CLASSIFICATION OF SPECIFIED SERVICE PROVIDERS INTO CATEGORIES OF RISK TO VIABILITY UNDER THE FINANCIAL RESOLUTION AND DEPOSIT INSURANCE BILL, 2017

[Mr. M. GOVINDARAJAN]

Categories of risk

Clause 36 (5) of the Financial Resolution and Deposit Insurance Bill, 2017 (‘Bill’ for short) provides that the Resolution Corporation (‘Corporation’ for short) is to classify a specified service provider into the categories of risk to viability.  The following are the categories of risk to viability-

• low, where the probability of failure of a specified service provider is substantially below the acceptable probability of failure;
• moderate, where the probability of failure of a specified service provider is marginally below or equal to acceptable probability of failure;
• material, where the probability of failure of a specified service provider is marginally above acceptable probability of failure;
• imminent, where the probability of failure of a specified service provider is substantially above the acceptable probability of failure;
• critical, where the probability of failure of a specified service provider is substantially above the acceptable probability of failure and the specified service provider is on the verge of failing to meet its obligations to its consumers.

The Corporation may specify different criteria for different categories of specified service provider.

Classification of specified service provider

The appropriate regulator or the Corporation may, by an order in writing, classify a specified service provider which meets the criteria, into any of the categories of risk to viability.  The Corporation shall have no power to classify a specified service provider into the category of low or moderate risk to viability.

The appropriate regulator or the Corporation shall, while classifying a specified service provider, if it considers expedient or necessary for the purposes of the resolution of the specified service provider, determine as to whether a holding company of such specified service provider or a non-regulated operational entity within a financial group or conglomerate of a specified service provider is to be so classified, and if it so determines-

• it shall classify such holding company or a non regulated operational entity within a financial group or conglomerate; and
• on such classification, the holding company or a non-regulated operational entity within a financial group or conglomerate of a specified service provider shall be deemed to be a specified service provider.

The appropriate regulator, may carry out investigation, inquiry or inspection, at such intervals as may be specified by regulations made by it.

Attributes to be considered

While making any regulations for such classification, the Corporation shall take into account the following attributes of a specified service provider-

• adequacy of capital, assets and liability;
• asset quality;
• capability of management;
• earnings sufficiency;
• leverage ratio;
• liquidity of the specified service provider;
• sensitivity of the specified service provider to adverse market conditions;
• compliance with applicable laws;
• risk of failure of a holding company of a specified service provider or a connected body corporate in India or abroad; and
• any other attributes as the Corporations deems necessary.

For the purposes of classifying a specified service provider in the category of critical risk to viability, the regulations shall take into account the period for which the specified service provider has been in the category of imminent risk to viable if applicable.

The Corporation may, in consultation with the appropriate regulator, specify additional criteria in respect of risk to viability of a specified service provider which is operating in India as a branch office of a body corporate incorporate outside India.

Difference of opinion

Where a specified service provider has been classified in the category of material risk to viability by the appropriate regulator and the Corporation has a difference of opinion over such classification, the Corporation shall record its reasons in writing and convey the same to the appropriate regulator.       

If the Corporation has conveyed a contrary opinion over the assessment there shall be a consultation of not more than 15 days between the Corporation and the appropriate regulator with a view to arriving at a consensus over the assessment.  If after such consultation, the Corporation continues to hold a different view regarding the assessment, it may decide to conduct an independent inspection to confirm its own view regarding the risk to viability and the appropriate regulator may be present during such inspection, if it deems necessary.

The Corporation shall, after conducting the inspection, forward a copy of the inspection report along with its findings to the appropriate regulator for its comments.  After considering the comments of the appropriate regulator, make a determination of the imminent or critical risk to viability of the specified service provider except the classification of a central counterparty and such determination shall be final.

The Corporation may request such information relating to the business of the specified service provider as may be specified by the regulations made by the Corporation, for any specified service provider classified in the category of material, imminent or critical to viability.

Forwarding of order

A copy of the order of classification shall be forwarded to the Corporation or the appropriate regulator within 15 days of such order.

Finality of order

The classification of a specified service provider by the Corporation or the appropriate regulator shall be final and the specified service provider shall comply with the requirements of such classification.

Material risk to viability

If the appropriate regulator classifies a specified provider in the category of material risk to viability, it may carry out additional inspections to monitor the risk to viability of the specified service provider.  The appropriate regulator may prevent the specified service provider which is classified in the category of material risk to viability, from carrying out any or all of the following actions-

• accepting funds which increase the liabilities to consumers;
• declaration or payment of dividends to any shareholder of the specified service provider;
• payment of any bonus to any director, employee or manager of the specified service provider;
• acquiring any interest in any other business;
• establishing new locations for carrying out business or acquiring new clients;
• carrying out transactions with any person related to the specified service provider; or
• repayment of any debt which is not due.

The appropriate regulator, for the above said purpose is to carry out any or all of the following actions-

• increase the capital of the specified service provider through such means as may be stated in the order, which may include conversion of securities from one type to another in terms of such securities;
• issue new securities;
• sell identified assets; or
• such other action as may be required by the appropriate regulator.

The regulator may vary the order on the request of the specified service provider on its satisfaction that such variation shall-

• reduce the financial obligation of the specified service provider; or
• restore the specified service provider to the category of low or moderate risk to viability.

Imminent risk to viability

A specified service provider may be classified in the category of imminent risk to viability by the regulator if the specified service provider has not submitted  a restoration plan within the period specified or if the specified service provider has failed to implement the restoration plan, in full or in part, within the period indicated in its restoration plan.

A specified service provider may be classified in the category of imminent risk to viability by the Corporation if the specified service provider has failed to submit a resolution plan to the Corporation.

The appropriate regulator or the Corporation may classify a specified service provider in the category of imminent risk to viability when an order is made by any court or tribunal that there has been a fraud in the conduct of the business of the specified service provider.

Obligation of specified service provider

A specified service provider classified in the category of imminent risk to viability shall, if it is not a systematically important financial institution, submit a resolution to the Corporation within ninety days.

Order of Corporation

When a specified service provider is classified in the category of imminent risk to viability the Corporation-

• may appoint an officer or any person authorized by it to inspect the specified service provider, including by being present at the principal location of business and any other location of the specified service provider and observing any meeting of the management of the specified service provider r any other functioning of the specified service provider;
• may by an order, prevent the specified service provider from-

• accepting funds which increase its liabilities and the number of consumers;
• declaration or payment of dividends to any stakeholders;
• payment of any bonus to any director, employee or manager;
• acquiring interest in any other business;
• establishing new locations for carrying on businesses or acquiring new clients;
• carrying out transactions with any person related to the specified service provider;
• repayment of any debt which is not due;
• payment of any fees to any agent or service provider of the specified service provider;
• payment of any remuneration to any employee, director or manager of the specified service provider in exercise of any limit set in the order;
• providing any financial service as may be specified in the order;
• making of any advances;
• any repatriation of capital and deployment of funds where the specified service provider is a branch office without the approval of the Corporation; or
• any other action, which in the opinion of the Corporation may help in the resolution;

• may, by order, require the specified service provider to carry out any or all of the following actions-

• increase the capital of the specified service provider through such means as may be stated in the order, which may include conversion of securities from one type to another in terms of such securities;
• issue new securities;
• sell identified assets; or
• take such other action as may be required by the appropriate regulator.

Central Counterparty

Clause 2(6) of the Bill defines the expression ‘Central counterparty’ as an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts, and includes a system provider operating a central counterparty under the Payment and Settlement Systems Act, 2007 or a clearing corporation under section 8A of the Securities Contracts Regulation Act, 1956.

A classification of a central counterparty in the category of imminent risk to viability shall only be made by the appropriate regulator which shall record its reasons for such classification and inform the Corporation within 15 days of the classification.

Critical risk to viability

If a specified service provider is classified in the category of critical risk to viability-

• by the appropriate regulator; or
• by the Corporation.

The appropriate regulator or the Corporation before classifying a specified service provider in the category of critical risk to viability, shall consider the potential effect of such classification on-

• any person related to the specified service provider; and
• stability of the financial system of any other relevant jurisdiction.

Order

            Any classification in the category of critical risk to viability shall be by an order in writing.  The order shall be published in such form and manner as may be specified by the regulations by the Corporation notwithstanding anything to the contrary in the Companies Act, 2013 or any other law for the time being in force.  The order of classification shall be effective from the date of its publication.

Effect of order

On classification of a specified service provider in the category of critical risk to viability-

• the Corporation shall be deemed to be an administrator of that specified service provider;
• no legal action or proceedings against such specified service provider, including any arbitration proceedings, shall commence or continue until such period as may be specified in the order or until conclusion the resolution or until the date of the order appointing the Corporation as the liquidator;
• no payment, repayment or acceptance of deposits shall be made or liabilities incurred, except on such terms and conditions as may be specified in the order until the date of the order appointing the Corporation as the liquidator;
• if such specified service provider is an insurance company, it shall not exercise any contractual rights to surrender or terminate an insurance cover or take any action as may be determined by the Corporation to be relevant for the purposes of carrying out resolution while preserving its value ; and
• the Corporation shall make payment of deposit insurance.

On classification of a specified service provider in the category of critical risk to viability the appropriate regulator may, by notification, withdraw or modify any authorization or licence granted to the specified service provider to carry out any financial service and no depositor of the relevant insured service provider shall have any deposit insurance with respect to any new deposit accepted by the insured service provider from the date of the order unless otherwise provided in that order.

Show cause notice

A specified service provider shall not be classified in the category of material risk to viability or imminent risk to viability or critical risk to viability unless a show cause notice is issued to such specified service provider in such form and in such manner as may be specified by regulation made by the Corporation and the specified service provider has been given an opportunity to present its case within such period as may be specified by regulations made by the Corporation.

Powers of appropriate regulator

The appropriate regulator shall, in respect of a specified service provider classified in the category of imminent risk to viability or critical risk to viability exercise its powers under the law regulating specified service provider, notwithstanding anything contrary in such law, to the extend it is not inconsistent with the provisions of this Act.