NEW DELHI: The government has put out a draft law proposing a mechanism to deal with bankruptcy in banks, insurance companies and financial sector entities, which when passed will complete the legal framework for dealing with failed business. The Financial Resolution and Deposit Insurance Bill, 2016 has been put out for stakeholder feedback.
Parliament has already passed a bankruptcy law to resolve failures of non-financial firms and also changes in debt recovery and the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) laws to empower lenders to deal with non-performing loans.
The government has simultaneously released the report of a committee set up to work out a draft code. Comments and suggestions have to be submitted by October 14. The draft report has recommended setting up of a Resolution Corporation to maintain systemic stability in the country.
Its board will comprise representatives from financial sector regulators including the Reserve Bank of India, nominees from the central government and two independent members.
This is similar to the mechanism in the bankruptcy law. Finance Minister Arun Jaitley had in his budget speech for 2016-17 said the government will bring a comprehensive code on resolution of financial firms.
“This code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy,” Jaitley had said.
The government had later set up a committee under an additional secretary in the Department of Economic Affairs to work out the code.
“Recent experience and research have shown that resolution of financial institutions requires a special regime that is faster than any traditional insolvency procedure, where rights of the creditors and other stakeholders can be overridden in the interest of the financial system (including the consumers) and the economy,” the committee said while detailing its proposals.
The committee in its report has said that the corporation will be the authority responsible for providing deposit insurance in the country and will replace the existing Deposit Insurance and Credit Guarantee Corporation.
“The draft Bill consolidates the existing laws relating to resolution of certain categories of financial institutions which are presently scattered in a number of legislations, into a single legislation, and provides for additional tools of resolution,” it said.
The report states that the corporation may use merger, acquisition, liquidation, transfer of assets and liabilities, and bail-in among other tools for resolving the covered service provider.
“The resolution has to be completed within two years, with the provision for an extension of one additional year, except in the case of liquidation,” it said.