⇒ 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”:
⇒ 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.
CA.Rajeev Joshi (CA,CISA,DISA,BSc)