NCLT: Stockbroker Company is a Financial Service Provider under IBC

NCLT: Stockbroker Company is a Financial Service Provider under IBC

Dismisses the petition filed by the company seeking initiation of the Corporate Insolvency Resolution Process

The New Delhi bench of the National Company Law Tribunal (NCLT) has held that a stockbroker company is a financial service provider under the Insolvency and Bankruptcy Code (IBC), 2016.

Adjudicating the Bezel Stockbrokers Private Limited vs Security Exchange Board of India & Anr case, the Coram of Ashok Kumar Bhardwaj (Judicial Member) and LN Gupta (Technical Member) stated, “Since the corporate applicant is a stockbroker, dealing in the activities of buying, selling, or dealing in securities, etc., which in terms of Section 3(15) of IBC are a ‘Financial Product’ belonging to another person. Hence, in terms of Section 3(16), the corporate applicant was providing ‘Financial Service’ or in other words, it was a ‘Financial Service Provider.’”

The Insolvency Resolution Process (IRP) under IBC can only be initiated against a ‘Corporate Person’, which excludes a ‘Financial Service Provider.’ Thus, the bench dismissed the petition filed by the stockbroker company seeking initiation of the Corporate Insolvency Resolution Process (CIRP).

Bezel Stockbrokers Pvt. Ltd. filed an application under Section 10 of the IBC seeking initiation of CIRP against it. The company is a stockbroker registered with the Securities and Exchange Board of India (SEBI), under the Stock Brokers and Sub-brokers Regulations, 1992.

Bezel contended that it was undergoing a financial crisis and could no longer continue operations. It was also declared a defaulter and expelled from the National Stock Exchange (NSE) membership.

But SEBI opposed the petition, contending that the company was a ‘Financial Service Provider’ and not a 'Corporate Person' under IBC. Therefore, it was ineligible to seek CIRP initiation.

The question arose whether a stockbroker company was a ‘Financial Service Provider.’

NCLT observed that under Sections 7, 9 and 10 of IBC, CIRP could be initiated only against a Corporate Debtor. Section 3(8) defines a Corporate Debtor as ‘a corporate person who owes a debt to any person.’ The definition under Section 3(7) excludes ‘any financial service provider.’ Therefore, if the company was a ‘Financial Service Provider’ CIRP could not be initiated against it.

The bench stated that it must first know if a stockbroker company could be categorized as a financial service provider.

Section 3(17) of IBC defines ‘Financial Service Provider’ as ‘a person engaged in the business of providing financial services in terms of authorization issued or registration granted by a financial sector regulator.’

In Section 3(18), the ‘Financial Sector Regulator’ means ‘an authority or body constituted under any law for the time being in force to regulate services or transactions of the financial sector.’ It includes SEBI.

Section 3(16) defines ‘Financial Service’ as services to financial products. Similarly, Section 3(15) defines financial product to mean securities, contracts of insurance, deposits et al. This means that securities are a financial product.

The tribunal observed that shares, scrips, stocks, bonds, debentures, debenture stocks, etc., were included under the term ‘Securities.’

The company had acknowledged in the petition that it was carrying the business as a ‘stockbroker/proprietary trading member/clearing member for carrying on the activities of buying, selling, or dealing in securities/clearing and settlement of trades.’ Hence, it could be treated as a ‘Financial Product.’

The bench ruled that the stockbroker company is a ‘Financial Service Provider’ under Section 3(16) of IBC, as it provides financial service by dealing in financial products such as securities.

Importantly, it stated that since SEBI is a financial sector regulator, the company’s registration with it showed that it was a ‘Financial Service Provider.’

While dismissing the petition, the tribunal noted that CIRP could only be initiated against a ‘Corporate Person’ and not a ‘Financial Service Provider.’