Withdrawal of FRDI Bill Following Public Concerns Over Security of Public Deposits

TC
Tuli & Co

Contributor

Tuli & Co is an insurance-driven commercial litigation and regulatory practice established in 2000. With offices in New Delhi and Mumbai, we undertake work for a cross section of the Indian and international insurance and reinsurance market and work closely alongside Kennedys’ network of international offices
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.
India Finance and Banking
To print this article, all you need is to be registered or login on Mondaq.com.

Introduction:

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

www.tuli.co.in

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.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More