India: Financial Resolution And Deposit Insurance Bill 2017: Resolution Framework For The Financial Sector Entities

Introduction

The Union Cabinet, in its meeting held in the month of June 2017, has approved1 the Financial Resolution and Deposit Insurance Bill, 2017 ("FRDI Bill") to be introduced in the Parliament. The FRDI Bill is a separate bankruptcy law to deal with insolvency and bankruptcy in financial sector companies covering all financial service providers including banks, NBFCs, microfinance institutions and insurance companies.

This Bill is similar to the Insolvency and Bankruptcy Code, 2016, which was enacted in 2016 to deal with the issues relating to insolvency and bankruptcy of companies in all sectors other than financial sectors. Therefore, in order to deal with the situation of insolvency and bankruptcy in financial sectors entities such as banks and insurance companies, the FRDI Bill has been introduced.

Background

Subsequent to the announcement made by the Union Finance Minister, Arun Jaitley, in his budget speech of 2016-17, to introduce a comprehensive Code on resolution of financial firms, a committee was formed in the month of March 2016 under the chairmanship of Shri Ajay Tyagi, Additional Secretary, Department of Economic Affairs. On the report of the committee, the FRDI Bill was drafted and after considerations and suggestions received from various authorities & stakeholders as sought by the Finance Ministry, the Bill was approved by the Union Cabinet to get introduced in the Parliament.

Key objectives of the FRDI Bill:

The FRDI Bill provides a framework for resolution mechanism of certain specified categories of financial service providers and establishment of Resolution Corporation in order to have the stability and resilience of the financial system in the country. The key objective of the FRDI Bill is to ensure an early recognition of a financial firm, regulated by Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA) or any other authority as may be notified by the Central Government, which are in financial distress and thus to provide a resolution mechanism to minimize the impact of such financial trouble on the depositors and entire economy of the country.

Salient features of the FRDI Bill:

The salient features of the FRDI Bill are:

  1. Establishment of Resolution Corporation: The FRDI Bill provides for establishment of a Resolution Corporation as principal agency with multiple roles of supervision and oversight from a viability perspective, receiver in case of entities for which resolution plan is to be prepared. The Resolution Corporation will also act liquidator or receiver in the case of liquidation of entities classified as having imminent risk entities to ensure quick payments to depositors and settle the claims of debtors and equity holders.
  2. Covered Service Provider: The FRDI Bill provides for the resolution of covered service provider as listed in the Schedule 2 of the FRDI Bill. Under the FRDI Bill, the powers and functions of the Resolution Corporation are applicable to covered service provider. Such covered service providers, among others, include any banking institution, any insurance company, any other financial service provider excluding individuals and partnership firms, Indian branches of foreign banks etc.
  3. Systemically Important Financial Institutions ("SIFIs"): The FRDI Bill provides for designation of certain categories of financial institutions as SIFls by the Central Government. Such designated financial institutions may or may not be a covered service provider and once designated all the provisions of the Act will be applicable to them. The Bill also provides some additional provisions in respect to such SIFIs.
  4. Time limit on Resolution: The FRDI Bill provides that any process of resolution of a covered service provider shall be completed within a period of two years from the date on which such entity is classified to be at critical risk to viability. However, such period of two years may be extended for up to one year.
  5. Consolidation of existing laws relating to resolution of certain categories of financial institutions: The FRDI Bill proposes to consolidate the existing laws relating to resolution of certain categories of financial institutions, including banks, insurance companies, financial market infrastructures, payment systems, and other financial service providers into a single legislation.
  6. Repeal of Deposit Insurance and Credit Guarantee Corporation ('DICGC') Act, 1961: The FRDI Bill also provides for repeal of DICGC Act, 1961 in the manner as provided in the Bill. Post enactment of the FRDI Bill, the DICGC shall stand dissolved and all its functions will be carried out by the Resolution Corporation.
  7. Cross Border Resolution: The FRDI Bill also provides for enforcement of resolution in a foreign country in case there is an agreement to this effect between the Indian government and such foreign country and its regulators.

Benefits & Effects :

The FRDI Bill has been enacted for the purpose of providing resolution regime for companies in the financial sector such as banks, insurance companies and financial institutions when such entities face financial crisis. The FRDI Bill will benefit large numbers of retail depositors and customers of financial service providers. The FRDI Bill will decrease the time and costs involved in resolving distressed financial service provider entities. By providing comprehensive resolution mechanism, the FRDI Bill along with the Insolvency and Bankruptcy Code, 2016 will facilitate reducing the NPAs and also maintaining stability in the economy.

Footnotes

1 http://pib.nic.in/newsite/PrintRelease.aspx?relid=165620

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