Navigating the Efficacy of Post-Crisis Legal Reforms of The IL&FC Crises In India

[By Shraddha Tiwari & Tejaswini Kaushal]

The authors are students of School of Law Christ University, Bangalore and Dr. Ram Manohar Lohiya National Law University, Lucknow.



Infrastructure Leasing & Financial Services Limited (“IL&FS”), a distinguished stalwart in infrastructure financing, boasted a legacy spanning over three decades. Functioning as a shadow bank, this non-banking financial company (“NBFC”) emulated the services provided by conventional commercial banks. With its ownership lying substantially in the hands of esteemed state-backed entities and prominent international organizations and boasting an intricate network of subsidiaries coupled with connections with banks, mutual funds, and infrastructure players, it was recognized as a ‘systemically important’ enterprise. It was, somewhat ironically, classified astoo big to fail.”

In 2018, the shadow bank faced a liquidity crisis and payment defaults due to a risky combination of short-term debt and imbalances in long-term assets. Compounded by delayed bond issuance, disputes over government payments, and investigations by the Serious Fraud Investigation Office (“SFIO”)and the Enforcement Directorate (“ED”)for procedural lapses and money laundering, the IL&FS crisis sent shockwaves across the stock market. The company’s market reputation suffered, leading to a downgrade in its debt rating, causing concerns among investors such as banks, insurance companies, and mutual funds about its financial stability and potential ripple effects. As the company experienced delays and defaults on its debt obligations and inter-corporate deposits, it ultimately collapsed, worsening existing issues arising from mismanagement in the banking sector and regulatory shortcomings. Evidently, insolvency was IL&FS’s only chance to limit further economic damage.

IL&FS, an NBFC established under the Companies Act (“CA”) 2013, faces challenges in efficient insolvency proceedings due to delays and concerns in implementing the recommended ‘Financial Data and Management Centre’ to monitor systemic risk. The proposed Resolution Corporation, meant for crisis resolution, also encountered opposition, leading to the withdrawal of the Financial Resolution and Deposit Insurance Bill 2017 (“Bill 2017”). These issues hinder the smooth functioning of insolvency proceedings for NBFCs.

Under the Insolvency and Bankruptcy Code (“IBC”) 2016, IL&FS wasn’t subjected to the insolvency process despite the Central Government’s authority to invoke its Section 2 to refer financial service providers for resolution since NBFCs themselves cannot resort to the IBC owing to their status as financial service providers. However, IL&FS’s non-financial subsidiary entities, such as power and infrastructure projects, could use the IBC individually. However, the complicated connections between group companies and the uncertainty surrounding group bankruptcies were obstacles for a conglomerate like IL&FS in choosing the IBC route. The inability to bring the ultimate holding company, IL&FS, under the purview of the IBC posed a significant obstacle to the resolution process, and the creditor-driven nature of the IBC did not align with the desires of IL&FS’s promoters to retain control and management. Additionally, prior scholarship suggested that IL&FS primarily faces a temporary liquidity issue rather than insolvency, further dampening the desirability of the IBC as a resolution option.

The Alternate Route taken by IL&FS

The alternate route that IL&FS undertook was of Sections 230, 231 and 232, CA 2013, which offer provisions for schemes of arrangements and compromises, although infrequently utilized in India for debt restructuring purposes. Unlike the UK and Singapore, the schemes of arrangements mechanism have faced limited adoption in India due to cumbersome procedural requirements, lengthy delays, and creditor resistance. However, for IL&FS, this route presented certain advantages over the IBC, given its broader scope and flexibility to tailor the revival plan to the company’s specific needs, encompassing corporate and credit restructuring. Moreover, promoters can retain control throughout the scheme’s implementation, and unlike the IBC, a particular default is not a prerequisite under Section 230 of the CA 2013. This potentially allowed IL&FS to include financially sound entities within the scheme as necessary.

Though the best suited for IL&FS, this crisis underscored that the CA 2013 only offered a potential but imperfect solution through a scheme of compromise or arrangement between a company and its creditors or shareholders to reorganize its financial structure. The CA 2013 route entails securing approval from at least 75 percent of secured creditors or shareholders and the National Company Law Tribunal. While it preserves equity rights and provides flexibility for crafting comprehensive solutions, its drawbacks include the absence of explicit provisions for a moratorium or fixed timelines, and the lack of overriding effect over other laws like the Income Tax Act, 1961 unlike resolutions approved under the IBC. Challenges arise from the absence of a comprehensive framework encompassing all classes of creditors and the untested nature of anonymity of schemes in group insolvency scenarios. Additionally, the CA 2013, lacking a moratorium provision like Section 14 of the IBC, does not offer a time-bound resolution, which it reserves solely for specific creditors, and leaves uncertainty regarding the impact of IBC proceedings initiated during the scheme’s NCLT approval.

Effect of the Crisis

The IL&FS crisis exposed weaknesses in India’s financial regulatory framework, emphasizing the urgent need for comprehensive reforms to manage risks effectively. The default sent shockwaves, impacting NBFCs significantly as they are primary borrowers from banks. Credit rating downgrades affected even stable NBFCs, eroding credit profiles and damaging the overall economy. Investors lost confidence and withdrew investments, leading to a liquidity crunch. The absence of a specific bankruptcy law for financial service providers made the resolution and liquidation processes cumbersome and costly under the CA 2013. This highlighted the critical necessity of implementing a tailored bankruptcy law for such entities.

Post-Crisis Legal Reforms

The Central Government, by §227 of the IBC 2016, came up with the Bill 2017, but it was withdrawn due to various loopholes. Against the backdrop of the IL&FC crisis, it formulated the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, for NBFCs. These rules incline more towards the ‘regulator-driven approach’ than the traditional ‘creditor-driven approach’ followed by the IBC. These rules include housing finance companies with asset size of Rs. 500 core or more as per the previously audited balance sheet. The insolvency process can be initiated against the NBFC only upon an application by the RBI. The 2019 rules require an RBI “no-objection” within 45 days of the CoC’s resolution plan, and CoC’s commercial decisions  cannot be interfered with as per the Supreme Court in the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta. This case established that resolution proposals must be finalized by Resolution Professioonal (“RP”) appointed by NCLT at CoC’s recommendation, with no interference from authorities like NCLT or acceptance of related applications.

The resolution process’s efficacy is questionable due to complexities, particularly in interpreting the term “FSP” concerning NBFCs, which perform diverse functions. The conflict between the IBC and RBI Act necessitates a consistent jurisdictional framework, especially for third-party assets controlled by administrators.

The absence of a moratorium period for certain assets introduces uncertainty in interpreting and applying rules. Manufacturing and allied sectors face unique challenges as they lack tangible assets and their financial assets tend to deteriorate faster. Financial Service Providers (FSPs) heavily rely on leverage and cash flow, which are disrupted during IBC proceedings, making value realization difficult. Resolving FSPs requires bidders to manage recoveries, collections, and customer commitments, leading to prolonged and challenging resolution processes that bidders may wish to avoid.

The complexity arises when the asset becomes unprofitable or leads to significant losses for lenders. Regulatory supervision of FSPs can cause delays, but it ensures informed decisions regarding public funds and securitized assets by establishing a hierarchy in authority and maintaining framework for accountability. However, additional compliances, regulatory clearances, and involvement of a regulator-backed administrator can create delays and conflicts in FSP resolution, differing from other cases where the CoC has ultimate decision-making authority.

The regulator-appointed administrator might lack expertise to manage large corporations with multiple subsidiaries effectively. The RCap case highlights pitfalls in the IBC-led process, where procedural requirements prioritize over timely resolution, leading to reduced liquidation value.

Despite the mentioned drawbacks, the IBC-led recovery process has notable benefits, requiring bidders to commit upfront cash to address short-term liquidity challenges. Moreover, the IBC aims to ensure continuity as a going concern by establishing a sustainable structure. However, the process is evolving and needs time and support to reach its full potential.

Addressing the IBC-RBI Tussle

The IBC and RBI conflict in matters of insolvency of NBFCs has prevailed since long which has been pacified significantly by the 2019 Rules. NBFCs in India are subject to specific insolvency rules set by the Central Government. The RBI is the designated authority for initiating the Corporate Insolvency Resolution Process (“CIRP”) for NBFCs and appointing administrators to oversee it, akin to resolution professionals. An interim moratorium, in addition to the standard one, is in place during which no legal proceedings can be pursued against NBFCs. Moreover, RBI’s non-objection is required for any resolution plan to proceed. This inclusion of NBFCs in the IBC has offered them some relief, allowing them to address issues of liquidity and Non-Performing Assets (“NPAs”). It also safeguards them from baseless complaints, as RBI alone can initiate insolvency proceedings, ensuring only truly distressed NBFCs enter the process.

Could Earlier Adoption of New Rules have Averted the Crisis?

The implementation of the 2019 rules might not have effectively addressed the IL&FS crisis due to various complexities and challenges. These rules are still in their early stages and lack a systematic approach for resolving FSPs. The absence of tangible assets and the deterioration of financial assets during business stagnation create difficulties in the resolution process. Jurisdictional conflicts between the IBC and RBI Act can add to the ambiguity. Delays caused by additional tasks may lead bidders to consider alternatives, making the process burdensome and lengthy. In cases of unprofitable assets or significant losses for lenders, the situation becomes even more complicated. Overall, the new rules may not have efficiently resolved the IL&FS crisis given these complexities.

Way Forward

The prolonged resolution processes in cases like RCap and the Srei group of companies with uncertain outcomes raise questions about the effectiveness of including FSPs in the IBC. Given the regulatory system’s relative infancy, it is crucial to allow ample time for its development and implementation. Addressing whether the IBC supersedes the RBI Act or vice versa is of critical necessity to avoid jurisdictional conflicts. Clarity on issues related to third-party assets and the ambiguity arising from the non-applicability of the moratorium period can only be achieved through a government notification that simplifies the rules’ scope and intent.

While government initiatives for clarity have arisen, furthering the efforts of legislative bodies in addressing the IBC-RBI conflict requires delineating and harmonizing the scope of powers of each entity at the most fundamental level. To strike a balance, the 2019 Rules sufficiently clarify each of the authority’s roles by emphasizing the RBI’s systemic concerns in cases with far-reaching implications, all the while ensuring the IBC’s resolution process remains intact for other instances. What lacks is coordination through regular communication and information sharing. Additionally, adapting the legal framework to accommodate complex cases and establishing a structured process to assess systemic impacts is imperative to harmonize the efforts of these two entities and ultimately facilitating a more effective resolution process fro NBFCs.


The IL&FS crisis exposed weaknesses in India’s financial regulatory framework, highlighting the critical need for comprehensive reforms to enhance regulatory mechanisms and effectively manage risks. The inclusion of FSPs under the purview of the IBC can be regarded as a significant milestone in safeguarding the interests of investors involved in financial business services. This comprehensive provision establishes a systematic approach to liquidation proceedings. While there may be some gaps and shortcomings, identifying and addressing these issues by the relevant authority will facilitate smoother functioning and proceedings. The rules play a crucial role in protecting the interests of investors and stakeholders of FSPs during times of financial distress, offering support and relief.


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