India: The Financial Resolution And Deposit Insurance Bill, 2017

SALIENT FEA

THE ACT:

  • Comprehensive law on Resolution of Financial Firms and providing Deposit Insurance to the persons holding accounts in such institutions. It provides a specialized resolution to deal with bankruptcy situations in banks, insurance companies and financial institutions.
  • The implementation of this Act shall repeal the Deposit Insurance and Credit Guarantee Corporation Act, 1961 ("DICGC Act, 1961"), the current law governing the bankruptcy in banks and financial institutions and providing for insurance on deposits.
  • The Financial Resolution and Deposit Insurance Bill, 2017 ("Act") provides for:

SETTING UP OF THE RESOLUTION CORPORATION:

The Corporation shall include various members nominated by the Central Government and various banking and insurance companies. The corporation shall have variety of powers such as investigation, inspection, resolution, liquidation, search and seizure, etc. All such powers have certain restrictions and can come into play only on achievement of a particular classification by the covered service provider. The head office of the corporation shall be Mumbai.

REGISTRATION UNDER THE ACT:

All existing service providers, service providers licensed by the appropriate regulator1, , specified service providers2, banking institutions registered under the DICGC Act, 1961 and all new banking institution will be registered. The Act also empowers the Corporation, in consultation with the appropriate regulator, to withdraw the registration of certain service providers.

FUNDS OF THE CORPORATION:

The Corporation shall maintain three types of funds, namely:

Corporate Insurance Fund – Providing deposit insurance to service providers;

Corporation Resolution Fund – Meeting expenses incurred during resolution;

Corporation General Fund – For functions apart from the ones above.

The funds shall be given by the Central Government to the Corporation and even the service providers under the Act shall provide the Corporation with the fees for resolution, administration expenses etc. as carried out by the Corporation.

LIABILITY OF CORPORATION TOWARDS INSURED DEPOSITORS:

The Corporation shall, in consultation with the appropriate regulator, specify the amount payable by the Corporation to one depositor. Such payments shall be made out of the Corporation Insurance Fund to the service provider for providing the depositors with the deposit insurance amount when under liquidation.

After the Corporation has liquidated the service provider, the payments made out of the Insurance Fund of the Corporation will be paid back in priority over all the other claims. Utilization of any funds from the Corporation's Insurance Fund shall be reported to the Central Government within ninety days of such utilization.

SYSTEMATICALLY IMPORTANT FINANCIAL INSTITUTIONS ("SIFI")

The Central Government, in consultation with the appropriate regulator, shall prescribe various criteria where a financial service provider shall be designated as a SIFI. The features that shall be taken into consideration for such a designation shall include size, complexity, volume of transactions and other related matters as may be prescribed by the Central Government.

RESOLUTION PROCEDURE

  • The Act has introduced various stages of risk to viability according to which the resolution procedure with the financial institution can be initiated. The different stages of risk as defined under the Act are:

    1. Low – Where the probability of failure of a service provider is below the acceptable probability of failure;
    2. Moderate – Where the probability of failure of a service provider is below or equal to the acceptable probability of failure;
    3. Material – Where the probability of failure of a service provider is marginally above the acceptable probability of failure;
    4. Imminent – Where the probability of failure of a service provider is substantially above the acceptable probability of failure;
    5. Critical – Where the probability of failure of a service provider is marginally above the acceptable probability of failure and is on the verge of failing to meet the obligations towards the customers.

SUBMISSION OF PLANS:

Where the service provider is at the stage of material or imminent risk, it shall submit a restoration plan to the appropriate regulator and a resolution plan to the Corporation stating its assets and liabilities, identification of functions, steps and procedure to be adopted to resolve the financial stability, etc., the time limit for the submission of such plans basis the classification is 90 days. The resolution plans so submitted shall be revised annually; and the appropriate regulator and the Corporation shall be duly notified about the same within 7 days of such revision.

  1. Transferring whole or part of the assets and liabilities to another person;
  2. Bridge Service Provider – The provider which takes control of the service provider and handles its working until the latter is finally sold;
  3. Bail-in – The Corporation may in consultation with the appropriate regulator, bailin a service provider to absorb the losses incurred or reasonably expected to be incurred by the service provider and to provide capital so as to enable it to carry on business for a reasonable period and maintain market confidence.
  4. Merger or amalgamation;
  5. Acquisition;
  6. Liquidation.

TIME LIMIT ON RESOLUTIONS:

The process of resolution under the Act has to be completed not later than one year from the date on which the service provider is classified to be at critical risk to viability. Though, such time can be extended by an order of the Corporation for up to an additional one year.

ADMINISTRATION

  • The administrator shall be appointed once the specified service provider is at the stage of critical risk to viability. The Corporation on being appointed as a receiver shall be vested with all the powers of the management and shall carry out all necessary actions as specified by the Central Government, whereas during this period when the Corporation is the receiver of the specified service provider, no additional directors shall be appointed by the shareholders, no resolution passed at any meeting of the shareholder shall be given effect to, unless approved by the Corporation.
  • The receiver shall perform all other necessary functions like taking over of assets, removing managerial persons from the office (persons aggrieved from the same can apply to the NCLT within 30 days), appointing additional directors to give effect to receivership, supersede the existing board of directors of the company (limit for such supersession is 2 years). The Corporation will also constitute a committee of persons with experiences in law, banking, finance and accountancy; all the salaries of such committee shall be made by the Corporation and paid by the specified service provider.

LIQUIDATION

  • Where the Corporation is of the opinion that liquidation is well suited for the service provider, it has to make an application to the NCLT with relevant documents for obtaining orders to liquidate (time limit for NCLT to pass orders on application is 14 days). The order by the NCLT may also include stay on commencement or continuance on all legal actions till liquidation is completed.
  • Corporation shall be appointed as the liquidator.
  • No legal proceeding shall be instituted by or against the service provider before any court or tribunal except the NCLT, after the order for liquidation has been passed.
  • The Liquidator shall form an estate out of the assets of the service provider, though the third-party assets shall be excluded.
  • Secured Creditors in liquidation – The Act provides for two options to the secured creditors -either to relinquish its security interest to the liquidation estate and to be paid from the proceeds or to realize its security interest on its own.
  • It allows the secured creditor to realize and enforce its security interest in accordance with any law prevalent and applicable to the secured creditors apart from the Act as well. For realizing the same outside the purview of the Act, the secured creditor shall have to make an application to the NCLT for facilitating the same.
  • The Act also provides for the order for distribution of proceeds from the sale of assets, that is:

    1. Sums paid by the Corporation for Deposit Insurance
    2. Costs incurred by Corporation for resolution and liquidation
    3. Workman dues and debts owed to a secured creditor to rank equally
    4. Wages to employees other than workmen
    5. Uninsured depositors
    6. Unsecured creditors
    7. Central and State Government
    8. Other remaining debts

The Act also provides for a safeguard to such order of payments to be made, wherein it specifically mentions that if under any contract between such persons to whom the payment is to be made, disrupts the order of priority in payments, as mentioned above, shall be disregarded by the liquidator and the payments to be made in the order as mentioned in the Act.

  • There are certain provisions of the Insolvency and Bankruptcy Code, 2016 which are mentioned in this Act as well, such as:

    1. Undervalued Transactions – Where it comes to the knowledge of the liquidator that the specified service provider has been involved with an undervalued transaction within the period of one year preceding the liquidation commencement date or such transaction was made with a related party within the period of two years preceding the liquidation commencement date, the liquidator shall make such application to the NCLT to declare such transactions as void and reverse the effect of such transactions.
    2. Preferential Transactions – Where it comes to the knowledge of the liquidator that the specified service provider has been involved in a preferential transaction such as transfer of property or interest for the benefit of the creditor or guarantor, etc. and was made with a related party within the period of two years preceding the liquidation commencement date or with a person other than the related party during the period of one year preceding the liquidation commencement date, the liquidator shall make such application to the NCLT for avoidance of preferential transactions.
    3. Extortionate Credit Transactions Where it comes to the knowledge of the liquidator that the specified service provider has been a party to an extortionate credit transaction involving a financial or operational debt during the period within two years preceding the liquidation commencement date, the liquidator shall make such application to the NCLT for avoidance of such transactions if the terms of such transaction required exorbitant payments to be made by the specified service provider.

FOREIGN RESOLUTION ACTION

  • Facilitates reciprocal arrangements with foreign jurisdiction for implementation of provisions of the Act in cases where the estate of the service provider is situated abroad.
  • In such cases, the Corporation may make an application to the NCLT for seeking assistance of foreign courts in taking evidence or any action in relation to such assets that may be situated in foreign court's jurisdiction.
  • The Corporation also has the power to enter into MOUs with such international organizations which have functions similar to those of the Corporation, though prior approval of the Central Government shall be necessary.

Footnotes

1. List of the Appropriate Regulator as under the First Schedule of the Act.

2. List of Specified Service Provider as under the Second Schedule of the Act.

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.

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