Standing Committee's recommendations on the Whistleblower's Bill

Kaushiki - June 17, 2011

The government is considering a number of measures to tackle corruption such as the formation of the office of the Lokpal or Ombudsman to investigate corruption cases, the Judicial Standards and Accountability Bill, 2010 that requires judges to declare their assets, lays down enforceable standards of conduct for judges, and establishes a process for removal of the Supreme Court and High Court judges (see PRS Analysis) and the Public Interest Disclosure and Protection of Persons Making the Disclosure Bill, 2010. In 2004, following the death of whistleblower Satyendra Dubey, the government issued a notification laying down certain guidelines for whistleblowing and protecting whistleblowers. It introduced the Public Interest Disclosure and Protection of Persons Making the Disclosure Bill, 2010 in August 2010 to give statutory backing to the 2004 government resolution. Commonly known as the Whistleblower’s Bill, it seeks to protect whistleblowers i.e. persons making a public interest disclosure related to an act of corruption, misuse of power or criminal offence by a public servant. It designates the Central and State Vigilance Commissions to receive disclosures from whistleblowers and lays down safeguards for protection of whistleblowers (see PRS Analysis). The Bill was referred to the Departmentally related Standing Committee on Personnel, Public Grievances, Law and Justice. The Committee presented its report on June 9, 2011. Key recommendations of the Standing Committee

§ The Bill seeks to establish a mechanism to register complaints on any allegation of corruption or wilful misuse of power by a public servant. The Committee broadly agreed with the provisions of the Bill but hoped that the government would consider the recommendations and adopt them wherever found appropriate.
§ The Bill covers any complaint under the Prevention of Corruption Act, 1988; wilful misuse of power, and a criminal offence by a public servant. The Committee suggested that the scope of the Bill may be widened to include offences such as maladministration and human rights violations. Specifically, the Bill should cover accrual of wrongful gain to a third party. Also, the definition of “public servant” in the Indian Penal Code and the Prevention of Corruption Act, 1988 could be adopted for this Bill.
§ The Committee proposed that the defence forces and intelligence organisations should be included within the ambit of the Bill. There could be reasonable exceptions based on operational needs of the forces. Alternately, a separate authority could be set up for these exempted agencies. It added that the Bill should cover members of the Council of Ministers, the judiciary (including higher judiciary) and regulatory authorities.
§ The Bill states that a public interest disclosure can be made only to the Central or State Vigilance Commissions (VCs). The Committee is of the opinion that this may restrict access especially to population in remote areas. It recommended that the Rules should provide for a smooth and convenient system. The Committee added that if there are multiple points at which complaints can be made, the identity of the complainant should be strictly protected.
§ The Bill does not allow anonymous complaints. The Committee however suggested that if the anonymous complaints have supporting documents that substantiates the claims, the VCs can investigate it. It also advised that an alternative mechanism could be set up within or outside the Bill for inquiring into anonymous complaints.
§ The Committee recommended that there should be a foolproof mechanism to ensure that the identity of the complainant is not compromised with at any cost. This is especially important because without such a mechanism it would deter prospective complainants due to fear of harassment and victimisation.
§ The Bill allows the VCs to reveal the identity of the complainant to the head of the organisation if it is necessary to do so. The Committee recommended that the identity of the complainant should not be revealed to the head of the organisation without the written consent of the complainant.
§ The Committee felt that undue burden should not be placed on the complainant to provide proof to substantiate his case. As long as he is able to make out a prima facie case, the VCs should follow up on the case.
§ The Committee is of the view that the VCs should inform the complainant about the outcome of the complaint. Also, the VCs should give reasons if it decides to dismiss a complaint and the complainant should be given a reasonable hearing if he is not satisfied with the dismissal.
§ The Committee proposed that there should be a time limit for conducting discreet inquiry by the VCs, for inquiry by the head of the organisation and for taking action on the recommendations of the VCs. The authority would have to give reasons in writing if it wants the time limit to be extended. There should also be some mechanism to ensure that the directions of the VC are not avoided to protect the wrongdoer.
§ The Bill states that the VCs shall not entertain any complaints made five years after the action. However, the Committee is not convinced that this restriction should be prescribed. If at all there has to be a time limit, exceptions should be made in case of complaints which prima facie reveal offences of a grave nature.
§ The Committee recommended that the term “victimisation” should be defined and the whistleblower should be provided with sufficient protection to protect him from violence. Also, witnesses and other persons who support the whistleblower should be accorded the same protection.
§ The Committee strongly recommended that there should be a mechanism to ensure that the orders of the VCs are complied with. Stringent action should be taken against any person who does not comply with the order.
§ The Committee felt that the penalty for frivolous or malafide complaints was too high and should be substantially reduced. Also, while deciding whether a disclosure is frivolous, the intention of the complainant should be examined rather than the outcome of the inquiry. The complainant should also have the right to appeal to the High Court.

Legislation

Resolving failure of financial firms: The FRDI Bill explained

Gayatri Mann - October 12, 2017

The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Parliament during Monsoon Session 2017.^[1] The Bill proposes to create a framework for monitoring financial firms such as banks, insurance companies, and stock exchanges; pre-empt risk to their financial position; and resolve them if they fail to honour their obligations (such as repaying depositors). To ensure continuity of a failing firm, it may be resolved by merging it with another firm, transferring its assets and liabilities, or reducing its debt. If resolution is found to be unviable, the firm may be liquidated, and its assets sold to repay its creditors.

After introduction, the Bill was referred to a Joint Committee of Parliament for examination, and the Committee’s report is expected in the Winter Session 2017. The Committee has been inviting stakeholders to give their inputs on the Bill, consulting experts, and undertaking study tours. In this context, we discuss the provisions of the Bill and some issues for consideration.

What are financial firms?

Financial firms include banks, insurance companies, and stock exchanges, among others. These firms accept deposits from consumers, channel these deposits into investments, provide loans, and manage payment systems that facilitate transactions in the country. These firms are an integral part of the financial system, and since they transact with each other, their failure may have an adverse impact on financial stability and result in consumers losing their deposits and investments.

As witnessed in 2008, the failure of a firm (Lehman Brothers) impacted the financial system across the world, and triggered a global financial crisis. After the crisis, various countries have sought to consolidate their laws to develop specialised capabilities for resolving failure of financial firms and to prevent the occurrence of another crisis. [2]

What is the current framework to resolve financial firms? What does the Bill propose?

Currently, there is no specialised law for the resolution of financial firms in India. Provisions to resolve failure of financial firms are found scattered across different laws.² Resolution or winding up of firms is managed by the regulators for various kinds of financial firms (i.e. the Reserve Bank of India (RBI) for banks, the Insurance Regulatory and Development Authority (IRDA) for insurance companies, and the Securities and Exchange Board of India (SEBI) for stock exchanges.) However, under the current framework, powers of these regulators to resolve similar entities may vary (e.g. RBI has powers to wind-up or merge scheduled commercial banks, but not co-operative banks.)

The Bill seeks to create a consolidated framework for the resolution of financial firms by creating a Resolution Corporation. The Resolution Corporation will include representatives from all financial sector regulators and the ministry of finance, among others. The Corporation will monitor these firms to pre-empt failure, and resolve or liquidate them in case of such failure.

How does the Resolution Corporation monitor and prevent failure of financial firms?

Risk based classification: The Resolution Corporation or the regulators (such as the RBI for banks, IRDA for insurance companies or SEBI for the stock exchanges) will classify financial firms under five categories, based on their risk of failure (see Figure 1). This classification will be based on adequacy of capital, assets and liabilities, and capability of management, among other criteria. The Bill proposes to allow both, the regulator and the Corporation, to monitor and classify firms based on their risk to failure.

Corrective Action: Based on the risk to failure, the Resolution Corporation or regulators may direct the firms to take certain corrective action. For example, if the firm is at a higher risk to failure (under ‘material’ or ‘imminent’ categories), the Resolution Corporation or the regulator may: (i) prevent it from accepting deposits from consumers, (ii) prohibit the firm from acquiring other businesses, or (iii) require it to increase its capital. Further, these firms will formulate resolution and restoration plans to prepare a strategy for improving their financial position and resolving the firm in case it fails.

While the Bill specifies that the financial firms will be classified based on risk, it does not provide a mechanism for these firms to appeal this decision. One argument to not allow an appeal may be that certain decisions of the Corporation may require urgent action to prevent the financial firm from failing. However, this may leave aggrieved persons without a recourse to challenge the decision of the Corporation if they are unsatisfied.

Figure 1: Monitoring and resolution of financial firms

Sources: The Financial Resolution and Deposit Insurance Bill, 2017; PRS.

How will the Resolution Corporation resolve financial firms that have failed?

The Resolution Corporation will take over the administration of a financial firm from the date of its classification as ‘critical’ (i.e. if it is on the verge of failure.) The Resolution Corporation will resolve the firm using any of the methods specified in the Bill, within one year. This time limit may be extended by another year (i.e. maximum limit of two years). During this period, the firm will be immune against all legal actions.

The Resolution Corporation can resolve a financial firm using any of the following methods: (i) transferring the assets and liabilities of the firm to another firm, (ii) merger or acquisition of the firm, (iii) creating a bridge financial firm (where a new company is created to take over the assets, liabilities and management of the failing firm), (iv) bail-in (internally transferring or converting the debt of the firm), or (v) liquidate the firm to repay its creditors.

If the Resolution Corporation fails to resolve the firm within a maximum period of two years, the firm will automatically go in for liquidation. The Bill specifies the order of priority in which creditors will be repaid in case of liquidation, with the amount paid to depositors as deposit insurance getting preference over other creditors.

While the Bill specifies that resolution will commence upon classification as ‘critical’, the point at which this process will end may not be evident in certain cases. For example, in case of transfer, merger or liquidation, the end of the process may be inferred from when the operations are transferred or liquidation is completed, but for some other methods such as bail-in, the point at which the resolution process will be completed may be unclear.

Does the Bill guarantee the repayment of bank deposits?

The Resolution Corporation will provide deposit insurance to banks up to a certain limit. This implies, that the Corporation will guarantee the repayment of a certain amount to each depositor in case the bank fails. Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides deposit insurance for bank deposits up to 1 lakh rupees per depositor.[3] The Bill proposes to subsume the functions of the DICGC under the Resolution Corporation.

[1]. The Financial Resolution and Deposit Insurance Bill, 2017, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/Financial%20Resolution%20Bill,%202017.pdf

[2]. Report of the Committee to Draft Code on Resolution of Financial Firms, September 2016, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/FRDI%20Bill%20Drafting%20Committee%20Report.pdf

[3]. The Deposit Insurance and Credit Guarantee Corporation Act, 1961, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/DICGC%20Act,%

Home

MPs & MLAs

Legislatures

Parliament

State

Bills & Acts

Budgets

Policy

LAMP

Careers