Legislative adventurism | Business Standard Column

On November 15, 2019, the government brought about a significant change in the Insolvency and Bankruptcy Code (IBC). It notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules) to provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks.

It was clarified then that the new rules would apply to such FSPs or categories of FSPs, as will be notified by the Union government under Section 227 of the IBC from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings. Remember that the IBC had been legislated in 2016 to provide a consolidated framework for reorganisation, insolvency resolution and liquidation of corporate persons, limited liability partnerships, partnership firms and individuals in a time-bound manner.

This was an interim measure. The government had indicated then that the notification of the rules for financial service providers under Section 227 of the Code was “an interim mechanism to deal with any exigency pending the introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers.”

Thus, the special framework for financial service providers had three key features. One, these did not include banks. Two, consultation and active involvement of the existing regulators were made mandatory before any insolvency and liquidation proceedings could be initiated for any financial service provider. And three, a separate legislation was being planned for dealing with insolvency resolution and liquidation of banks and other financial service providers.

Within weeks of this framework, the government appears to have acted quite fast in starting internal deliberations on the promised legislation, which is expected to be more comprehensive than the rules framed under Section 227 of the IBC. Contours of the new legislation have not yet been made public by the government. But an online financial publication, Moneylife, has brought out the key features of the new law on insolvency and liquidation proceedings for banks and financial service providers. Thomas Franco of the All India Bank Officers’ Confederation or AIBOC has also outlined the provisions of the proposed law in a programme on NewsClick, an online video news network.

The proposed name of the new law seems to be the Financial Sector Development and Regulation (Resolution) Bill. A similar proposal for a law, Financial Resolution and Deposit Insurance Bill (FRDI), was mooted in 2017, but was withdrawn a year later in 2018 after massive protests over its “bail-in” provisions. These provisions had envisaged that depositors’ money would be used to recapitalise banks in financial trouble. Even assurances that the cap on the amount of deposits protected by insurance would be raised had failed to assuage the concerns of the people and the idea of the Bill was dropped.

The new Bill is believed to have discarded the use of any bail-in provisions, but has given the resolution authority the power to cancel, modify or amend the contract between a bank or a financial service provider and the customer. The extent of the amendment or curtailment of the contract would be determined by the resolution authority, which would be composed of representatives from the existing financial sector regulators. In other words, the bail-in provision has been replaced by an equally problematic clause that allows the depositors’ contract to be modified by the resolution authority. Fears of bank customers losing their deposits in the event of a bank becoming insolvent have only grown.

The new Bill is also likely to have a provision for raising the cap on the amount of deposit that would enjoy insurance cover. The deposit amount to be brought under insurance coverage would be decided by the resolution authority, though no details of how these calculations would be undertaken are known. Even more worrying is the reported provision in the new law, as per which the resolution and liquidation of public sector banks would be undertaken in consultation with the government.

Given the sequence of these events in the last two months, it seems that the government is readying itself to face yet another major controversy over a new law. Shouldn’t the government have undertaken broader consultation among stakeholders to frame its thoughts on the kind of legislation it should introduce on insolvency resolution for banks? Its earlier attempt at bringing a similar law had led to protests and the government had to withdraw the FRDI Bill. Should it not have learnt appropriate lessons from that episode?

via Legislative adventurism | Business Standard Column

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