Draft law for financial firm's insolvency suggests setting up of Resolution Corp

A panel tasked with drafting a bankruptcy code for financial service providers such as banks, insurance companies and payment systems has proposed classifying companies into five categories based on their vulnerability and also suggested setting up a Resolution Corporation.

The panel's report was made public on Wednesday for comments. It has also recommended that some of the bigger firms be classified as systemically important financial firms (SIFIs). "These are financial institutions whose failure might pose a risk to not just their consumers or the sector they operate in, but rather to the overall financial stability of the country itself," the panel said it in its report

In the report, the panel said the proposed resolution corporation would 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. After the 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.

"This board will comprise representatives from financial sector regulators - Reserve Bank of India, Securities and Board Exchange of India, Insurance Regulatory and Development Authority and Pension Fund Regulatory And Development Authority - representatives of the central Government as well as two independent members," the report stated.

The corporation, in consultation with the appropriate regulator, will specify objective criterium for the classification of covered service providers into five categories based on the risk they carry, 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 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 government, can enter into memoranda 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.