Introduction
The Financial Resolution and Deposit Insurance Bill 2017 (Bill), which has been referred to a Joint Parliamentary Committee of both the Houses (Joint Committee) in early October 2017, has recently attracted much attention. This has mainly been due to the objections raised by the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority of India (IRDAI) and by the banking industry.
The Bill is aimed at creating a special framework for resolving bankruptcy in financial institutions, pre-empting risk to their financial position, and resolving or liquidating them in case of such failure. The Bill, inter alia, provides for the setting up of a resolution corporation (Resolution Corporation), which will primarily be constituted of representatives from the Finance Ministry, the RBI, the IRDAI, and the Securities and Exchange Board of India (SEBI), and five members appointed by the Central Government.
It is proposed that the Resolution Corporation shall be empowered to classify financial institutions as "critical" in certain specific scenarios and assume management of such financial institutions. The Resolution Corporation shall work towards ensuring continuity of a failing institution by transferring its assets and liabilities, merging it with another institution or reducing its debt.
Significant provisions of the Bill
The Bill will apply to financial institutions (such as banks, cooperative banks, regional rural banks, insurance companies, and stock exchanges), and any other financial institution designated as a 'systemically important financial institution' by the Central Government.
Since a failure of these financial institutions may have an adverse impact on financial stability of the country (as they generally make investments, provide loans, accept deposits from consumers and also manage payment systems to facilitate transactions), a specific framework for dealing with bankruptcy of such financial institutions has been provided in the Bill.
Some of the key functions of the Resolution Corporation will include:
- Categorizing financial institutions into five categories based on their risk criteria;
- Undertaking resolution of financial institutions in case of failure, within a period of 1 year, during which it shall be immune against all legal actions;
- Investigating the activities of financial institutions, and undertaking search and seizure operations if provisions of the Bill are being contravened.
The Bill is similar to the Insolvency and Bankruptcy Code issued in 2016, except that it only covers financial institutions. It will repeal the Deposit Insurance and Credit Guarantee Corporation Act, 1962 and amend 12 other laws.
Industry views
By way of a press release of 8th September 2017, the Joint Committee had invited stakeholders to provide their views and inputs on the Bill, and had also sought the RBI's opinion on the Bill.
Although the exact details are not yet available, we understand from various sources available in the public domain that the RBI and the IRDAI have both objected to the Bill in the following manner:
- RBI has objected to the wide powers vested in the proposed Resolution Corporation, stating that "some of its provisions could undermine the authority of other regulatory bodies" and may lead to a "divergence of assessment" between the regulators;
- The RBI has also objected to the provisions empowering the new regulator to carry out joint inspections of potentially insolvent financial institutions, stating that [they] "don't agree with the need for joint inspection with [Resolution Corporation]" in their note to the Joint Committee;
- Reports state that the IRDAI has also raised objections to the Bill, citing multiple instances when companies were restructured "without any loss to the customers", and emphasising its ability to resolve bankruptcy among insurers.
Although we are not aware of the exact nature of the concerns raised by the RBI and the IRDAI, it appears that the objections have primarily been regarding the Bill proposing to grant certain overarching powers to the Resolution Corporation in relation to dealing with bankruptcy matters involving financial institutions. For instance, in the case of Indian insurance companies, the Bill provides as follows:
- The Bill proposes various amendments to the Insurance Act 1938, adding that where an insurance company is classified in the category of imminent or critical risk, the powers exercisable by the IRDAI under those provisions shall be exercised by the Resolution Corporation;
- The Bill also empowers the Resolution Corporation to restrain critical insurance companies from writing any new business, and sell or transfer the portfolios of an insurance company to another insurance company, as may be specified by regulations issued by the Resolution Corporation.
Conclusion
As stated above, although, at this juncture the exact nature of objections being raised in relation to the Bill are not clear, a balance of powers between the existing sectoral regulators such as the SEBI, IRDAI and RBI and the proposed Resolution Corporation may need to be struck. This must also be considered in view of the relevant experience/expertise and industry knowledge of the sectoral regulators to deal with matters involving their specific sectors. Hence, it may be argued that a harmonious balance be struck between the existing regulators and the new regulatory body instead of overarching powers being granted to a new regulator. As the Bill is still in draft stage and is being considered by the Joint Committee, these concerns may be factored in going forward.
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