⇒ THE FINANCIAL RESOLUTION AND DEPOSIT INSURANCE BILL, 2017 (FRDI) referred to as “The Bill” hereinafter, is introduced with the objective to address the issue of “Prevailing systemic vacuum with regard to bankruptcy situations in financial firms”.

⇒ Provisions addressing the issue of “failures of financial service providers “can be found scattered in several enactments such as the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, the Insurance Act, 1938……, however, we don’t see specific law dedicated to address this issues.

⇒ While every new legislation is bound to be riddled with concerns from people at large, yet what is needed is to professionally examine the provisions setting aside any intransigency. Rather than mere flutter over some apparently draconian provisions, let’s welcome a genuine attempt to understand the provisions and initiate a stream of conversation to surface changes where there is any discomfort. The article that follows is one such genuine attempt where the author tables key provisions of FRDI.

⇒ RBI has earlier introduced the concept of “Systemically Important Banks (SIBs)” which are perceived as banks that are ‘Too Big To Fail (TBTF)’.  The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity. Therefore, the continued functioning of D-SIBs (Domestic SIB) is critical for the uninterrupted availability of essential banking services to the real economy. Several large lenders have been included in this list of D-SIB. FRDI (The Bill), in its Section 25 and 26 attempts to monitor the safety, soundness, and solvency of such SIBs by introducing the concept of “SIFI” (systemically important financial institution)

⇒ By Section 2(9) of The Bill, the concept of “Corporation” by the name of the “Resolution Corporation” is introduced. Resolution Corporation would have perpetual succession and a common seal with powers to acquire, hold or dispose of property, and has powers to contract and sue or be sued.

⇒ As per “The Second Schedule”, Resolution Corporation is empowered to exercise their powers and functioning on below “Specified Service Provider”:

  • Banking entities,
  • Insurance companies,
  • Entities providing financial infrastructure,
  • Entities forming part of the payment and settlement systems under the “Payment and Settlement Systems Act, 2007 ”,
  • Non-banking financial companies, not notified under section 227 of the Insolvency and Bankruptcy Code, 2016. (Thus the Act will not necessarily be applicable to all NBFCs) 
  • Branch offices of body corporates incorporated outside India carrying on the business of providing financial service in India,
  • Holding companies of above.

⇒ As per Section 25 (1), The Central Government may, in consultation with the appropriate regulator, by an order published in the Official Gazette, designate a financial service provider, as a “SIFI”.

⇒ “Section 26 (3): Every SIFI shall provide such information to the Resolution Corporation at such intervals and in such manner as may be specified by regulations. The Corporation shall monitor the safety, soundness, and solvency of such SIFI.

⇒ Section 36 of “The Bill” empowers The Resolution Corporation by an order in writing, to classify a specified service provider into any one of the categories of risk to viability. Risk factors are categorized as low, moderate, material, imminent and critical. Such classification shall be made after taking into consideration several factors like the adequacy of capital, assets and liability; asset quality; capability of management; earnings sufficiency……

⇒ As Per Section 38 any specified service provider, classified in the category of material or imminent risk to viability shall submit a restoration plan to the appropriate regulator and a resolution plan to the Resolution Corporation within ninety days of such classification under section 36.

⇒ Under Section 48 and Section 52, the Resolution Corporation may release a scheme or a bail-in instrument to safeguard safety, soundness and solvency of service provider classified in the category of critical risk to viability.

⇒ Section 133 introduces “Bar Of Jurisdiction” and specifies that unless otherwise provided in this Act, no court or other tribunals shall have jurisdiction to entertain or adjudicate upon any matter which the Resolution Corporation, is empowered to decide or determine under this Act and no court or tribunal shall grant an injunction.

⇒ Section 145 seeks to repeal the Deposit Insurance and Credit Guarantee Corporation Act, 1961, and to save certain actions done or taken under the repealed Act.

⇒ Above write-up represents a summary of few critical provisions of FRDI that may have bearing on the current economic viability of the country. The legislation is regarded as one of the three main functions of government. Democracy can be built through open societies that share information. When there is information, there is enlightenment. When there are debates, there are solutions. People have a right to take part in their government. Thus lets read, contemplate, contribute and debate. If we find few provisions to be tyrannical then let’s propose alternate resolution while if we find few provisions to be good let’s assent them.

Disclaimer: Opinions expressed are current opinions only as of the date indicated. The Author does not accept any responsibility to update any opinions or other information contained in this material.This material should not form the primary basis for any decision that you make in relation to matters referred to herein.Review carefully the material and perform such due diligence as you deem fit, including consulting your own independent legal, tax, accountancy and other professional or specialist advisors, as necessary or appropriate.Neither the Author, nor any of his officers, directors, agents or employees, makes any warranty, express or implied, of any kind whatsoever, or assumes any responsibility for any losses, damages, costs or expenses, of any kind or description, relating to the adequacy, accuracy or completeness of this material or its use including, but not limited to, information provided by third parties. You should not construe silence by the Author, or any of his officers, directors, agents or employees as approval or endorsement of any statements made by a third party.

CA.Rajeev Joshi (CA,CISA,DISA,BSc)

The Author is a partner with  YSP & Co LLP with over 20 years of experience in myriad areas of GST, Direct Tax, System Audits, Controllership and CFO Functions.

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2 responses to “FRDI – Lets examine few key provision.”

  1. Lakshminarayana M says:

    Is It effect to General Public who kept Fixed Deposits with in Banks & Financial Institutes /Firms, Post Offices and other Fianacial Service Providers, and it is effect to balances kept in Banks? All Gen Public were worrying about their Fixed Deposits in Banks.In NTV show has been uploaded in whatsapp and it halchal here and there! All were worring about this, please confirm this comment. Expecting real News.

  2. Sarbjit Randhawa says:

    1. Sec 133 takes away a fundamental right of approaching the HC and SC. Thus making the decision of the Resolution Council final.This may not be in the best interest of the public and Justice.
    2. Would you like to buy shares of a failing financial institution? Will bail-in really help the failing financial institution or will it further increase their liability is a question for discussion?
    3. Punishing the guilty bank officials, Management and the Government for their wrong decision should be specified. It is seen that most of the NPA of banks are a direct result of government policies.

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