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,%
According to a recent press release, the Cabinet has approved a proposal to introduce a Bill in Parliament to amend the Indian Penal Code, 1860 (IPC). While the draft Bill is currently not available, its highlights are specified in the press release. As per the press release, the Bill aims to make rape laws gender neutral. The key features specified are:
Present Law According to section 375 of the IPC, an allegation of rape has to satisfy the following criteria:
This definition of rape does not include use of other body parts or foreign objects by the offender upon the victim’s body. Such offences are classified as “use of criminal force to outrage the modesty of a woman” (see here) and are punishable with two years imprisonment or fine or both. Rape, on the other hand, is punishable with imprisonment for seven years to a life term. Proposals to amend the law on rape Through an order in 1999, the Supreme Court had directed the Law Commission to review the law on rape (Sakshi vs. Union of India). The Law Commission had in its 172nd Report, dated March 25, 2000 made recommendations to amend the law to widen the definition of rape. In its report, the Commission had recommended that rape be substituted by sexual assault as an offence. Such assault included the use of any object for penetration. It further recognised that there was an increase in the incidence of sexual assaults against boys. The Report recommended the widening of the definition of rape to include circumstances where both men and women could be perpetrators and victims of sexual assault.[1] Amendments to the law on the basis of these recommendations are still awaited. The High Court of Delhi has recognised the need to amend the laws on rape. It observed that the law did not adequately safeguard victims against sexual assaults which were included by the Law Commission within the scope of rape. It was observed that the definition should be widened to include instances of sexual assault which may not satisfy the penile-vaginal penetration required under the existing law. The 2010 draft Criminal Laws Amendment Bill, released by the Ministry of Home Affairs, attempted to redefine rape. The draft provisions substitute the offence of rape with “sexual assault”. Sexual assault is defined as penetration of the vagina, the anus or urethra or mouth of any woman, by a man, with (i) any part of his body; or (ii) any object manipulated by such man under the following circumstances: (a) against the will of the woman; (b) without her consent; (c) under duress; (d) consent obtained by fraud; (e) consent obtained by reason of unsoundness of mind or intoxication; and (f) when the woman is below the age of 18. Variation between proposals The existing legal provisions, the Law Commission Report, the 2010 Bill and the recent press release are similar in that they provide an exception to marital rape. Under the law, un-consented sexual intercourse is not an offence if the wife is above a certain age. (Under the existing law the wife has to be over 16 years’ of age and as per press release she has to be more than 18 years old.) This is at variance with the proposal of the National Commission of Women (NCW). An amendment to the IPC recommended by the NCW deleted the exemption granted to un-consented sex between a man and his wife if she was more than 16 years old. It therefore criminalised marital rape. As per the press release, this exemption has been retained in the proposed Bill. Furthermore, as per the release, while the age of consent for sexual intercourse will be increased to 18 years, for the purpose of marital sex, the age of consent would be 16 years.
[1] Review of Rape Laws, Law Commission of India, 172nd Report, paragraph 3.1.2, "375. Sexual Assault: Sexual assault means - (a) penetrating the vagina (which term shall include the labia majora), the anus or urethra of any person with - i) any part of the body of another person or ii) an object manipulated by another person except where such penetration is carried out for proper hygienic or medical purposes; (b) manipulating any part of the body of another person so as to cause penetration of the vagina (which term shall include the labia majora), the anus or the urethra of the offender by any part of the other person's body; (c) introducing any part of the penis of a person into the mouth of another person; (d) engaging in cunnilingus or fellatio; or (e) continuing sexual assault as defined in clauses (a) to (d) above in circumstances falling under any of the six following descriptions: ... Exception: Sexual intercourse by a man with his own wife, the wife not being under sixteen years of age, is not sexual assault."
