of coordination. Each case cannot go to the IBC. There has to be a different approach for each company facing a liquidity crunch,” said Ashwin Parekh, an independent banking expert.
According to him, the central bank is losing its grip over many decisions, leading to shrinkage of the banking space.
Whatever the haircut a lender decides, it should be acceptable to all the regulators, said another expert. Currently, all regulators are not on the same page because there are secured and non-secured creditors, and in a majority of cases, exposures of mutual funds are substantially high.
Major NBFCS are facing an acute liquidity crunch. They are selling their non-core assets, and securitising retail assets to banks. Meanwhile, DHFL, India’s third-largest housing finance company, alongside Reliance Capital and the IL&FS group, has been downgraded to the default category. All three were considered AAA once.