Stakeholders seek clarity on role of Resolution Corpn

A major objection of all key stakeholders — banks, insurance companies, security depositories and stock markets — have to the setting up of the Resolution Corporation (RC) is that it will overlap with the existing regulators especially the RBI and create conflict and confusion.

All these institutions have demanded clarity from the Centre on clauses pertaining to the specific areas of conflict between RC and existing regulators in the Financial Resolution and Deposit Insurance (FRDI) Bill.

All these stakeholders interacted with the members of the Joint Committee of Parliament on the Bill, headed by BJP MP Bhupendra Yadav.

Interestingly, while the RBI has actively sought specific amendments to the FRDI Bill, private banks, especially ICICI Bank, are clear in their assertion that dual regulatory structure is in conflict with the principle of ease of doing business. ICICI Bank maintained before the joint committee of Parliament on FRDI that the RC should be a specialised body that steps in only when the regulator classifies that a service provider is at critical risk of viability. HDFC Bank pointed out that while Japan has a separate RC, in Singapore and England the central bank oversees the powers of the resolution authority.

In fact, BusinessLine has learnt that all the main stakeholders told the parliamentary panel that assigning the power of a super- regulator to the RC should not be at the cost of a weakened RBI and other regulators.

The Centre, on its part, apparently told the panel members that the RC is not intended to function like a regulator. It has assured the members that the appropriate regulator will retain control over the specified service providers in the lower stages of risk viability. It said the RC will step in only when the role of regulation is substantially over and added that the overlap between the two must not be viewed as an overlap of functions but as two completely separate bodies with distinct functions of regulation and orderly resolution.

However, the RBI is specific in its objections to the duality in the regulatory structure that the RC would create. The central bank has sought amendments to clause 36(5) of the Bill that provides the powers for RC with the appropriate regulator to specify the criteria of classification of risk of a particular service provider.

The RBI said that the risk to viability should be determined by the appropriate regulator in consultation with RC and said the classification of risk up to imminent stage should be left to the regulator. The IBA (Indian Banks Association) has backed this proposal of the RBI.

Along with public sector banks, the IBA and the RBI, private sector lenders such as HDFC Bank and ICICI Bank, various financial service providers, government institutions such as Finance Industry Development Council (FIDC), Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL), have voiced their concerns over the Bill.

The FIDC has told the parliamentary committee that since the issues related to viability or bankruptcy are addressed by the Insolvency and Bankruptcy Code and the RBI has powers to address stress among non-banking financial companies, setting up of the RC may lead to confusion and litigation. CDSL suggested that including depositories under the FRDI will be a regulatory overkill of the securities market as they are already closely regulated by SEBI with a high standard of governance and code of conduct.

Union Bank of India termed the powers vested with RC as draconian and said the power with RC should be subject to the overarching power of the Centre or otherwise confidence in the financial system will crumble. It also said that Chapter 6 of the FRDI Bill creates an unwarranted conflict zone between the regulator and the RC, which is unavoidable. Regulators, according to Union Bank, are better suited to the job of risk categorisation and the RC’s role should be confined to resolution and liquidation.

The Insurance Regulatory and Development Authority of India (IRDAI) flagged Clause 14(1) of the Bill that gives the RC the power of investigation.

The insurance regulator said the RC has been given powers to investigate even before an entity is classified as critical or imminent risk to viability and it creates a conflict with the role of regulator. Life Insurance Corporation suggested that to avoid conflict, the RC should obtain information and ensure compliance through the regulator.