The Financial Resolution and Deposit Insurance Bill was introduced into the lower house of India's bicameral Parliament in August. Since then, speculation has been rife regarding clause 52, which makes provision for depositors' funds being used to attain financial stability at failing banks. Premier Narendra Modi (pictured) is finding it difficult to reassure HNW depositors and the markets.

Such 'bail-ins,' a term devised by the Economist magazine, are a far cry from normal bankruptcy proceedings where strict rules apply and a court-supervised process ranks creditors in order of repayment precedence, with creditors in each group being treated equally; Forbes contributor Nathan Lewis has described them as "another crony bankster scam."

Lewis has written: "The difference with the 'bail-in' is that the order of creditor seniority is changed. In the end, it amounts to the cronies (other banks and government) and non-cronies. The cronies get 100% or more; the non-cronies, including non-interest-bearing depositors who should be super-senior, get a kick in the guts instead."

In Cyprus, HNW depositors saw 37.5% of the value of their uninsured deposits converted to equity. Financial institutions (e.g. German banks and central banks including the Bundesbank), along with government entities, received full repayment.

Heated debate, therefore, surrounds the subject of bail-ins, with the European Union coming down strongly in their favour. India is the latest jurisdiction to embrace this unsettling wave of the future.

The all-powerful corporation
 
To facilitate this, the Bill (aka Bill No 165 of 2017) provides for the setting-up of a Resolution Corporation to replace today's Deposit Insurance and Credit Guarantee Corporation. Clause 3 states that the head office of the government-appointed corporation is to be at Mumbai, although it may then set up offices throughout India. According to clause 13 the corporation will:

• provide deposit insurance to banking institutions;
• specify the criteria for classification of a specified financial service provider into one of the categories of risk to viability;
• act as an administrator for the specified financial service provider which has been so classified;
• exercise powers in relation to certain termination rights in respect of specified financial service providers;
• resolve a specified financial service provider which has been classified in the category of critical risk to viability;
• act as a liquidator for a specified financial service provider against which an order of liquidation has been made; and
• wield any other powers as may be prescribed.

Its investigative powers are to be extensive. Clause 15 proposes to allow it to restrain a specified financial service provider (or officer thereof) from carrying out such business activities as it thinks fit; impound and retain the proceeds in respect of any activity of a specified financial service provider which is under investigation; and command people not to dispose of assets under investigation.

Clause 52

This important clause states that if the corporation thinks it necessary to bail-in a specified financial service provider to absorb the losses it has incurred and to provide a measure of capital so as to enable it to carry on business for a reasonable period and maintain market confidence, it will be able to issue a bail-in instrument containing:

• a provision cancelling a liability owed by a specified financial service provider; and/or
• a provision modifying or changing the form of a liability owed by a specified financial service provider; and/or
• a provision that a contract or agreement under which a specified financial service provider has a liability shall have effect as if a specified right had been exercised under it.

By "changing the form of a liability" the draftsman is proposing to allow the corporation to convert an instrument under which the service provider owes a liability from one form or class to another, or to replace it with another instrument of a different form or class, or even to create a new security of any form or class in connection with the modification of such an instrument. The appropriate regulator (such as the Securities and Investments Board of India or SEBI) may, in consultation with the corporation, require specified financial service providers or classes of them to maintain liabilities that may be subject to bail-ins. The corporation may also order the haircutting of the collaterals and margins and direct the issuance of equity to the creditors.

According to sub-clause 7, the bail-in instrument or scheme cannot affect any liability owed by a specified financial service provider to the depositors to the extent that such deposits are covered by deposit insurance or any liability that the specified service provider has by virtue of holding clients' assets. The statutory expression 'client assets' applies here and is to include anything that financial regulators stipulate in their regulations, plus:

• any liability of original maturities up to seven days;
• any obligation to a central counterparty;
• any liability, so far as it is secured;
• any liability owed to employees or workmen including pension liabilities that cannot be described as performance-based incentives.

This seems to give the customers of stricken banks some relief from the spectre of asset-abuse on the Cypriot model, but one worrying phrase here is "to the extent such deposits are covered by deposit insurance." According to a press release on the Associated Chambers of Commerce & Industry of India's website, only a very small ('measly') proportion of such deposits - 100,000 rupees or US$1,572.85 - is actually covered by such insurance, and the sums that might be exempted from the bail-ins are therefore negligible.

Modi's methods

Premier Narendra Modi, hailed by some as India's answer to Donald Trump, has promised that his government is not planning the ravenous plunder of bank accounts that the European Union has in store for its HNW citizens when the world's sovereign debt crisis finally bites. On 7 December his minister of finance issued a press release that read: "The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all. They provide rather additional protections to the depositors in a more transparent manner. The FRDI Bill will strengthen the system by adding a comprehensive resolution regime that will help ensure that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors." (Our italics.) Many members of the legal fraternity, however, remain unconvinced by Modi's assurances.