Securities Code vs. Insolvency Law: Overlap or Gap?

India's Securities Markets Code (SMC), 2025, has sparked discussions regarding its compatibility with the Insolvency and Bankruptcy Code (IBC), 2016. Initial concerns about conflicts between settlement finality clauses in the SMC and moratorium provisions in the IBC are widespread. However, this perceived overlap masks a significant gap in India's legal structure: the absence of a dedicated resolution framework for financial service providers (FSPs) crucial to market stability.

The SMC primarily aims to prevent market disruptions during participant stress, whereas the IBC focuses on orderly resolution of financial distress. Courts typically interpret such overriding clauses narrowly. Crucially, assets held by clearing corporations and members in custodial or fiduciary capacities for third parties are not considered part of the insolvency estate under the IBC.

This means much of what the SMC protects is already outside the IBC's distribution pool. The challenge lies in resolving failing FSPs like clearing corporations. While the SMC addresses consequences of insolvency, it doesn't provide a resolution framework, nor does the IBC's general scope, which excludes most FSPs.

Section 227 of the IBC allows the government to modify insolvency procedures for certain FSPs. Combined with the SMC, this suggests a workable, albeit interim, solution. However, policymakers must decide whether to continue with modified IBC frameworks or create a distinct regime for financial institutions.

Systemically important FSPs, akin to banks, require a specialized resolution framework. Differentiated approaches are necessary, as not all FSPs pose the same systemic risks. A unified insolvency architecture is best, with sector-specific exceptions accommodated within the IBC itself, rather than scattered across multiple statutes. The SMC's role is to identify necessary market-stability safeguards, while the IBC provides the procedural mechanism.

The core issue is not an SMC-IBC overlap, which is less significant than assumed. The real gap is the lack of a comprehensive FSP resolution framework. Policymakers must design an architecture that ensures market stability, protects client assets, and upholds the insolvency process.