Government of India Volume I: Analysis and Recommendations

Table of Recommendations 7.5 Powers of the resolution corporation as receiver
RESOLUTION
If a covered service provider fails to implement the instructions of the micro-prudential regulator and the resolution
corporation under the prompt corrective action framework, and reaches a stage of “imminent risk to viability,” the
regulator will appoint the resolution corporation as receiver of that covered service provider. As a consequence of
being appointed as receiver of a covered service provider, the resolution corporation will have the following powers:
1. To act as successor to all rights, titles, powers, and privileges of the covered service provider;
2. To take over the management of the covered service provider;
3. To exercise any of the three major tools to resolve a covered service provider: sale to another financial service
provider, the incorporation of a bridge institution, or temporary public ownership (nationalisation);
4. To manage and operate the covered service provider including selling off its assets, arranging for the assumption
of its liabilities, and conducting the business of the covered service provider; and
5. The resolution corporation as receiver shall terminate all rights and claims that the shareholders and creditors
of the covered service provider may have against the assets of the company, except for the right to payment,
resolution, or other satisfaction of their claims.
The resolution process must be allowed to proceed smoothly, with appropriate immunity from legal proceedings
pending the completion of resolution. In law, this requires mandating the following:
1. The decision to resolve a covered service provider, as determined by the resolution corporation, is final, conclusive
and may not be appealed;
2. A court will not have jurisdiction over any claim or any action seeking a determination of rights with respect to
the assets of the covered service provider, including any assets which the resolution corporation may acquire
as receiver; and
3. Throughout the exercise of its functions, the resolution corporation must be bound by a clearly defined legal
process. If it strays from this process, it may be open to challenge before the tribunal.
Table of Recommendations 7.6 Tools of resolution
The draft Code on resolution enables the resolution corporation to exercise at least three types of resolution tools:
1. Resolution by purchase
◮ The resolution corporation can merge a failing covered service provider with another financial service
provider(s), or transfer some of its assets and liabilities to another financial service provider; and
◮ The resolution corporation must ensure that there is thorough due diligence, and there is minimal
disruption caused to the consumers of the service providers concerned.
2. Resolution by bridge service provider
◮ The resolution corporation can create a wholly-owned bridge institution to which all or some of the
assets and liabilities of a failing covered service provider may be transferred;
◮ This tool may be exercised if, given the size and complexity of the covered service provider, it is infeasible
to sell it to another institution directly; and
◮ This tool may also be exercised if the resolution corporation determines that the continued operation
of the covered service provider is essential to provide financial services in the market.
3. Resolution by temporary public ownership
◮ As a last resort, the resolution corporation may require temporary public ownership of a failing covered
service provider in order to maintain financial stability;
◮ This tool should be used only when all other options have been exhausted;
◮ Temporary public ownership should typically be used for a SIFI, including banking service providers,
where the risk of firm failure is a threat to the financial system;
◮ The resolution corporation must consult and obtain the permission of the FSDC in the exercise of this
tool; and
◮ Since the tool has large fiscal implications, the draft Code must limit the conditions when the tool can
be exercised.
and a wholly owned subsidiary of a foreign firm will be identical from the viewpoint of
resolvability.
In the existing legislative landscape, there are certain Acts such as the State Bank of
India Act, 1955 and the Life Insurance Corporation Act, 1956, that were enacted to create
specific financial institutions. These laws contain provisions that vary or exclude the applicability
of general corporate and financial laws to the institutions created under them.
For instance, the State Bank of India Act, 1955 exempts the State Bank of India from the
76 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION