Now, a resolution mechanism for distressed financial firms

To quickly and effectively deal with bankruptcy situations in financial firms, the Centre plans to introduce a comprehensive ‘Code on Resolution of Financial Firms’ as a Bill in Parliament in FY17.

Finance Minister Arun Jaitley said in his Budget speech that this code will provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities.

“This code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy,” he said.

Currently, a systemic vacuum exists with regard to bankruptcy situations in financial firms.

Reserve Bank of India Governor Raghuram Rajan had observed last year that given the state of the world economy, firms in some industries are in deep real distress. Some firms can survive with a little help from the government, but others are unviable. Too much help to unviable firms can also cause distress to spread to healthy firms, he cautioned.

“In this regard, the country needs rapid progress in the coming year on the creation of the institutions necessary for resolution such as the new Bankruptcy Code and the Company Law Tribunals that will administer it as well as the Financial Resolution Authority (for resolving financial institution distress). On-going government efforts in this regard will pay rich dividends,” said Rajan.

In a speech in 2011, the then RBI Governor D Subbarao observed that developing a comprehensive legal framework for resolution that covers all the different types of financial institutions was a challenge.

“Currently, the relevant provisions governing issues, such as control of management, acquisition of the financial institution, suspension of business and winding up, are all spread over different laws and regulations. Moreover, different types of banks are covered by different statutes.

“…All in all, the legal framework governing bank resolution is spread all over, making the framework complex, confusing and oftentimes non-transparent,” said Subbarao.

The government is planning to bring in comprehensive central legislation in 2016-17 to deal with the menace of illicit deposit schemes.

In the recent past, instances of people in various parts of the country being defrauded through illicit deposit-taking schemes, have been increasing. The worst victims of these schemes are the poor and the financially illiterate.

Jaitley said: “The operation of such schemes is often spread over many states. I, therefore, propose to bring in comprehensive Central legislation in 2016-17 to deal with the menace of such schemes.”