Ever since the Financial Resolution and Deposit Insurance Bill 2017 (FRDI Bill) was introduced in the Lok Sabha this June, it has evoked a strong response from various quarters including consumer organisations, bank employee unions and trade unions. There are also several messages doing the rounds on WhatsApp, etc, arguing for and against the provisions of the Bill that seeks to change the way in which banks and financial firms facing bankruptcy may be resolved. The bail-in provision seeks to confer statutory powers to a Resolution Authority to convert existing creditors (including depositors) into shareholders to recapitalise ailing banks.
The piece in Moneylife, titled “Do Bank Depositors Need To Worry about FRDI?” by Sucheta Dalal, succinctly gave a background to the provisions of the Bill and its implications and the issues that the parliamentary standing committee will have to consider.
Apart from the financial and economic considerations, there is also a legal/constitutional problem with the bail-in provision. It has to do with treating banking companies merely as financial entities without regard to the legal structure that gives each entity its basis. In law, a corporation is a business association with specified business objects with a distinct legal personhood.
The association is of choice wherein members agree to be governed by the memorandum and the articles of association of such a corporation. The right to form such an association is protected by various provisions of the Constitution, particularly Article 19(1)(c) read with Article 19(1)(g).
Article 19(1)(c) recognises the right to form unions and associations. Implicit in such a right is the right to form an association of one’s choice. A statutory prohibition against some associations or a statutory compulsion to become member of certain associations will necessarily, therefore, restrict such a right.
Any restriction on Article 19(1)(c) will need to comply with the test in Article 19(4) of the Constitution. According to Article 19(4), the restriction will need to have statutory backing; the restriction may be imposed only for the purposes of sovereignty and integrity of India, public order, or morality; and that such a restriction must be reasonable, i.e., can be no more than what is required for such purposes.
The bail-in provision’s compliance with 19(4) is clearly suspect. A statutory scheme that provides for forcing depositors, without a need for taking their consent, to become members of a banking corporation is manifestly restrictive of the depositors’ right to form associations of their choice.
The FRDI Bill, the purpose of which is the bankruptcy resolution of banking and insurance corporations, is not a law whose object is in line with any of the purposes mentioned in 19(4).
However, it doesn’t mean there is no way to provide for a statutory, consent-less, bail-in clause without violating the Constitution.
One way to do it is to provide for all three methods of resolution—first, a sovereign bail-out; second, a consent-based bail-in; and third, a compulsory statutory bail-in.
However, the law ought to ensure that compulsory bail-in can be invoked only when there is a manifest threat to sovereignty and integrity of India, which may be the case when the viability of big public sector banks that substantially affect India’s economic sovereignty and financial stability are threatened.
In other words, when a financial emergency is in operation. Article 360 of the Constitution of India provides for a proclamation of financial emergency when the financial stability of the country is under threat.
A compulsory bail-in, predicated exclusively on a proclamation of financial emergency, will not only be within Constitutional bounds, but also, perhaps, be acceptable to the civil society voices that are now against the provision in its current form.
senior citizen deposits should be exempted from the bail in completely
bail in if at all enacted should exempt senior citizens
deposits contracts entered into prior to the act should be exempted or should be expressly consented upon for closure or renewal
exit options to existing depositors should made available