After independence, in order to improve rural credit, the government and Reserve Bank of India decided to set up a committee which would take up a study of agricultural credit in India. It was headed by Mr. Accordingly, RBI has started two major funds for providing loans to State Governments and also to cooperate banks. The role of RBI in agricultural credit was appreciated.
Client Asset Protection Section 2: Techniques for Protecting Clients of Insolvent Firms The basic types of protections available to clients whose assets are held by an insolvent investment firm are: These mechanisms are not mutually exclusive and in many jurisdictions all play a part in minimising the risk of client losses.
The effectiveness of a particular technique may differ depending on the type of asset concerned whether it is client money, securities or positions and the insolvency legislation of the jurisdiction in which the assets are held. The method of meeting a defaulting firm's obligations will normally be dictated by a jurisdiction's insolvency legislation, or the interaction of its insolvency and financial services legislation.
In jurisdictions where client assets held by an insolvent investment firm are afforded differential treatment, two main mechanisms may be used: Preferential Creditor Status Insolvency regimes often provide that some types of creditors rank ahead of others, so that some or all of the insolvent firm's assets are to be used to meet the claims of these preferred creditors before they are available for settling the claims of other creditors.
In some jurisdictions, a firm's ability to meet its obligations to clients whose assets it holds or controls is secured by charges over general assets of the firm. Clients will thus receive preferential treatment by contrast with unsecured creditors of the firm.
In certain jurisdictions, common law provides that assets which can be traced to a customer are held in trust by a firm. Although this does not generally apply to client money, it is possible that securities might be protected in this way.
Advantages and Disadvantages The clear advantage of such an approach is that, subject to a possible change in statute, such a system can but does not always require little additional cost to firms and therefore to investorsas it involves no operational changes while the firm is a going concern with the possible exception of disclosure to creditors affected by such a policy and is only effective upon the default of the firm.
A major disadvantage of systems relying solely on clients having preferential creditor status is that they can be ineffective where there is a shortfall in net assets of the insolvent firm. In that case, if this is the only method used to protect client assets, clients will be recompensed for the loss of their assets only to the extent that assets are available.
A second major disadvantage is that clients may in some jurisdictions be required to wait until the administration of the insolvency is advanced before it can be clear whether sufficient assets remain, which creditors have preference and in relation to what, and for other procedures prior to the distribution of assets to be completed.
This technique might also lead other creditors who would not be subject to preference to seek other means of safeguarding their assets, for example, liens and other charges or greater demands for collateral. An arrangement of this kind could reduce the pool of assets available for preferred creditors, including clients of the firm.
Regulatory authorities can, however, make arrangements of this kind unattractive, for example by adjusting capital charges. Continuing Client Ownership of Client Assets Many regimes provide that, even though assets are held or controlled by an investment firm, they are not property of the firm available for distribution to the firm's creditors in the event of its insolvency.
Under regimes of this kind, the authorised firm may physically hold the assets for example, securities or deposit them with another person for example, by depositing funds with a bankbut the client retains title to the assets and can assert title against the firm or the firm's creditors.
This separation of control of the assets from beneficial ownership of them can be achieved in a number of ways.
In jurisdictions with a tradition of trust law, the regime often requires investment firms to hold client assets "in trust" for clients. In other regimes, the same effect can be achieved by legislation which provides specifically that client assets held by an authorised firm are not available to meet the claims of the firm's creditors.
These methods of protecting client assets are effective only if they are supported by measures that require client assets to be held so that they can readily be distinguished from proprietary assets of the firm. Measures of this kind include: These measures usually also involve an obligation to make clear to the custodian that assets held by it are not the property of the investment firm, but are held by the firm with the custodian on behalf of the firm's clients.
Legislation that specifically provides that client assets held with or controlled by an authorised firm remain the property of the firm's clients can provide a very effective means of protecting client assets. It may not, however, be without problems, which include: In the case of regimes which rely on the jurisdiction's general trust law, the following drawbacks may also exist: The main advantage of using a custodian is the safeguard to investors of having their securities lodged there, which, in the event of the investment firm's default, enables them to be readily identified and isolated from assets of the insolvent firm.
It should be noted, however, that clients in these circumstances are exposed to the risk of insolvency of the custodian, so that these measures only add to the protection of clients if the custodian or other third party by whom client assets are held is at least of the same credit standing as the authorised firm.
The disadvantages of assets being held by a custodian include the additional time and cost involved in maintaining separate accounts in order to distinguish between the firm's and its clients' assets and, most importantly, the risk that it might not be legally effective, especially in overseas jurisdictions.Learn the key advantages of using the SAP Bank Communication Management module.
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The main advantage of using a custodian is the safeguard to investors of having their securities lodged there, which, in the event of the investment firm's default, enables them to be readily identified and isolated from assets of the insolvent firm.
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