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The Financial Resolution and Deposit Insurance Bill 2017 (Bill),
which was tabled in the Parliament in August 2017 as a result of
India's G-20 commitment, had attracted some criticism following
concerns over its controversial 'Bail-in' provision which
allowed for the use of public deposits for restructuring of a
failing financial institution's liabilities.
After months of widespread protest by bank employee unions,
state-run insurance companies and politicians, the Department of
Economic Affairs was reportedly asked to prepare a withdrawal
proposal for the Cabinet to approve. The government was reported to
have internally decided to withdraw the Bill to avoid controversial
legislation ahead of the upcoming general elections.
Public Concerns:
The Bill was referred to a Joint Parliamentary Committee of both
the Houses (Joint Committee) in early October 2017. The Joint
Committee is due to submit its report on 10 August 2018, the last
day of the ongoing Monsoon Session of the Parliament.
Clause 52 of the Bill provided 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. 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.
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 under government programmes, the bail-in
provisions had caused widespread apprehension in the public.
Finance Ministry statements:
In December 2017, the Ministry of Finance had sought to reassure
depositors that their existing rights remain protected, noting that
the Bill was more "depositor friendly than many other
jurisdictions, which provide for statutory bail-in". The
Ministry has however not elaborated on the exact nature of the
additional protections provided to public deposits in the Bill.
It is interesting to note that the government has now decided to
withdraw the Bill, instead of modifying the contentious provisions
and retaining the fundamental purpose of the legislation, which was
to resolve bankruptcy in "systemically
important" financial institutions such as banks,
insurance companies, and stock exchanges. This month the Cabinet
also approved the Insolvency and Bankruptcy Code (IBC) Amendment
Bill 2018, however, the same does not provide a framework for
resolving failing financial institutions.
It will be interesting to note how the issue of bankruptcy in
"systemically important" financial institutions
such as banks, insurance companies, and stock exchanges is dealt
with going forward.
For further information on this topic please contact Tuli &
Co
Tel T +91 11 4593 4000, fax F +91 11 4593 4001 or email lawyers@tuli.co.in
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