Now is a perfect time to introduce a composite code for the resolution of financial service providers, following a series of high-profile incidents in this area, writes Mohit Shukla

Editor’s note: Large banking and financial companies such as Yes Bank, IL&FS, DHFL and others have experienced serious trouble in the recent past, damaging public trust in the financial system. These events have been widely reported.


The possible aftermath of COVID-19 is being discussed avidly, and the house is not entirely unanimous as to the degree of doom, and the span of time for recovery, but the mood remains largely sombre. India’s government, too, has focused on fiscal and economic stimuli, including regulatory measures for segments of the financial sector.

With these, will a series of failures in India be in the offing? The hope is that there will not be, or at least, it will be contained. But what instrumentality is best placed to provide for a well-managed handling of situations when a rescue is not otherwise available?

India’s Insolvency and Bankruptcy Code, 2016 (IBC), consolidated and updated various legal provisions aiming to provide for the orderly reorganization, resolution and liquidation of corporations, as well as deal with bankruptcy.

The IBC was intended to be comprehensive, with a finite timeframe and a clear roadmap, and, with regard to corporate insolvency, to provide confidence and clarity to international and domestic businesses as to how matters may pan out once a company enters insolvency. At about the same time, the country also prepared a separate code, the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), for the resolution of financial services providers.

While the code was hailed for what it offered, it was also criticized for perceived shortcomings. It was subjected to what is described as the “settling-in” phase for new and significant law. In this time, it has seen constitutional challenge, a flurry of amendments necessitated by constituent behaviour, rapid judicial finality to tribunal and appellate interpretation, rule setting and rule tweaking. The belief has persisted that this code will definitely establish and demonstrate that it is for the greater good.

The code’s twin – the FRDI Bill – set out a schematic to monitor banks, insurers and other financial sector entities, to resolve them, merge them, transfer assets and liabilities, and, in the final eventuality, liquidate them in an orderly fashion, and all of this within a fixed timeframe.

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