India: Public Concerns Over The ‘Bail-In' Provisions Of The FRDI Bill

Introduction:

The Financial Resolution and Deposit Insurance Bill 2017 (Bill), which was tabled in the Parliament this August, has come into increased media scrutiny over the last week. As we noted last month 1, the IRDAI and other regulatory bodies had raised objections to certain provisions of the Bill with regard to the powers vested in the proposed regulator.

The Bill is a result of India's G-20 commitment in line with the recommendations made by the Financial Stability Board in its guidance paper called "Key Attributes of Effective Resolution Regimes for Financial Institutions". The objective of the FSB was to create an effective regime for resolution of financial institutions,

"...without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation."

The Bill is aimed at creating a special framework for resolving bankruptcy in systemically important financial institutions such as banks, insurance companies, and stock exchanges, and resolving or liquidating them in case of failure. It provides for the setting up of a resolution corporation (Resolution Corporation) empowered to assume management of failing financial institutions and ensuring its continuity by transferring its assets and liabilities, merging it with another institution, or reducing its debt. The Resolution Corporation replaces the existing Deposit Insurance and Credit Guarantee Corporation (DICGC).

Recently, there has been increased discussion around Clause 52 of the Bill which contains a 'Bail-in' provision and has led to widespread concerns over the protection of uninsured deposits in the event of failure of financial institutions.

Bail-in Provision

A Bail-in commonly refers to the restructuring of a financial institution's liabilities by either converting the debts owed to creditors into equity, or by writing off its liabilities altogether. This allows the State to use the depositor and shareholders' monies instead of absorbing such losses from the common tax payer and its own reserves.

In the present Bill, Clause 52 provides for a Bail-in provision empowering the Resolution Corporation to convert a percentage of the deposits with a bank to bank shares and other forms of security, for the purpose of debt restructuring.

Deposit Insurance

At present, depositors are protected to a limit of ₹1 lakh covered under deposit insurance by the DICGC. In this regard, the Bill expressly states that the provisions of the bail-in clause shall not be applicable to the amounts insured under deposit insurance2.

However, the Bill will repeal the Deposit Insurance and Credit Guarantee Corporation Act 1962 and in doing so also removes the specified deposit insurance limit protecting these deposits. This has further added to the debate, since the Bill does not commit any particular deposit insurance amount whatsoever.

Concerns raised

The outcry among depositors is a by-product of the Indian banking system, which is largely driven by deposits from common depositors. It is to be noted that a depositor's unsecured deposits are only exposed when the Resolution Corporation classifies such bank to be in a "critical" terms of risk of failure. However, with reports of large scale write-offs by banks due to a rising number of bad loans and non-performance assets, and an increase in new bank accounts due to the Jan Dhan Yojana, a potential exposure to a depositors' uninsured deposits has caused widespread apprehension.

As per Clause 79 of the Bill, in the event of liquidation of a failing financial institution, the proceeds from the sale of assets will be distributed in the following order of priority:

  1. Depositor's amounts covered by Deposit Insurance
  2. Costs of liquidation and resolution
  3. Workmen's dues, and amounts owed to secured creditors who relinquish their security
  4. Employee wages
  5. Amounts due to uninsured depositors and insurance policyholders
  6. Debts owed to unsecured creditors
  7. Amounts due to the Government and the balance owed to secured creditors
  8. All balance debts and dues
  9. Preference shareholders
  10. Equity shareholders/Partners

If the proceeds from liquidation are insufficient to cover all the debts owed by the financial institution, it is possible that a reduction may be applied to unsecured deposits (deposits over ₹1 lakh). It is widely reported that this may not be in the interest of the smaller depositors, as they may have to bear the losses resulting from any ill-advised decisions made by such financial institutions.

Finance Ministry Press Release

In response to the criticism faced from various stakeholders, the Ministry of Finance issued the following statement on 7th December 2017 on the Press Information Bureau website:

"The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all. They provide rather additional protections to the depositors in a more transparent manner. The FRDI Bill is far more depositor friendly than many other jurisdictions, which provide for statutory bail-in, where consent of creditors / depositors is not required for bail-in."

However, the Ministry's statement does not elaborate on the exact nature of the 'additional protections' provided to depositors in the Bill.

In addition, it has been reported that certain Government officials have sought to reassure depositors that their existing rights remain protected, and that the National Company Law Tribunal may still direct the Resolution Corporation to pay compensation in case of any injudicious exercise of the bail-in provision. 

Conclusion:

The Bill is now at the centre of a heated public debate, with depositors on one hand raising concerns over the changes in insurance mechanism under the Bill and the extent of discretionary powers to the Resolution Corporation, while the Government reassuring depositors of the sovereign guarantee towards public sector banks.

With the report of the Joint Parliamentary Committee being due for submission in the upcoming Winter Session of the Parliament, it is still to be seen how the public concerns will be factored into the Bill.

Footnotes

1 http://www.internationallawoffice.com/Newsletters/Insurance/India/Tuli- Co/Insurance-regulatory-bodies-object-to-new-bankruptcy-bill

2 Clause 52 (7) of the Bill is in the following terms:

"The bail-in instrument or scheme under this section shall not affect:

(a) any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance;

(b) any liability that the specified service provider has by virtue of holding client assets..."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions