Resolving failure of financial firms: The FRDI Bill explained

Legislation

Resolving failure of financial firms: The FRDI Bill explained

Gayatri Mann - October 12, 2017 Comments

The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Parliament during Monsoon Session 2017.^[1] The Bill proposes to create a framework for monitoring financial firms such as banks, insurance companies, and stock exchanges; pre-empt risk to their financial position; and resolve them if they fail to honour their obligations (such as repaying depositors). To ensure continuity of a failing firm, it may be resolved by merging it with another firm, transferring its assets and liabilities, or reducing its debt. If resolution is found to be unviable, the firm may be liquidated, and its assets sold to repay its creditors.

After introduction, the Bill was referred to a Joint Committee of Parliament for examination, and the Committee’s report is expected in the Winter Session 2017. The Committee has been inviting stakeholders to give their inputs on the Bill, consulting experts, and undertaking study tours. In this context, we discuss the provisions of the Bill and some issues for consideration.

What are financial firms?

Financial firms include banks, insurance companies, and stock exchanges, among others. These firms accept deposits from consumers, channel these deposits into investments, provide loans, and manage payment systems that facilitate transactions in the country. These firms are an integral part of the financial system, and since they transact with each other, their failure may have an adverse impact on financial stability and result in consumers losing their deposits and investments.

As witnessed in 2008, the failure of a firm (Lehman Brothers) impacted the financial system across the world, and triggered a global financial crisis. After the crisis, various countries have sought to consolidate their laws to develop specialised capabilities for resolving failure of financial firms and to prevent the occurrence of another crisis. [2]

What is the current framework to resolve financial firms? What does the Bill propose?

Currently, there is no specialised law for the resolution of financial firms in India. Provisions to resolve failure of financial firms are found scattered across different laws.² Resolution or winding up of firms is managed by the regulators for various kinds of financial firms (i.e. the Reserve Bank of India (RBI) for banks, the Insurance Regulatory and Development Authority (IRDA) for insurance companies, and the Securities and Exchange Board of India (SEBI) for stock exchanges.) However, under the current framework, powers of these regulators to resolve similar entities may vary (e.g. RBI has powers to wind-up or merge scheduled commercial banks, but not co-operative banks.)

The Bill seeks to create a consolidated framework for the resolution of financial firms by creating a Resolution Corporation. The Resolution Corporation will include representatives from all financial sector regulators and the ministry of finance, among others. The Corporation will monitor these firms to pre-empt failure, and resolve or liquidate them in case of such failure.

How does the Resolution Corporation monitor and prevent failure of financial firms?

Risk based classification: The Resolution Corporation or the regulators (such as the RBI for banks, IRDA for insurance companies or SEBI for the stock exchanges) will classify financial firms under five categories, based on their risk of failure (see Figure 1). This classification will be based on adequacy of capital, assets and liabilities, and capability of management, among other criteria. The Bill proposes to allow both, the regulator and the Corporation, to monitor and classify firms based on their risk to failure.

Corrective Action: Based on the risk to failure, the Resolution Corporation or regulators may direct the firms to take certain corrective action. For example, if the firm is at a higher risk to failure (under ‘material’ or ‘imminent’ categories), the Resolution Corporation or the regulator may: (i) prevent it from accepting deposits from consumers, (ii) prohibit the firm from acquiring other businesses, or (iii) require it to increase its capital. Further, these firms will formulate resolution and restoration plans to prepare a strategy for improving their financial position and resolving the firm in case it fails.

While the Bill specifies that the financial firms will be classified based on risk, it does not provide a mechanism for these firms to appeal this decision. One argument to not allow an appeal may be that certain decisions of the Corporation may require urgent action to prevent the financial firm from failing. However, this may leave aggrieved persons without a recourse to challenge the decision of the Corporation if they are unsatisfied.

Figure 1: Monitoring and resolution of financial firms

Sources: The Financial Resolution and Deposit Insurance Bill, 2017; PRS.

How will the Resolution Corporation resolve financial firms that have failed?

The Resolution Corporation will take over the administration of a financial firm from the date of its classification as ‘critical’ (i.e. if it is on the verge of failure.) The Resolution Corporation will resolve the firm using any of the methods specified in the Bill, within one year. This time limit may be extended by another year (i.e. maximum limit of two years). During this period, the firm will be immune against all legal actions.

The Resolution Corporation can resolve a financial firm using any of the following methods: (i) transferring the assets and liabilities of the firm to another firm, (ii) merger or acquisition of the firm, (iii) creating a bridge financial firm (where a new company is created to take over the assets, liabilities and management of the failing firm), (iv) bail-in (internally transferring or converting the debt of the firm), or (v) liquidate the firm to repay its creditors.

If the Resolution Corporation fails to resolve the firm within a maximum period of two years, the firm will automatically go in for liquidation. The Bill specifies the order of priority in which creditors will be repaid in case of liquidation, with the amount paid to depositors as deposit insurance getting preference over other creditors.

While the Bill specifies that resolution will commence upon classification as ‘critical’, the point at which this process will end may not be evident in certain cases. For example, in case of transfer, merger or liquidation, the end of the process may be inferred from when the operations are transferred or liquidation is completed, but for some other methods such as bail-in, the point at which the resolution process will be completed may be unclear.

Does the Bill guarantee the repayment of bank deposits?

The Resolution Corporation will provide deposit insurance to banks up to a certain limit. This implies, that the Corporation will guarantee the repayment of a certain amount to each depositor in case the bank fails. Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides deposit insurance for bank deposits up to 1 lakh rupees per depositor.[3] The Bill proposes to subsume the functions of the DICGC under the Resolution Corporation.

[1]. The Financial Resolution and Deposit Insurance Bill, 2017, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/Financial%20Resolution%20Bill,%202017.pdf

[2]. Report of the Committee to Draft Code on Resolution of Financial Firms, September 2016, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/FRDI%20Bill%20Drafting%20Committee%20Report.pdf

[3]. The Deposit Insurance and Credit Guarantee Corporation Act, 1961, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/DICGC%20Act,%

Tenure and salaries of CIC and ICs under the Right to Information Rules, 2019

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Anya Bharat Ram - October 29, 2019 Comments

The Right to Information (Amendment) Act, 2019 amended the Right to Information Act, 2005. The RTI Act, 2005 specified the tenure, terms of service and salaries of the Chief Information Commissioner (CIC) and Information Commissioners (ICs) at the central and state levels, in the parent law. The RTI (Amendment) Act, 2019 removed these provisions and stated that the central government will notify the term and quantum of salary through rules.[1]^,[2]

The Right to Information Rules, 2019 were notified on October 24, 2019.[3] These rules set out the tenure, terms of service and salaries of the CIC and ICs at the state and central levels. Table 1 compares the provisions related to the tenure and salary of the CIC and ICs under the Right to Information Act, 2005 and the Right to Information Rules, 2019

Table 1: Comparison of the provisions of the Right to Information Act, 2005 and the Right to Information Rules, 2019

Provision

RTI Act, 2005

RTI Rules, 2019

Term

The CIC and ICs (at the central and state level) will hold office for a term of five years.

The CIC and ICs (at the central and state level) will hold office for a term of three years.

Salary

The salary of the CIC and ICs (at the central level) will be equivalent to the salary paid to the Chief Election Commissioner and Election Commissioners (Rs 2,50,000 per month)

Similarly, the salary of the CIC and ICs (at the state level) will be equivalent to the salary paid to the Election Commissioners (Rs 2,50,000 per month) and the Chief Secretary to the state government (Rs 2,25,000 per month), respectively.

The CIC and ICs (at the central level) shall receive a pay of Rs. 2,50,000 and Rs. 2,25,000 per month, respectively.

CICs and ICs (at the state level) shall receive a pay of Rs. 2,25,000 per month.

Source: The Right to Information (Term of Office, Salaries, Allowances and Other Terms and Conditions of Service of Chief Information Commissioner, Information Commissioners in the Central Information Commission, State Chief Information Commissioner and State Information Commissioners in the State Information Commission) Rules, 2019; The High Court and the Supreme Court Judges (Salaries and Conditions of Service) Amendment Act, 2017; Indian Administrative Services (Pay) Rules, 2016; PRS.

[1] Right to Information Act, 2005, https://rti.gov.in/rti-act.pdf.

[2] Right to Information (Amendment Act), 2019, file:///C:/Users/Dell/Downloads/The%20Right%20to%20Information%20(Amendment)%20Bill,%202019%20Text.pdf.

[3] The Right to Information (Term of Office, Salaries, Allowances and Other Terms and Conditions of Service of Chief Information Commissioner, Information Commissioners in the Central Information Commission, State Chief Information Commissioner and State Information Commissioners in the State Information Commission) Rules, 2019, http://egazette.nic.in/WriteReadData/2019/213438.pdf.

More Privatisation on the cards?

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MR Madhavan and Prachee Mishra - October 22, 2019 Comments

The core group of secretaries on disinvestment has recently approved the disinvestment of five public sector undertakings (PSUs). This includes the entire shareholding of the government in four PSUs: Bharat Petroleum Corporation (BPCL), Shipping Corporation of India (SCI), North Eastern Electric Power Corporation (NEEPCO) and THDC (operates and maintains the Tehri Hydro Power Complex), and 30% of the shareholding in Container Corporation of India Limited (Concor). The government currently holds 54.8% of Concor, so the sale will reduce its stake below 25%.

Over the last few years, the government has removed legislative barriers towards privatisation of several other PSUs. This raises the question whether the government plans to privatise them.

What was the Supreme Court’s order on privatisation of PSUs?

In 2003, a similar proposal had been raised by the government for the sale of its shareholding in HPCL and BPCL. This proposal was challenged in the Supreme Court on the grounds that it would violate the provisions of the laws that transferred ownership of certain assets to the government (which later formed these PSUs). For example, BPCL was formed by nationalising Burmah Shell in India through an Act of Parliament, and merging their refinery and marketing companies. The Court ruled that the central government cannot proceed with the privatisation of HPCL and BPCL (i.e., reduce its direct or indirect ownership below 51%) without amending the concerned laws. So the government continues to hold majority stake directly in BPCL, and indirectly in HPCL ( through ONGC, another PSU).

The five Companies approved for privatisation include BPCL and SCI (into which two nationalised companies, the Jayanti Shipping Company, and the Mogul Line Limited were merged). The relevant nationalisation Acts have been repealed over the last five years.

How did the government remove the legislative barriers for privatisation?

Between 2014 and 2019, Parliament passed six Repealing and Amending Acts which repealed around 722 laws. These included laws that had transferred the ownership of companies to the central government which later formed BPCL, HPCL, and OIL. These also repealed the laws that had transferred ownership of the companies to the central government which were later merged with the SCI. This implies that now the government can go ahead with the privatisation of these government companies as the conditions imposed by the Supreme Court’s order have been fulfilled. These Repealing and Amending Acts also repealed several other nationalisation laws that were later formed into PSUs. In the Table below, we have listed some of these companies. Note that the Law Commission of India (2014) had suggested the repeal of several of these laws (including the Esso Act, the Burmah Shell Act, the Burn Company Act) on the grounds that these laws do not serve any purpose with respect to the nationalised entity. However, it had suggested that a study of all the nationalisation Acts should be done before repealing these Acts, and if necessary a savings clause should be provided in the repealing Act.

Did Parliament scrutinise these Acts before passing them?

Many of these repeals were made through the Repealing and Amending Act, 2016. These include the Acts relating to BPCL, HPCL, OIL, Coal India Limited, SCI, National Textiles Corporation, Hindustan Copper and Burn Standard Company Limited. The Bill was not referred to a Parliamentary Standing Committee, and was passed after a cursory debate (50 minutes in Lok Sabha and 20 minutes in Rajya Sabha). Similarly, the two Acts passed in 2017, that enable privatisation of SAIL, PowerGrid, and State Trading Corporation were not examined by a Standing Committee.

So what comes next?

The repeal of these Acts have cleared the legislative hurdle for privatisation of these companies. That is, the government does not need prior approval of Parliament to sell its shareholding. Therefore, it is now up to the government to decide whether it wishes to privatise these entities.

A version of this article was published by the Business Standard on October 20, 2019.

Table 1: Some Nationalisation Acts repealed since 2014 (list not exhaustive)

Company	Act being repealed	Repealing Act
Shipping Corporation Of India (SCI)	The Jayanti Shipping Company (Acquisition of Shares) Act, 1971	Repealing and Amending Act, 2016
Shipping Corporation Of India (SCI)	The Mogul Line Limited (Acquisition of Shares) Act, 1984	Repealing and Amending Act, 2016
Bharat Petroleum Corporation Limited (BPCL)	The Burmah Shell (Acquisition of Undertakings in India) Act, 1976	Repealing and Amending Act, 2016
Hindustan Petroleum Corporation Limited (HPCL)	The Esso (Acquisition of Undertakings in India) Act, 1974	Repealing and Amending Act, 2016
	The Caltex [Acquisition of Shares of Caltex Oil Refining (India) Limited and of the Undertakings in India of Caltex (India) Limited] Act, 1977
	The Kosangas Company (Acquisition of Undertaking) Act, 1979
Coal India Limited (CIL)	The Coking Coal Mines (Emergency Provisions) Act, 1971	Repealing and Amending Act, 2016
	The Coal Mines (Taking Over of Management) Act, 1973	Repealing and Amending Act, 2016
	The Coking Coal Mines (Nationalisation) Act, 1972.	Repealing and Amending (Second) Act, 2017
	The Coal Mines (Nationalisation) Act, 1973.	Repealing and Amending (Second) Act, 2017
Steel Authority of India Limited (SAIL)	The Bolani Ores Limited (Acquisition of Shares) and Miscellaneous Provisions Act, 1978	Repealing and Amending (Second) Act, 2017
Steel Authority of India Limited (SAIL)	The Indian Iron and Steel Company (Acquisition of Shares) Act, 1976	Repealing and Amending (Second) Act, 2017
Power Grid Corporation of India Limited	The National Thermal Power Corporation Limited, the National Hydroelectric Power Corporation Limited and the North-Eastern Electric Power Corporation Limited (Acquisition and Transfer of Power Transmission Systems) Act, 1993.	Repealing and Amending (Second) Act, 2017
Power Grid Corporation of India Limited	The Neyveli Lignite Corporation Limited (Acquisition and Transfer of Power Transmission System) Act, 1994.	Repealing and Amending (Second) Act, 2017
Oil India Limited (OIL)	The Burmah Oil Company [Acquisition of Shares of Oil India Limited and of the Undertakings in India of Assam Oil Company Limited and the Burmah Oil Company (India Trading) Limited] Act, 1981	Repealing and Amending Act, 2016
State Trading Corporation of India Ltd. (STC)	The Tea Companies (Acquisition and Transfer of Sick Tea Units) Act, 1985	Repealing and Amending Act, 2017
National Textile Corporation Limited (NTC)	The Sick Textile Undertakings (Taking Over of Management) Act, 1972	Repealing and Amending Act, 2016
	The Textile Undertakings (Taking Over of Management) Act, 1983
	The Laxmirattan and Atherton West Cotton Mills (Taking Over of Management) Act, 1976
Hindustan Copper Limited	The Indian Copper Corporation (Acquisition of Undertaking) Act, 1972	Repealing and Amending Act, 2016
Burn Standard Co Ltd	The Burn Company and Indian Standard Wagon Company (Nationalisation) Act, 1976	Repealing and Amending Act, 2016
Indian Railways	The Futwah-Islampur Light Railway Line (Nationalisation) Act, 1985	Repealing and Amending Act, 2016
Braithwaite & Co Limited, Ministry of Railways	The Braithwaite and Company (India) Limited (Acquisition and Transfer of Undertakings) Act, 1976.	Repealing and Amending (Second) Act, 2017
Braithwaite & Co Limited, Ministry of Railways	The Gresham and Craven of India (Private) Limited (Acquisition and Transfer of Undertakings) Act, 1977	Repealing and Amending (Second) Act, 2017
Andrew Yule & Co. Ltd.	The Brentford Electric (India) Limited (Acquisition and Transfer of Undertakings) Act, 1987	Repealing and Amending (Second) Act, 2017
Andrew Yule & Co. Ltd.	The Transformers and Switchgear Limited (Acquisition and Transfer of Undertakings) Act, 1983	Repealing and Amending Act, 2019
Alcock Ashdown (Guj) Limited, Government of Gujarat Undertaking	The Alcock Ashdown Company Limited (Acquisition of Undertakings) Act, 1973.	Repealing and Amending Act, 2019
Bengal Chemicals & Pharmaceuticals Ltd. (BCPL)	The Bengal Chemical and Pharmaceutical Works Limited (Acquisition and Transfer of Undertakings) Act, 1980	Repealing and Amending (Second) Act, 2017
Organisations under Department of Pharmaceuticals	The Smith, Stainstreet and Company Limited (Acquisition and Transfer of Undertakings) Act, 1977	Repealing and Amending (Second) Act, 2017
Organisations under Department of Pharmaceuticals	The Bengal Immunity Company Limited (Acquisition and Transfer of Undertakings) Act, 1984.	Repealing and Amending (Second) Act, 2017

Sources: Repealing and Amending Act, 2015; Repealing and Amending (Second) Act, 2015; Repealing and Amending Act, 2016; Repealing and Amending Act, 2017; Repealing and Amending (Second) Act, 2017; Repealing and Amending Act, 2019.

Resolving failure of financial firms: The FRDI Bill explained

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