Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 is similar to the Insolvency and Bankruptcy Code, 2016, which was enacted last year in May. Both of these are about issues that can arise when companies go bankrupt or insolvent, except that this Bill deals only with the companies that are in the financial sector. The insolvency code Act deals with companies in all other sectors. The FRDI will provide a comprehensive resolution framework to deal with bankruptcy situations in financial sector entities such as banks and insurance companies. Let’s read more about the Bill.
Why in news?
Raising their protest against the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, bank employees’ unions have launched a nationwide signature campaign to highlight the adversities in the Indian banking sector.
Expressing concerns over the safety for people’s money deposited in Banks, the All India Bank Employees’ Association (AIBEA) demanded a withdrawal of the FRDI Bill, 2017, which they claim, is trying to remove the safety for the bank deposits.
AIBEA plans to collect 1 crore signatures from across India by end of March 25 and submit a mass petition to the Parliament and Lok Sabha Speaker.
In his 2016-17 budget speech, Union finance minister Arun Jaitley said, “A systemic vacuum exists with regard to bankruptcy situations in financial firms. A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.” Following the announcement, on 15 March 2016, a committee was set up under the chairmanship of Ajay Tyagi, additional secretary, Department of Economic Affairs, Ministry of Finance, to draft and submit the Bill. The committee also had representatives of the financial sector regulatory authorities and the Deposit Insurance and Credit Guarantee Corporation.
The committee submitted its report and based it the draft FRDI Bill was drawn up. The finance ministry sought comments on the Bill till 31 October 2016 and after consideration of the suggestions, the Union Cabinet approved it to introduce it in the Parliament.
Presently, there is no specific law in India for resolution of failures of financial services providers. The Insolvency and Bankruptcy Code 2016 does not automatically cover financial service providers. Thus, a separate law was needed to address financial service providers. The bill also limits the use of public money to bail out distressed entities. This would inculcate discipline among financial service providers in the event of financial crises. The Bill ensures adequate preventive measures, and also provides the necessary instruments for dealing with a post-crisis situation thus helps in maintaining financial stability in the economy. Further, it seeks to decrease the time and costs involved in resolving distressed financial entities. The bill also seeks to protect customers of financial service providers in times of financial crisis.
What the Bill offers?
- According to the finance ministry, FRDI Bill, 2017 seeks to protect customers of financial service providers in times of financial distress.
- It seeks to create a framework for resolving bankruptcy in financial firms such as banks and insurance companies and also aims to instil discipline in financial service providers in the event of a financial crisis by limiting the use of public money to bail out distressed entities.
- It also aims to inculcate discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities.
- The Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.
- The Bill aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
- It also seeks to regulate financial service providers including banks except cooperative banks, insurance companies, financial market infrastructure, payment systems, and non-banking finance companies so as to comply with the emerging international norms for establishing effective resolution regime for financial sector.
- Further, it seeks to decrease the time and costs involved in resolving distressed financial entities.
- Once enacted, a resolution corporation will be set up to strengthen the stability and resilience of the entities in the financial sector.
1. Resolution Corporation
The bill proposes that a Resolution Corporation will be established by Central Government as an independent regulator; and it will have a Chairperson and representatives from the Finance Ministry, RBI, and SEBI, among others. This would take over the task of resolution of failing financial firms from the Reserve Bank of India (RBI) and other regulators.
Functions of the Corporation will include:
- Providing deposit insurance to banks (to repay deposits to consumers in case of failure),
- To classify service providers like banks and insurance companies based on their risk and undertaking resolution of service providers in case of failure.
- The corporation may also investigate the activities of service providers, or undertake search and seizure operations if provisions of the Bill are being contravened.
In case of bank failure the Resolution Corporation will also take over the task of insuring bank deposits, compensating depositors up to a specified maximum amount at present it is Rs.1 lakh.
2. Risk-based Classification
The Resolution Corporation is mandated to classify service providers based on their risk of failure by consulting with respective regulators like RBI for banks, and IRDA for insurance companies.
Total four categories are proposed based on their risk of failure- Low, Moderate, Material, imminent and critical
- Low: Probability of failure is substantially below acceptable levels.
- Moderate: Probability of failure is Marginally below acceptable levels.
- Material: Probability of failure is Above acceptable levels.
- Imminent- Probability of failure is Substantially above acceptable levels.
- Critical: Service providers on the verge of failure.
3. Time limit
When a service provider is classified as ‘critical’ the resolution process will be completed within a year from the date. This time limit may be extended by another year (i.e. maximum limit of two years).
If resolution of service provider is not completed during this time period then the service provider will be liquidated.
4. Liquidation and distribution of assets
To liquidate the assets of a service provider the Corporation will require the approval of the National Company Law Tribunal.
The Bill specifies penalties for offences such as concealment of property, and destruction or falsification of evidence. Penalties vary based on the nature of the offence, with the maximum penalty being imprisonment for five years, along with a fine.
The bill also provides to designate certain categories of financial institutions as Systematically Important Financial Institutions (SIFIs).
Criticism of the Bill
Classifying service providers like “material” or “imminent” category make depositors fearing of failure would want to move out their deposits. Therefore Instead of resolving the problem of vulnerability to failure, the mechanism may actually precipitate failure. The restoration and/or resolution plan, to be acceptable, may “force” a financial firm to accept amalgamation or merger. This would have implications for parties that are not responsible for the state of the firm, including officers, employees, creditors and small shareholders.
The Resolution Corporation will exercise certain powers including: (i) classification of firms based on risk, and (ii) directing the management of a firm to return their performance based incentive.
However, the Bill does not specify a review or appeal mechanism for aggrieved persons to challenge the decision of the Resolution Corporation.
Insolvency and Bankruptcy Code vs FRDI
A Financial Resolution and Deposit Insurance Act along with the Insolvency and Bankruptcy Code, 2016 is expected to provide a comprehensive resolution mechanism for the Indian economy with the objective of protecting consumers of specific service providers and public funds. Both of these are about issues that can arise when companies go bankrupt or insolvent, except that this Bill deals only with the companies that are in the financial sector. The insolvency code Act deals with companies in all other sectors.
Analysis by – Wakeman Neutron
- The Hindu
- The Indian Express