A committee set up by the finance ministry on Wednesday proposed to set up a Resolution Corporation to expeditiously deal with issues concerning insolvency of financial institutions, including banks and insurers.
The suggestion to set up a Resolution Corporation, which will also be responsible for providing deposit insurance, was made by the committee set up to draft a Code on Resolution of Financial Firms.
The committee was chaired by Ajay Tyagi, additional secretary in the Department of Economic Affairs.
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“The draft Bill envisages the setting up of a Resolution Corporation with its head office in Mumbai. As proposed, the general direction and management of the Corporation will be conferred on the Board of the Resolution Corporation. This Board will comprise representatives from financial sector regulators, like RBI, Sebi, Irdai and PFRDA; representatives of the central government as well as two independent members,” the finance ministry said.
The draft code proposes to consolidate the existing laws related to resolution of certain categories of financial institutions, including banks, insurance companies, financial market infrastructures, payment systems, and other financial service providers into a single legislation, and provide for additional tools of resolution to enable the Resolution Corporation to maintain systemic stability in the country.
While the Insolvency and Bankruptcy Code enacted by Parliament in 2016 provides for resolution and liquidation of non-financial firms, the proposed code aims to deal with insolvency issues of financial firms in line with international best practices, the committee said.
“Recent experience and research have shown that resolution of financial institutions requires a special regime that is faster than any traditional insolvency procedure, where rights of the creditors and other stakeholders can be overridden in the interest of the financial system (including the consumers) and the economy,” it added.
The proposed Resolution Corporation will also protect consumers of financial institutions and public funds to the extent possible.
After 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.
The covered service providers shall also be required to pay fees, as specified by the Resolution Corporation.