The offsetting of all claims arising from dealings between two parties to deduce a total receivable or payable amount is referred to as netting. Qualified financial contracts (QFC) means any mutual contract stated by the associated authority such as the Reserve Bank of India, Insurance Regulatory and Development Authority of India, Securities and Exchange Board of India, International Financial Services Centres Authority, or Pension Fund Regulatory and Development Authority. These relevant authorities may designate an entity regulated by it as a qualified financial market participant to deal in QFCs. It would include entities such as non-banking finance companies (NBFCs), insurance companies and pension funds.
In India currently, there is no legal framework for bilateral netting. Credit exposure is measured by banks based on a gross basis and not a net basis. Hence, there is an increased credit risk disclosure and systemic risk within the economic market in the event of default of a counterparty. The bilateral netting law will facilitate effective margining and capital saving for banks to give price efficiency in offering hedging instruments to businesses in India, and accelerate the corporate bond market by developing the credit default exchange market.
The essential highlights and feature of the bill are discussed below:
Netting Enforcement: The Bill provisions that the netting of QFCs is enforceable if the contract holds a netting agreement or even if it does not have one. A netting agreement is an agreement that provides for the netting of amounts involving two or more QFCs. A netting agreement may also include a collateral arrangement which is a form of security provided to one or more QFCs in a netting agreement. Also, the enforceability of the netting agreement will not be affected by non-qualified financial contracts.
Close-out netting and its enforcement: This refers to the termination of all obligations arising out of relevant QFCs. It can be initiated by a notice given by one party to the other after a default or a termination event. However, when one of the parties to a netting agreement is subject to administration, then no prior notice to the party in insolvency, winding up, liquidation, administration or resolution proceeding, or the administration practitioner, is required. Also, the obligations owed by one party to the other under the contract must be replaced by one net amount. The netting will have the effect of liquidating current and upcoming obligations resulting out of QFCs. The total payable or receivable amount under the close-out netting will be decided: (a) under the netting agreement entered into by the parties, or (b) through an agreement between the parties, or (c) through arbitration.
Close-out netting is enforceable against an insolvent party and the person providing collateral and also against a party placed under administration, notwithstanding any injunction, moratorium, insolvency, resolution, winding up or order of the court, issued under any law.
Power limitations of Administration Practitioner: The administration practitioner cannot ineffectively perform any transfer of cash or other interests made between the insolvent party and the non-insolvent party to a QFC in connection to the netting agreement. Also, it cannot deliver any payment incurred by the insolvent party and owing to the non-insolvent party under or in connection with a netting agreement.
Power to amend Schedules: The Central government can amend the list of authorities and Acts which regulate entities that are party to a QFC.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.
