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This article is written by Ms Kishita Gupta from Unitedworld School of Law, Karnavati University, Gandhinagar. This article deals with the FSDR Bill 2019 which replaced the FRDI Bill 2017 and the role of NCLT concerning it.

Introduction

The Financial Resolution and Deposit Insurance Bill (FRDI Bill) was launched in 2017 as a game-changer for Public Sector Banks (PSBs), amending the banks’ existing resolution policies. Because of the bail-in clause and other provisions that could lead to bank liquidation, it was predicted to produce chaos in the PSB space and entirely collapse the banks.

The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) was first introduced in the Lok Sabha on August 10, 2017, but was withdrawn exactly a year later (for further comprehensive examination and reconsideration). It had sparked fear among depositors over the contentious “bail-in clause,” which threatened to convert term deposits with banks (beyond a specific insured threshold) into equity to recapitalize failing banks.

The FSDR Bill, 2019

The Financial Sector Development and Resolution (FSDR) establishes a Financial Resolution Authority (FRA) with the authority to initiate resolution actions.

  • Its scope will be limited to “orderly resolution only, not restoration and recovery.”
  • All financial sector regulators — RBI + SEBI + PFRDA + IRDAI + the Central government—will be represented.

Bank depositors and account holders may finally relax, knowing that their money will not be used to bail out a failing institution. The administration announced that the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 has been withdrawn from the Lok Sabha. The FRDI Bill, which sparked widespread outrage among the general public, included a “bail-in” mechanism for bank failure resolution, considered in the depositors’ best interests.

Several statutes will need to be amended for the FSDR to become effective. These include amendments to the Insolvency & Bankruptcy Act, (2016), the Companies Act 2013, Pension Fund Regulatory and Development Authority, Payment and Settlement Systems Act, (2007), the Multi-State Cooperative Societies Act, (2002), Reserve Bank of India Act, (1934), Insurance Act (1938), National Housing Bank Act, (1987), Export-Import Bank of India Act, (1981), Banking Companies (Acquisition and Transfer of Undertaking) Act, (1969), the Central Goods and Services Tax Act (2017), Regional Rural Banks Act, (1976), General Insurance Business (Nationalisation) Act, (1972), Income Tax Act, (1961), Customs Act, (1962), Securities Contracts Regulation Act, (1956), Life Insurance Corporation Act, (1956) and State Bank of India Act, (1955), among others.

Functions

The new measures aim to give banks some fundamental powers, such as the ability to terminate contracts, write off defaults, set up bridging facilities, and establish a framework for settling cross-border foreign financial transactions.

Banks, insurance companies, financial market infrastructure, payment systems, and other financial service providers (except individuals and partnership firms) are all covered by the financial sector resolution framework. It now includes cooperative banks and regional rural banks for the first time.

The Bill also establishes clearly defined triggers for a Prompt Corrective Action (PCA) system to resolve a problem institution. Infrastructure Leasing & Financial Services (IL&FS) were allowed to spawn over 347 subsidiaries and associates while the group holding company remained unlisted and out of the public eye, and this is a lesson learned.

Structure

The Bill’s main goal is to establish a Resolution Authority (RA) in Mumbai. Its scope will be limited to “orderly resolution only, not restoration and recovery.” The Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance and Regulatory Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority (PFRDA), and the Central government will all be represented, with three full-time members and two independent members.

The Resolution Authority (RA) will be self-sustaining and will be supported by three sorts of financing, which are as follows:

  • For deposit insurance, there is the Resolution Authority Insurance Fund (which replaces the Deposit Insurance and Credit Guarantee Authority Act of 1961). 
  • Two, the Resolution Authority Resolution Fund, which is used to cover resolution fees.
  • Three, the Resolution Authority General Fund, which is used to cover RA’s administrative costs.

It will also charge specified service-providers fees (who are not defined and could be market intermediaries or institutions). When all other options have been exhausted, the central government will supply the remaining chunk of financing.

Each regulator will be responsible for developing a PCA framework for the institutions that fall under their jurisdiction. Premiums will be collected by the Resolution Fund, which will take the position of DICGC, based on a “risk-based assessment.” A government bailout (to supply liquidity) is not ruled out if there is a systemic concern.

By establishing a clear framework to deal with financial sector failures, the Bill intends to avoid passing the burden to taxpayers.

Tools for resolution

Following are the harmful rules of the FSDR: 

  1. Transferring all or a portion of the assets and liabilities to some other entity;
  2. Establishing a bridge service provider;
  3. Cancellation/modification of liabilities;
  4. Merger or amalgamation;
  5. Acquisition;
  6. Liquidation;
  7. Run-off, if considered suitable, in the event of an insurance company.

The resolution must be completed in one year, with the option of a one-year extension if necessary, except in the case of liquidation. Concerning the administratorship, the RA will suspend the board and take over as administrator, once the resolution process has begun. It has the authority to make executive decisions on behalf of the organization, such as appointing or dismissing management and function as a receiver. The NCLT, which will appoint the RA as a liquidator, must first approve the liquidation decision.

Powers of NCLT in resolution matters

Different phases of boom and depression have always afflicted the Indian economy. The Indian corporate sector is expanding and diversifying its operations. Banks and financial institutions are encountering staggered recovery challenges as a result of their ever-expanding functions and business transactions, making them exposed to the non-performing asset crisis. Specialized tribunals, such as the NCLT, are primarily designed to target weak spots and promote the interests of banks, financial institutions, stakeholders, and the corporate sector.

The National Company Law Tribunal (NCLT) is established under Article 254 of the Indian Constitution and Section 408 of the Companies Act, 2013. It was formed by the Apex Court (Supreme Court of India) to hear cases involving corporate law. NCLT is a quasi-judicial organization that is entirely responsible for adjudicating company structures, legislation, and resolving disputes.

Registration of companies, transfer of shares, deposits, power to investigate, freezing assets of a company, and turning a public limited company into a private limited company are all key duties of NCLT.

It functions similarly to a conventional court. It makes decisions that resolve disputes, impose penalties, and award compensation. NCLT’s decisions can be appealed to the National Company Law Appellate Tribunal. The appeal must be submitted within 45 days after the order’s date. The Supreme Court is the next level of appeal.

There were several authorities for settling company-related problems. As a result, decisions were often delayed and contradictory. The delay stifles business growth and discourages investment. The NCLT has several key advantages, including a faster dispute resolution procedure and consistency in decision-making.

Role of NCLT under FSDR Bill

When it comes to the power of NCLT in the context of the new FSDR Bill, we can say that the means for resuscitation are inadequate when financial sector entities such as stock exchanges, clearing authorities, and depositories, or other capital market and insurance market intermediaries fail or are about to fail, according to FSDR.

FSDR is a law designed to prevent financial institutions from going bankrupt due to financial irresponsibility, mismanagement, defalcation, fraud, and other factors. The Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance and Regulatory Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority (PFRDA), and the Central government will all be represented, with three full-time and two independent members.

A critical examination of RA’s above-mentioned structure reveals the prospect of power centralization, which, if manipulated, might harm creditors. While the provisions appear to be reasonable, the truth remains that the combination creates a cocktail that, without warning, might kick off a chain of events that would result in tragedy for individuals and families – but not for corporations in the financial industry.

The role of quasi-judicial entities as a redressal body to protect the interests of aggrieved parties comes into play here. The National Company Law Tribunal (NCLT) is an Indian quasi-judicial organization that adjudicates matters involving Indian corporations, and it has certain responsibilities under the FSDR Bill.

The RA’s role as an administrator is expanded. It has the authority to make executive decisions on behalf of the organization, such as appointing or dismissing management and function as a receiver. The NCLT, which will appoint the RA as liquidator, must first approve the liquidation decision. Institutions that fail will be recognized as Systemically Important Financial Institutions (SIFIs), and they will be able to challenge their liquidation to the National Company Law Tribunal (NCLT).

Role of NCLT as a redressal body in the financial sector

NCLT has the authority to defend the interests of various stakeholders, particularly non-promoter shareholders and depositors, and provide redress for oppression and mismanagement by authorities in the corporate sector. It also has the authority to offer investors relief from a wide range of unjust acts perpetrated by corporate management or other consultants and advisers linked with the company, including the activities of the Resolution Committee, constituted under the FSDR Bill. Those who have been wronged have the option of filing a class-action lawsuit to seek retribution for the company’s conduct or omissions that have harmed their depositor rights.

According to Section 245 of the Companies Act, 2013, an application may be made with the tribunal by the company’s members, depositors, or on behalf of the members, asserting that the company’s affairs have been conducted in a manner that is adverse to the company’s interests.

The tribunal shall issue a public notice to all members and depositors in response to the members’ or depositors’ application; where a similar application is filed from another jurisdiction, the tribunal shall consolidate and consider it as one application, and the class members or depositors shall be allowed to choose the lead applicant; and two class-action applications filed for the same clause of the application, shall not be allowed.

The members, depositors, auditors (including audit firms), advisors, experts or consultants, and any other person affiliated with the corporation are bound by the tribunal’s orders. The Tribunal also has the authority to investigate or initiate an investigation. Provisions are made to assist foreign countries’ investigation agencies and courts with inquiry proceedings.

Under the Corporations Act, the NCLT has the authority to hear accusations of oppression and mismanagement of a company, as well as to wind up companies and exercise all other powers conferred by the Companies Act.

Within 45 days of receiving an order or judgment from NCLT, an aggrieved party may file an appeal with NCLAT for any decision or order made by NCLT. Furthermore, the NCLAT issues its verdict within six months after receiving the appeal. Where the NCLT and NCLAT are empowered to decide the matters, no civil court has jurisdiction.

Conclusion

While this is Bill’s structure and operation, the government’s note supporting its provisions makes various incongruent assumptions dating back to 1961 to support some of its claims. It claims, for example, that the Indian experience over the last 50 years has been one of “forced mergers” of PSBs, which has imposed a significant cost on shareholders and the government in terms of recapitalization support to transferee banks and poor recoveries.

At this time, the emergence of a quasi-judicial judicial body such as the NCLT is playing a key role in protecting their rights by limiting liquidation appeals and allowing class-action lawsuits. NCLT not only acts as a check on government actions but also increases the confidence of legitimate depositors in the existing financial system. Furthermore, the establishment of the NCLT has resulted in a quick resolution of corporate law problems, which will be resolved quickly.

References


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