According to the Ministry of Finance, there is presently no comprehensive and integrated legal framework for resolution, including "liquidation, of financial firms in India".
The ministry said that current resolution instruments available under respective legislations are "limited, and so is guidance on the process leading up to the resolution".
"The current resolution regime is especially inappropriate for private sector financial firms in the light of significant expansion of private financial firms and many of these acquiring systemically important status in India," the ministry said in a statement on January 2.
"The Insolvency and Bankruptcy Code, 2016 has introduced in the country a comprehensive resolution regime for mainly non-financial firms, but such a regime is not available in the country for financial firms."
The ministry said the FRDI Bill proposes to establish a "Resolution Corporation" and a comprehensive regime to enable timely and orderly resolution of a failing financial firm.
"It provides for detecting incipient insolvencies in financial firms by introducing a five-stage health classification of financial firms and stepping in to appropriately nurse a financial firm at the stage when its health becomes weak and it is classified in the category of material risk to viability," the statement said.
"FRDI Bill also introduces a menu of resolution tools, including transfer of whole or parts of the assets and liabilities of a financial firm to another person, acquisition, merger or amalgamation, bridge service provider, and bail-in, and mandates recovery and resolution planning obligations to enable careful monitoring of risk to viability of a financial firm."
On the "Bail-in" provision of FRDI Bill, the ministry said that it has only been proposed as one of the tools to be used in the event a financial firm is sought to be sustained by resolution.
"Bail-in amounts to liabilities' holders bearing a part of the cost of resolution by reduction in their claims. Bail-in is only one of many resolution tools in the FRDI Bill; others are acquisition, merger and bridge service provider, and is to be used either singly or in combination with other tools," the statement explained.
"Bail in provision may not be required to be used in case of any specific resolution. Most certainly, it will not be used in case of a public sector bank as such a contingency is not likely to arise."
The ministry added that the FRDI Bill does not prohibit the central government from extending support to banks, including PSU banks.
"Government's implicit guarantee for solvency of public sector banks remains unaffected as the government remains committed to adequately capitalise the public sector banks and improve their financial health," the ministry said.
"The government is committed to protecting the existing protection to depositors and providing additional protection to them."
At present, the FRDI Bill, introduced in the Lok Sabha on August 10, 2017, is under the consideration of the Joint Committee of Parliament, which is consulting all the stakeholders on the provisions of the FRDI Bill.
"The Joint Committee of Parliament has been asked to submit their Report to the Parliament by the last day of the Budget Session, 2018," the statement added.
"The government is awaiting the recommendations of the Joint Committee of Parliament in regard to the FRDI Bill and would favourably consider the recommendations."