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
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,%
Last week, the Assam Legislative Assembly passed the Assam Cattle Preservation Bill, 2021. The Bill seeks to regulate the slaughter and transportation of cattle and the sale of beef. It replaces the Assam Cattle Preservation Act, 1950, which only provided for restrictions on cattle slaughter. In this post, we examine the Bill and compare it with other state laws on cattle preservation. For a detailed analysis of the Bill, see here.
Cattle preservation under the Bill
The Bill prohibits the slaughter of cows of all ages. Bulls and bullocks, on the other hand, may be slaughtered if they are: (i) over 14 years of age, or (ii) permanently incapacitated due to accidental injury or deformity. Inter-state and intra-state transport of cattle is allowed only for agricultural or animal husbandry purposes. This requires a permit from the competent authority (to be appointed by the state government). Further, the Bill allows the sale of beef and beef products only at certain locations as permitted by the competent authority. No permission for such sale will be granted in areas that are predominantly inhabited by Hindu, Jain, Sikh and other non-beef eating communities, or within a five-kilometre radius of a temple or other Hindu religious institution.
Provisions of the Bill may raise certain issues which we discuss below.
Undue restriction on cattle transport in the north-eastern region of India
The Bill prohibits the transport of cattle from one state to another (or another country) through Assam, except with a permit that such transport is for agricultural or animal husbandry purposes. This may lead to difficulties in movement of cattle to the entire north-eastern region of India. First, the unique geographical location of Assam makes it an unavoidable transit state when moving goods to other north-eastern states. Second, it is unclear why Assam may disallow transit through it for any purposes other than agriculture or animal husbandry that are allowed in the origin and destination states. Note that the Madhya Pradesh Govansh Vadh Pratishedh Adhiniyam, 2004 provides for a separate permit called a transit permit for transporting cattle through the state. Such permit is for the act of transport, without any conditions as to the purpose of transport.
Unrestricted outward transport of cattle to states that regulate slaughter differently from Assam
The Bill restricts the transport of cattle from Assam to any place outside Assam “where slaughter of cattle is not regulated by law”. This implies that cattle may be transported without any restrictions to places outside Assam where cattle slaughter is regulated by law. It is unclear whether this seeks to cover any kind of regulation of cattle slaughter, or only regulation that is similar to the regulation under this Bill. The rationale for restricting inter-state transport may be to pre-empt the possibility of cattle protected under the Bill being taken to other states for slaughter. If that is the intention, it is not clear why the Bill exempts states with any regulation for cattle slaughter from transport restrictions. Other states may not have similar restrictions on cattle slaughter as in the Bill. Note that other states such as Karnataka and Chhattisgarh restrict outgoing cattle transport without making any distinction between states that regulate cattle slaughter and those that do not.
Effective prohibition on sale of beef in Assam
The Bill prohibits the sale of beef within a five-kilometre radius of a temple (which means an area of about 78.5 square kilometres around a temple). This threshold may be overly restrictive. As per the 2011 census, the average town area in Assam is 5.89 square kilometres (sq km) and the average village area is 1.93 sq km. The three largest towns of Assam by area are: (i) Guwahati (219.1 sq km), (ii) Jorhat (53.5 sq km), and (iii) Dibrugarh (20.8 sq km). Hence, even if there is only one temple in the middle of a town, no town in Assam – except Guwahati – can have a beef shop within the town area. Similarly, if a village has even one temple, a beef shop cannot be set up in a large area encompassing several adjoining villages as well. In this manner, the Bill may end up completely prohibiting sale of beef in the entire state, instead of restricting it to certain places.
Note that certain states such as Gujarat, Rajasthan, Uttar Pradesh and Haryana completely prohibit the sale or purchase of beef within the state. However, they also completely prohibit the slaughter of cows, bulls and bullocks. This is not the case under the Bill, which only places a complete prohibition on slaughter of cows. Further, in places such as Delhi, municipal regulations prohibit the sale of meat (including beef) within 150 metres from a temple or other religious place. This minimum distance requirement does not apply at the time of renewal of license for selling meat if the religious place comes into existence after the grant of such license.
The prohibition on sale of beef in areas predominantly inhabited by communities identified based on religion or food habits (non-beef eating) may also have an unintended consequence. With the food typically consumed by a community becoming unavailable or available only in select locations, it may lead to the segregation of different communities into demarcated residential areas. As per the 2011 census, the population of Assam comprises roughly 61% Hindus, 34% Muslims, and 4% Christians.
Onerous requirement for the accused to pay maintenance cost of seized cattle
Cattle rearing is essentially an economic activity. Under the Bill, cattle may be seized by a police officer on the basis of suspicion that an offence has been or may be committed. Seized cattle may be handed over to a care institution, and the cost of its maintenance during trial will be recovered from such persons as prescribed by the state government through rules. Note that there is no time frame for completing a trial under the Bill. Thus, if the owner or transporter of seized cattle is made liable to pay its maintenance cost, they may be deprived of their source of livelihood for an indefinite period while at the same time incurring a cost.
Cattle preservation laws in other states
The Directive Principles of State Policy under the Constitution call upon the state to prohibit the slaughter of cows, calves, and other milch and draught cattle. Currently, more than 20 states have laws restricting the slaughter of cattle (cows, bulls, and bullocks) and buffaloes to various degrees. Table 1 below shows a comparison of such laws in select states of India. Notably, north-eastern states such as Arunachal Pradesh, Meghalaya, Mizoram and Nagaland do not have any law regulating cattle slaughter.
