Government of India Volume I: Analysis and Recommendations

RESOLUTION
applicability of laws governing winding-up of companies and provides for its liquidation
only by an order of the Government. These provisions create unfair competition as it
creates a perception of safety in the minds of consumers and an expectation that they
will be insulated from the failure of such firms. The Commission recommends that such
provisions be amended immediately so that the resolution corporation can engage in orderly
and least disruptive resolution of all covered service providers in accordance with
its objectives envisaged in Table 7.2.
In an attempt towards enhancing the effectiveness of the resolution framework, the
Commission also focussed on the regulatory framework of co-operative societies that
carry out banking activities. In the current arrangement, such “co-operative banks” are
governed by state legislations and are subject to a dual regulatory framework by the RBI
and the Registrars of Co-operative Societies of the States in which the banks are located.
This has created difficulties in the regulation of co-operative banks. These difficulties
have been attempted to be addressed through memorandums of understanding entered
into between the RBI and State Governments. Some States and Union Territories which
have amended the local Co-operative Societies Act empowering the RBI to order the Registrar
of Co-operative Societies of the State or Union Territory to wind up a co-operative
bank or to supersede its committee of management and requiring the Registrar not to
take any action regarding winding up, amalgamation or reconstruction of a co-operative
bank without prior sanction in writing from the RBI are covered under the Deposit Insurance
Scheme. These co-operative banks are designated as “eligible co-operative banks”
for the purpose of deposit insurance under the DICGC Act, 1961. This has resulted in an
uneven framework where some co-operative banks are eligible to avail the deposit insurance
scheme by the DICGC while some others are not part of this arrangement.
The Commission is of the view that when co-operative societies engage in the business
of providing financial services, they need to be regulated and supervised by financial
regulators in a manner that is commensurate with the nature of their business and the
risks undertaken by them and must be resolved in an orderly manner to cause least disruption
to the consumers and the financial system. Since co-operatives often cater to the
needs of small households, the Commission is of the view that in the event of a deterioration
in their risk profile, they should be subject to the prompt resolution framework
envisaged by the Commission.
This can be achieved under Article 252 of the Constitution which allows two or more
State Legislatures to pass a resolution accepting the authority of the Parliament to make
laws for the State on any matter on which it otherwise does not have the capacity to legislate.
Using this provision, State Governments could pass resolutions to extend the power
to make laws on the regulation, supervision and resolution of co-operative societies carrying
on financial services to the Parliament.
The Commission therefore makes the following recommendations with respect to
co-operative societies:
1. In consonance with the recommendations on competitive neutrality, co-operative societies carrying
on financial services should be subject to similar regulatory and supervisory framework of
resolution as other entities carrying on similar activities;
2. Using Article 252 of the Constitution of India, State Governments should accept the authority of
the Parliament to legislate on matters relating to the failure resolution of co-operative societies
carrying on financial services; and
3. The regulator may impose restrictions on the carrying on of financial services by co-operative
societies from States whose Governments have not accepted the authority of the Parliament to
legislate on the regulation of co-operatives. These restrictions would entail that co-operative
societies in such states would not be covered under the resolution framework envisaged by the
Commission.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 77