A Finance Ministry-appointed committee today proposed to set up a Resolution Corporation to expeditiously deal with issues concerning insolvency of financial institutions, including banks and insurers.
The suggestion to set up a Resolution Corporation, which will also be responsible for providing deposit insurance, was made by Finance Ministry's committee set up to draft a Code on Resolution of Financial Firms.
The draft code proposes to consolidate the existing laws relating to resolution of certain categories of financial institutions, including banks, insurance companies, financial market infrastructures, payment systems, and other financial service providers into a single legislation, and provide for additional tools of resolution to enable the Resolution Corporation to maintain the systemic stability in the country.
While the Insolvency and Bankruptcy Code enacted by Parliament in 2016 provides for resolution and liquidation of non-financial firms, the proposed code aims to deal with insolvency issues of financial firms in line with international best practices, the committee said.
"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," it added.
The proposed Resolution Corporation will contribute to the stability and resilience of the financial system by carrying out speedy and efficient resolution of financial firms in distress, providing deposit insurance to consumers of certain categories of financial services and monitoring the systemically important financial institutions.
It will also protect consumers of financial institutions and public funds to the extent possible. After enactment of the Financial Resolution and Deposit Insurance Bill, 2016, the Deposit Insurance and Credit Guarantee Corporation will be dissolved and all its functions will be carried out by the Resolution Corporation.
As proposed in the code, the general direction and
management of the body will be conferred on the Board of the Resolution Corporation
"This Board will comprise of representatives from financial sector regulators like RBI, SEBI, IRDAI and PFRDA; representatives of the Central Government as well as two independent members," the Committee said.
After the enactment of the Bill, the Deposit Insurance and Credit Guarantee Corporation shall be dissolved and all its functions will be carried out by the Resolution Corporation.
"Thereafter, the Resolution Corporation will be the authority responsible for providing deposit insurance in the country," the committee noted.
The Corporation, in consultation with the appropriate regulator, will specify objective criteria for the classification of covered service providers into five categories, namely, low, moderate, material, imminent and critical, taking into account several features of the covered service providers, including adequacy of capital, asset quality, leverage ratio, liquidity and capability of management.
The code proposes to give power to the Resolution Corporation to transfer the whole or part of the assets and liabilities of the covered service provider to another person, on terms agreed between the Corporation and such person, creating a bridge service provider, merger or amalgamation of the covered service provider, acquisition of the covered service provider and liquidation.
The powers of the Corporation as a liquidator include, amongst others, the power to verify claims of all the creditors, take into custody all the assets, property and actionable claims of the covered service provider, sell property, access information, consolidate and verify claims, admit or reject claims and payments of deposit insurance.
"The Central Government and the Resolution Corporation, with the prior approval of the Central Government, can enter into memorandums of understanding with the governments and their regulators of other countries and exchange information with them to give full effect to the provisions of this Act," the committee stated.
It further said resolution has to be completed within two years, with the provision for an extension of one additional year, except in the case of liquidation.
The Resolution Corporation shall have three types of funds -- the Corporation Insurance Fund for payment of deposit insurance, the Corporation Resolution Fund for covering resolution fees and a Corporation General Fund for meeting the administrative expenses of the Corporation. The covered service providers shall also be required to pay fees, as specified by the Corporation.
(REOPENS DCM 94)
The Finance Ministry in a statement said all stakeholders/ public are requested to forward their suggestions on the draft Financial Resolution and Deposit Insurance Bill, 2016 by October 14.
Finance Minster Arun Jaitley, in his Budget 2016-17, had 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.
"This Code will provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. This Code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy."
Pursuant to the announcement, a committee was set up under the Chairmanship Ajay Tyagi, Additional Secretary, Department of Economic Affairs, Ministry of Finance on March 15, 2016 with representatives from the ministry, financial sector regulatory authorities and the Deposit Insurance and Credit Guarantee Corporation with instructions to submit a report and a draft Code.
