Resolution Corporation could be made governing body for bankruptcy in financial firms

Bankruptcy code for financial firms will have different standards of insolvency and safe harbour provisions

The finance ministry is learnt to be considering using the Resolution Corporation, proposed in the Financial Sector Legislative Reforms Commission (FSLRC) report, as a code for insolvency and bankruptcy in financial companies.

“On Resolution Corporation, there has been a consensus among the various regulators that there is a need for a separate bankruptcy code for financial firms,” said a source privy to the developments.

The government has already formed a task force for setting up the body with a mandate to complete the work by October 2015; this is, however, likely to be extended to the end of the year. The insolvency code for financial institutes will contain a safe harbour provision, specifically for institutes contributing to the infrastructure of the financial markets in India. Under this provision, the normal rules for bankruptcy, including the temporary suspension of rehabilitation or winding up, will not apply.

The Financial Stability and Development Committee is overseeing non-legislative implementation of the proposals in the FSRLC report.

The government is of the opinion that the legislative part of the recommendations will require certain administrative and legal changes in the present format.

“The burden of failure of private financial firms is generally placed upon the customers, taxpayers and shareholders of public-sector financial companies. That is unfair,” says a government official.

The final face and provisions of the bankruptcy code for financial firms will be decided by a committee to be jointly chaired by a deputy governor of the Reserve Bank of India (RBI) and the secretary in the finance ministry’s department of economic affairs (DEA).

For non-financial firms a committee headed by former law secretary T K Viswanathan recently gave its report, which draws parallels with the provisions in the Companies Act. In its interim report, the committee also said financial firms should be dealt through a different code.

In its recommendations, the panel has also dealt with issues for financial contracts of stock exchanges and clearing corporations in the event of insolvency of trading members.

It has agreed with the Securities and Exchange Board of India’s (Sebi’s) suggestions to allow amendments in the securities Act, and has made a provision for safe harbour for stock exchanges and clearing corporations. The panel has suggested the same principles could be applied to financial market infrastructure firms.