The Bilateral Netting of Qualified Financial Contracts Act, 2020
Parliament enacted the Bilateral Netting of Qualified Financial Contracts Act, 2020, Act No. 30 of 2020, on 28 September 2020, and it came into force on 1 October 2020. The Act makes bilateral netting and close-out netting enforceable for notified qualified financial contracts between qualified financial market participants, including when a party becomes insolvent or enters administration.
What the Act governs
The Bilateral Netting of Qualified Financial Contracts Act, 2020 governs bilateral qualified financial contracts between qualified financial market participants. At least one participant must be regulated by the Central Government or a regulatory authority specified in the First Schedule.
The relevant authority may notify:
- A bilateral agreement, contract, transaction or regulated type of contract as a qualified financial contract.
- A regulated entity as a qualified financial market participant.
Contracts entered into on a multilateral basis under the laws identified in the Act are excluded from designation under this framework.
Who may be affected
The Bilateral Netting of Qualified Financial Contracts Act, 2020 covers categories including banking institutions, non-banking financial companies, other institutions supervised by the Reserve Bank of India, insurance and reinsurance companies, regulated pension funds, financial institutions regulated by the International Financial Services Centres Authority, and other notified entities. Its definition also includes individuals, firms, companies, bodies corporate and specified international organisations.
For a property buyer or owner, the Act does not set rules for land ownership, registration, planning permission or property transfers. It may be relevant where the person or entity is a party to a notified qualified financial contract within the Act's scope, including a contract supported by collateral or security.
Key provisions
The Bilateral Netting of Qualified Financial Contracts Act, 2020 provides that:
- Netting is enforceable according to a netting agreement, where one exists.
- Including a contract that is not qualified in the same netting agreement does not invalidate netting for qualified financial contracts.
- Netting can also apply where a qualified financial contract was entered into without a netting agreement.
- A qualified financial contract is not void or unenforceable merely because of another law.
- Close-out netting remains enforceable against an insolvent party and, where applicable, a guarantor or another person providing collateral or security.
- Insolvency proceedings, administration, moratoriums, stays, injunctions and similar measures do not stop or limit valid close-out netting under the Act.
- Amounts payable after close-out netting are final, irrevocable and binding on the parties and the administration practitioner.
How close-out netting begins
The Bilateral Netting of Qualified Financial Contracts Act, 2020 allows one party to give notice after a default or termination event. If a party is under administration, prior notice to or consent from that party or its administration practitioner is not required. Relevant obligations are terminated or accelerated, valued, converted into one currency and reduced to a single net amount.
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Common questions
Does this Act change Tamil Nadu land ownership or registration rules?
No land ownership, registration, planning permission or property transfer rules are stated in the Act. It deals with bilateral netting of qualified financial contracts.
Does every financial contract qualify for netting under the Act?
No. The relevant authority must designate the bilateral agreement, contract, transaction or regulated type of contract as a qualified financial contract, and the statutory participation requirements must be met.
Can close-out netting continue if one party becomes insolvent?
Yes. Close-out netting is enforceable against an insolvent party and is not stopped or limited by administration, insolvency, winding up, liquidation, moratoriums or similar proceedings identified in the Act.
Is a netting agreement always required?
No. Netting may be enforced under the terms of a netting agreement, but the Act also provides for qualified financial contracts entered into without one.
