New framework for stressed financial cos underway, FSDC meet likely today : Report

New Delhi, Sept 27 : Financial sector regulators are likely to discuss a new framework for stressed financial conglomerates at RBI headquarters on September 27, reports Business Standard. The Financial Stability Development Council (FSDC), which includes top officials of the Reserve Bank of India, the Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI) will meet on September 27 to discuss the bailout process for these companies. After the debt crisis at Dewan Housing Finance Corporation (DHFL), there is discussion to adopt a uniform approach to cover lapses in coordination and inter-regulatory issues. The default by DHFL on interest payment to its debenture-holders was followed by a rating downgrade by ICRA and CRISIL to default. A standard operating procedure (SoP) will be implemented under the framework for parent companies to bail out distressed subsidiaries. Currently, there is no defined procedure for parent companies to follow in case their subsidiaries default or face a liquidity crunch.
Regulators will identify firms based on certain parameters that will come under the new mechanism, sources told the paper. The shortlisted firms will not include companies under the Insolvency & Bankruptcy Code (IBC) or those under any resolution process.
Later, a senior financial expert will chair the panel of the distressed firm to monitor the implementation of the SoP. Therefore, the resolutions will be examined on a case-by-case basis. DHFL and some other important non-banking financial companies (NBFCs) might not come under the new framework, sources said.
Sectoral regulations also currently limit a standard resolution process. There are also legal complications in parent company bailing out subsidiaries as each is an independent entity. Therefore, sources told the publication that all regulators need to make joint efforts for revival of the stressed arm.
The central bank is losing its grip over many decisions and each case can’t be referred to IBC, Ashwin Parekh, an independent banker, told the daily.
Cases under IBC usually experience major delays and subsequent litigations. Sources reinstate the need for all regulators to accept the resolution with the offered haircut. The NBFC sector has been facing troubled times for several months. The new measures should bring part relief to this liquidity crunch. The spate of recent downgrades in NBFCs, housing finance companies and infrastructure projects highlight the problems caused by the crisis.