Insolvency bill moots ‘creative destruction’

A draft Financial Resolution and Deposit Insurance Bill 2016 has mooted the “creative destruction of inefficient firms” as part of the legislation that seeks to address insolvency issues in financial services companies.

“In financial firms, zero failure of financial firms is not always possible,” the report by the Committee that accompanied the draft Bill said. “Regulation will sometimes fail, and a prudentially regulated financial firm will become insolvent. Moreover, some instances of firm failure are good for creative destruction of inefficient firms.

However, it is important to ensure that the failure of a financial firm is orderly, so that consumers are protected and systemic stability and resilience are preserved, without relying on taxpayer-funded bail-out.”

The Ministry of Finance on Wednesday invited comments on the proposed draft. Finance Minister Arun Jaitley had in his Budget 2016 speech said that there was a need for a comprehensive code for the resolution of financial sector companies, which would, together with the Insolvency and Bankruptcy Code 2015, when enacted, “provide a comprehensive resolution mechanism for our economy”.

The draft Bill sets in place the creation of a Resolution Corporation comprising three ex-officio members representing the Ministry of Finance, the Reserve Bank of India, and the Securities and Exchange Board of India, respectively. Additionally, there will be one member each nominated by the insurance and pension regulators.

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