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Advising And Assisting Resolution Professionals In Resolution Process Management

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    What Do You Understand by Term ‘Resolution of Financial Firms’?

    The resolution of a financial firm can be defined as a typical category of immediate inability to pay debts ruining the interest of a few creditors instantly and mercilessly. On the other hand, it provides the other (i.e. the bank depositors, a new as well as a jubilant beginning. Resolution is supposed to be carried out before contagion sets into the business and the various parties (like customers, competitors, traders etc.) associated with the business also break down in panic or due to lack of improper risk management strategies. This code is known to provide specific resolution mechanism in order to handle bankruptcy circumstances in banks, insurance companies, and other financial institutions. This Bill received a green go in the Parliament on June 14, 2017.

    Resolution Corporation’s Establishment and Its Operations

    The draft Bill visions the establishment of a Resolution Corporation with a description from financial sector regulators, like, IRDAI, RBI, SEBI and PFRDA, delegates from the Government (i.e. Central Government) as well as two independent members. There are three major functions of the Resolution Corporation, namely; (a) assessing risks and preparing for the failure of covered service providers (CSPs), (b) resolving failed CSPs with the help of a variety of tools and (c) managing funds for deposit insurance, resolution and administration.

    Funds and Accounts

    A Resolution Corporation ought to have three kinds of funds:

    The Corporation Insurance Fund which would be used for payment of deposit insurance;
    The Corporation Resolution Fund which would be used for covering resolution fees and;
    A Corporation General Fund which would be used for meeting the administrative expenses of the Resolution Corporation. The covered service providers shall also be needed to pay fees, as specified by the Corporation.

    Systemically Important Financial Institutions (“SIFIs”)

    The Government (i.e. the Central Government), in deliberation with the appropriate sectoral regulator may entitle certain categories of financial institutions as Systemically Important Financial Institutions. Given their consequences for the economy, the Bill envisages a few other supplementary powers in respect of these Systemically Important Financial Institutions.

    Deposit Insurance

    After the proclamation of the Bill, the Deposit Insurance as well as Credit Guarantee Corporation would be dispersed and all its functions will be taken over by the Resolution Corporation.

    Assessment: Risk v/s Viability

    The Resolution Corporation along with the Appropriate Regulator would determine the objective criteria for the classification of covered service providers into five categories, namely

    Low,
    Moderate,
    Material,
    Imminent and
    Critical

    The categorization of a covered service provider as ‘low’, ‘moderate’ and ‘material’ can only be done by the allocated regulator. The categorization into ‘imminent’ can be done either by the Resolution Corporation or the Appropriate Regulator.

    The powers of the Appropriate Regulator at the ‘material’ stage involves preventing the covered service provider from conducting a number of activities, including payment or declaration of dividends, accepting funds and acquiring any interest in any other business. The powers of the Resolution Corporation are restricted until the covered service provider reaches the ‘imminent ‘stage.

    The categorization to be at ‘critical’ risk to growth by the Appropriate Regulator or the Resolution Corporation shall only be through a written order that needs to be published in a specified manner.

    At this point, the Resolution Corporation shall be chosen to manage the affairs of the covered service provider.

    Until the conclusion of the resolution, there will be a stay on legal actions and proceedings.

    There will also be a stay on both the payment or acceptance of deposits to the depositors of the covered service provider in a particular manner provided through a written order.

    Document Required
    Monitoring Regime
     

    The Insolvency and Bankruptcy Code, 2016 has been brought into the picture with the sole motive of making available the credit more transparent by boosting the value of the assets in a time-bound fashion. It builds up the trust in the judicial mechanism by preventing the immoral and corrupt debtors from dodging the paying back of their debts by taking the aid of insolvency.

    The Insolvency and Bankruptcy Board is the supervisory power entrusted with the obligation to guarantee the efficient and productive exercise of the essentials laid down under the Insolvency and Bankruptcy Code.

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      Insolvency Information Utilities Governance

      An Information Utility stocks financial information that serves to set up delinquency as well as validate claims rapidly as well as promptly and thereby aid in the completion of transactions under Insolvency and Bankruptcy Code. In order to allow the Insolvency and Bankruptcy Board the control of Information Utility as per the Insolvency and Bankruptcy Code, the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 were brought forth. The Information Utility Regulations provide for qualification norms, technical specifications, guidelines, for the proper conduct of core services and other services by Information Utilities. Spelling out the responsibilities and assignments to be carried out under the law, the Information Utility Regulations assists in confirmation and verification of information to be stored with the Information Utility, data integrity and security, registration of users, porting of information, interoperability among Information Utilities grievance redressal mechanism, etc.

      Alteration of Information Utilities Regulations

      For the objective of better application and implementation of the principles of the Information Utilities Regulations as per the terms of Insolvency and Bankruptcy Code, the Insolvency and Bankruptcy Board of India (Information Utilities) (Second Amendment) Regulations, 2018 were circulated on October 11 in the year 2018. Some of the characteristics of the Amendment Regulations are listed below:

      Regulation 9 – Composition of the Governing Board.

      The Governing Board must exist of – (a)shareholder directors; (b) independent directors; as well as (c) managing director:
      The MD (i.e. managing director) shall not be thought out either a shareholder director or an independent director.
      Any employee of an information utility may be selected or elected as a director on its Governing Board along with the managing director, but such director shall be considered/ regarded as a shareholder director.
      The number of independent directors, in any case, shall not be less than the number of shareholder directors:
      An independent director is supposed to be an individual-
      – who is a person of integrity and ability;
      – who has specific know-how in the field of management, finance, law or insolvency;
      – who is not related to the directors of the Governing Board;
      – who has or had no financial relationship with the information utility, or any of its shareholders holding more than 10% of its share capital, or any of its directors, during the current financial year or during immediately preceding 2 financial years;
      – who is not a shareholder of the information utility; and
      – who is not a representative of the Board of Directors of any of the shareholders holding more than ten per cent. of the share capital of the information utility.
      An independent director shall be designated by the Board from amongst the list of names recommended by the information utility.
      An individual may serve as an independent director for a maximum period of three years (specifically two terms) each or part thereof, or up to the age of 70 years, whichever is earlier.
      The second term referred to in sub-regulation (7) may be subject to a satisfactory performance review of the first term by the Governing Board.
      A cooling off period of 3 years shall be pertinent for an independent director to become a shareholder director in the same or a different information utility.
      The directors ought to elect an independent director as the Chairperson of the Governing Board.
      A director, who has any interest, direct or indirect, financial or otherwise, in any matter coming up for consideration at a meeting of the Governing Board or any of its Committees, shall as soon as possible after appropriate circumstances have come to his knowledge, reveal the nature of his interest at such meeting and such revelation shall be registered in the proceedings of the Governing Board or the Committee, as the case may be, and the director shall not take part in any discussion or decision of the Governing Board or the Committee in respect to that matter.

      Regulation 9A – MD (Managing Director)

      An information utility shall, subject to the guidelines issued by Insolvency and Bankruptcy Board of India from time to time, conclude the qualification and experience, manner of appointment, terms and conditions of appointment and other procedural formalities associated with the selection and appointment of the managing director, based on the condition that-
      – an individual shall be preferred as Managing Director through an open advertisement in all editions of at least one national daily newspaper;
      – an individual at the time of joining as a Managing Director shall not be above the age of fifty-five years, which may be relaxed by the Governing Board up to 60 years, after recording reasons therefor; and
      – an individual shall not act as Managing Director after he has attained the age of sixty-five years.
      The nomination of an individual as the Managing Director shall be for a term of not less than 3 years but not exceeding 5 years.
      An individual can serve as Managing Director for a maximum of two terms.
      The procedure of nomination for the second term as Managing Director shall be conducted afresh. Both the appointment as well as remuneration payable to the Managing Director shall be certified by a compensation committee constituted by the Governing Board.
      The appointment, renewal of appointment as well as termination of service of the managing director shall be subject to prior authorization of Insolvency and Bankruptcy Board.
      The Managing Director shall be responsible for discharge or termination of services by the Governing Board, with the prior approval of Insolvency and Bankruptcy Board, for failing to give effect to the directions, guidelines and other orders issued by the Governing Board or Insolvency and Bankruptcy Board, or the rules, the articles of association or bye-laws of the information utility or on the ground of unethical behavior (i.e. misconduct) or incapacity to continue in office.
      The Insolvency and Bankruptcy Board may suo motu remove or terminate the services of the Managing Director, in case it deems fit, in the interest of stakeholders of the insolvency resolution process or in the public interest, after giving a reasonable opportunity of being heard.

      Regulation 9B. – Compliance

      Agreement to the amended regulations 9 and 9A are required to be made within one year from the date of initiation.

      The Information Utility ecosystems, in turn, facilitates the speedy disposal of insolvency resolution process to avoid denial of justice to bonafide creditors which may be threatened due to the evident inability of the debtor. The adjustments and alterations help in the setting up of an infrastructure ascertaining obedience to the law of the land.

       

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      Frequently Asked Questions on Advising and Assisting Resolution Professionals in Resolution Process Management

      This person would be eligible to be selected for the corporate insolvency resolution process of a corporate debtor in case he as well as his partners and directors of the insolvency professional entity of which he is related.

      This can be done immediately on his nomination as an interim resolution professional.

      Any individual demanding to be an operational creditor, other than an employee of the corporate debtor ought to submit proof of claim to the interim resolution professional either in person or by post.

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