By — Shreya Vakkaleri
Abstract
Ten years after the enactment of India’s Insolvency and Bankruptcy Code (“IBC” or “the Code”), the exclusion of banks and financial service providers (FSPs) under Section 227 from the ordinary corporate insolvency framework continues to remain a gaping hole in the legislation. The 2020 collapse of Yes Bank highlights this flaw, it demonstrates how India has almost accidentally constructed a framework that produces a parallel enforcement track that delivers accountability, minus the procedural discipline, creditor participation, or judicial oversight. Despite being in force for a decade, no systematic efforts have been made to close this gap; the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 was intended to provide this mechanism before it was withdrawn in 2018 due to public backlash over its bail-in clause. This article contends that the Section 227 gap has deliberately been left open-ended due to the state’s unwillingness to subject systemically important lenders to a resolution process it does not fully control.
Introduction: Exclusion and Its Rationale
The exclusion of banks from the IBC did not emerge in a vacuum; it reflects a considered, if incomplete, legislative judgment about the limits of ordinary insolvency law. Section 227 permits the Central Government, in consultation with regulators, to notify categories of FSPs for insolvency and liquidation proceedings under the IBC. In November 2019, the Ministry of Corporate Affairs (MCA) used this power to notify the FSP Rules for important non-banking financial corporations (NBFCs) valued under Rs 500 crore following the collapse of IL&FS in 2018. Consequentially, banks were carved out of the aforementioned limited extension; the rationale given was that ordinary insolvency law was unsuited for deposit-taking institutions. Therefore, banks require an intervention that prioritises financial continuity instead of liquidation-style value maximisation. Provisions should be made to empower a regulator (such as RBI) to intervene before balance sheet insolvency becomes a formal legal event.
However, to realistically implement this mechanism, Indian insolvency law has to build a framework that allows a dedicated regulatory body with proper safeguards and an enhanced bail-in system to make a bail-in politically and tolerable. The FRDI Bill was expected to provide this framework. However, without the power of the RBI, a power the FRDI Bill was never meant to replace, only to build upon, to apply to the Central Government for a moratorium under Section 45(2) of the Banking Regulation Act, 1949, the FRDI framework would have had no trigger mechanism at all. This is precisely why, in the Bill’s absence, Section 45 has had to do double duty as both moratorium power and de facto resolution tool. This dual role comes at a cost: Section 45 offers no equivalent to the safeguards built into the IBC’s own resolution framework. Neither is a stakeholder hierarchy comparable to Section 53 IBC, nor any statutorily mandated committee of creditors (CoC), nor avoidance provisions in Sections 43, 45, and 66 that allow an IBC resolution professional to claw back value from transactions structured to defeat creditors. The result is a resolution tool operating entirely on regulatory discretion, unconstrained by the very safeguards the Code was built around.
Yes Bank as a Case Study
When Yes Bank was placed under an RBI-imposed moratorium due to its rapidly deteriorating financial position in March 2020, the reconstruction scheme that followed was drafted and implemented entirely outside the IBC. A consortium led by the State Bank of India infused fresh capital, while the administrator restructured the bank’s capital base. Around ₹8,400 crore in Additional Tier-1 bonds (instruments marketed to institutional and retail investors as seemingly safe and loss-absorbing) were written down to zero, while existing equity shareholders were diluted without being wiped out entirely. Bondholders challenged this before the Bombay High Court, which held in January 2023 that the administrator had gone beyond his authority. The reconstruction scheme, properly construed, did not extend to extinguishing the AT-1 bonds. This ruling has been under appeal before the Supreme Court, with the Centre, RBI, and Yes Bank contending that reversing the write-down risks destabilising the tools available for future bank rescues. As of mid-2026, the matter remains reserved for judgment.
This protracted uncertainty is not incidental to the argument; it is the argument. Under the IBC, the priority of claims and the treatment of instruments like AT-1 bonds would have been governed by a known statutory waterfall, tested and litigated over a decade of NCLT and NCLAT jurisprudence. Under the Section 45 route, the same question has taken more than six years to work through the courts, with the answer still unsettled, which is precisely the kind of prolonged, ad hoc litigation the IBC’s time-bound design was meant to avoid.
The criminal accountability track ran on an even more disconnected timeline. Rana Kapoor, Yes Bank’s co-founder and former CEO, was arrested in March 2020 in connection with the ₹466 crore bank fraud case associated during his tenure. A substantial share was turned into non-performing assets were tied to quid pro quo arrangements benefiting his family; separate PMLA and CBI cases followed. Two years into these proceedings, a special PMLA court granted Kapoor bail on the basis that prolonged pre-trial incarceration without a framed charge amounted, in substance, to punishment without conviction. As a consequence of this result, the Court itself characterised it as “serious” given how few PMLA prosecutions nationally have concluded in a verdict. Irrespective of the eventual outcome, the criminal process has operated on a timeline and an evidentiary logic entirely independent of the bank’s financial resolution. A resolution professional under the IBC, by contrast, is required to refer suspected fraudulent or preferential transactions to the adjudicating authority, in turn ensuring accountability and resolution proceed together, not on separate, indefinitely long tracks.
An Assessment of the Indian Insolvency Framework
The Yes Bank case suggests that the existing fractured insolvency framework, comprising RBI reconstruction for solvency, PMLA/CBI/Enforcement Directorate (ED) for individual culpability and involvement of the Serious Fraud Investigation Office (SFIO) where corporate fraud is concerned, eventually reaches a stage that produces an outcome similar to insolvency proceedings. In an ordinary IBC-style process, creditors and depositors are protected, promoters face prosecution and capital is infused to keep the institution functioning, as witnessed in the DHFL insolvency proceedings, which concluded in 2025. This case’s resolution supplies a useful point of contrast, not least because it arises from the same fraud nexus. The ED’s investigation into Yes Bank implicated Rana Kapoor in a quid pro quo arrangement with Kapil Wadhawan, DHFL’s promoter, involving loans extended by Yes Bank to DHFL group entities. Yet DHFL itself was resolved through the actual IBC machinery: it was the first financial entity referred to the NCLT under Section 227, its CoC approved Piramal Capital’s ₹37,250 crore resolution plan by a 93.65% majority, and the Supreme Court upheld that plan in 2025. Crucially, when a special court later granted DHFL statutory immunity under Section 32A IBC following its resolution, it pierced the corporate veil. In contrast, the Yes Bank resolution offered no equivalent mechanism, since Rana Kapoor’s prosecution was taking place outside the reconstruction scheme. This comparison suggests the deficiency in Yes Bank’s case was not that fraud-linked resolution is impossible to do well within a structured framework, but that no such framework was available for a bank in the first place.
In such cases, the corporations fall victim to the said framework sans the features that give the IBC its legitimacy. These include a defined creditor voice through the medium of the CoC, a judicially settled priority of claims and integrated fraud-related retrieval embedded in the resolution timeline itself.
Therefore, the IBC’s own machinery, including Section 227 and the 2019 FSP Rules for NBFCs, shows that the Parliament already accepts the basic premises that financial entities can be brought within a modified version of the Code. However, the continued absence of political will, i.e., the willingness to extend this logic to banks and finally legislate the resolution authority the FRDI Bill was never able to create to extend the logic to banks. This implies that bank failures will continue to be resolved in accordance with the undisciplined precedent set by the Yes Bank failure.
Conclusion
The Yes Bank crisis is not evidence that India’s financial sector is under governed. It is evidence that governance has been achieved through improvisation rather than design; specifically, through the discretionary reach of Section 45 while being bolstered by criminal law running on its own clock. A decade after the IBC’s enactment, that improvisation should no longer be mistaken for a settled framework. The more honest conclusion is that Section 227’s exclusion of banks was a reasonable transitional choice in 2016 that has hardened, through a decade of legislative inertia, into a permanent and increasingly costly gap.
About the Author
Shreya Vakkaleri is a third-year law student currently pursuing B.A. LL. B (Hons.) from Jindal Global Law School, Sonipat. Her areas of interest include banking & securities law, aviation law, constitutional law and commercial international arbitration.
Image Source: https://www.fortuneindia.com/business-news/yes-bank-q2-profit-jumps-184-to-655-crore-asset-quality-stable/127597