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Thursday, April 15, 2021

An impending problem with wheat inventories of the government

by Ajay Shah.

Wheat stocks with the FCI had risen to 24 million tonnes in 2012-13. This was an imprudent level of inventory, either when compared with the requirement of buffer stock in the country, or when compared with the ability to store wheat in the public system. There was a concerted effort to bring down this inventory, and it was brought all the way down to 8 million MT in 2016-17.

We may now face a bit of a problem on this score. Under certain assumptions, there is a possibility that at the end of 2021-22, wheat stocks could be about 35 million MT.

Govt. opening stock Produc-tion Procure-ment PDS, Schemes outgo Open Market Sales Scheme (OMSS) Closing stock
2017-18 8.1 92.5 31 24 1.4 13.7
2018-19 13.7 92 36 24 8.1 17.5
2019-20 17.5 97.5 34 24 3.0 24.3
2020-21 24.7 98.5 39 34 1.5 27.3
2021-22 (Estimated) 27.3 98 39 24 7.0 35.3

The table above shows data for recent years, and an estimate for 2021-22. At the end of 2016-17, i.e. at the start of 2017-18, wheat stocks were at 8.1 million MT. From this point, inventories have come back up.

Procurement rose to 39 million MT in 2020-21. We assume that it will stay at the same level in 2021-22.

The use of wheat in the public system has been stable at about 23 or 24 million MT. The exception to this is 2020-21 where an additional 10 million MT were given out into the country through "PM Garib Kalyan Yojana", on account of the Covid-19 crisis.

Assuming that 7 million MT is sold through the OMSS, this yields a projection of closing stock, on 31/March/2022, of 35 million MT.

It is worth reiterating the assumptions under which we posit this scenario, for wheat inventory of 35 million MT on 31/March/2022: (a) Public procurement in 2021-22 will be the same as the previous year, i.e. 39 million MT, (b) 24 million MT will be used by PDS and other schemes and (c) Government will sell 7 million MT to the private sector through OMSS.

Holding 35 million MT of inventory presents certain difficulties. It represents an unreasonable scale of holding a buffer stock, when compared with the requirements associated with fluctuations of wheat production. As the data in the column shows, the fluctuations of wheat production are about a few million MT; e.g. a buffer stock of 5 million MT to 8 million MT would suffice. In addition, 35 million MT is likely to exceed the mechanisms available in the public system to safely store wheat. When low quality storage mechanisms are employed, the exchequer loses money owing to depreciation.

This problem was incipient in 2020-21 also, and was averted because an additional 10 million MT was pushed out into schemes, on account of Covid-19.

What can the government do in order to fare better? There are four useful pathways:

  1. If wheat procurement is reduced, then the problem will be diminished. As an example, if the government goes back to the 2019-20 level of buying 34 million MT, this would get the projected closing stock down from 35 million MT to 30 million MT.

  2. Selling more wheat through OMSS would help. At its peak, 8.2 million MT was sold thorugh OMSS in 2018-19.

  3. The macroeconomic distress associated with Covid-19 has not entirely subsided. Hence, there is a case for repeating something like the PMGKY grain subsidy, to help improve access to food for poor people.

  4. Improvements in storage, such as going beyond CWC to private warehouses, will reduce the extent to which stored wheat depreciates.

There is a need for policy makers on food to recognise these impending problems and initiate steps through some linear combination of these four actions. On a similar subject, also see an article by Siraj Hussain and Jugal Mohapatra.

Wednesday, April 14, 2021

Online dispute resolution in India: Looking beyond the window of opportunity

by Rashika Narain and Smriti Parsheera.

Online dispute resolution (ODR) refers to the use of electronic communications and other information and communication technology for dispute resolution (UNCITRAL, 2016). Its objective being to bring the gains of efficiency, reach, cost-effectiveness, and convenience that technology has brought to so many sectors into the domains of redress, resolution and justice delivery. Some of the use cases of ODR include internal dispute management systems of businesses, electronic forms of alternative dispute resolution (often referred to as e-ADR), and operation of online courts.

India has seen a spate of recent developments in this space. There has been a rise in the number of ODR startups and businesses that are willing to experiment with ODR as an alternative to the traditional forms of dispute resolution. On the institutional side, COVID-19 induced pressures forced courts and Lok Adalats to switch to an online mode, the Reserve Bank of India directed payment systems operators to adopt ODR for failed payment disputes and the NITI Aayog put out a draft ODR Policy Plan.

Collectively, these developments signal the intersection of the problem, policy and politics streams to create a window of opportunity (Kingdon, 2013) for ODR in India. However, alongside the many benefits and opportunities of ODR lie a few areas of caution. First, the push toward ODR should account for the country's narrowing yet persistent digital divide. ODR solutions must, therefore, be designed in a manner that avoids extending digital exclusions into the domains of justice delivery and redress. Second, the immediate focus needs to be on building trust in the ODR sector though an emphasis on competence, accountability, equity, and transparency. These priorities should emerge from within the ODR ecosystem rather than being imposed through external forces. Lastly, the ecosystem should remain wary of any kind of central planning, particularly in terms of technical design. While controlled technical standardisation may seem attractive for initial adoption, it could result in the locking in of specific technologies and standards in the long run.

In this article we describe the meaning and evolution of ODR, explain the state of adoption in India, and introduce the Handbook on Online Dispute Resolution (ODR Handbook, 2021) created by a group of nine institutions that was recently launched by Justice D.Y. Chandrachud at a virtual event. The Handbook serves as an invitation to businesses to adopt and mainstream ODR solutions in India. While sharing the optimism generated by recent advancements in this space, we emphasise certain areas of caution and desirable practices for ODR to succeed beyond the current window of opportunity.

What is ODR?

ODR refers to the use of technology for enabling more accessible and efficient dispute resolution. Its genesis is often traced to the growth of Internet-based businesses and the resulting search for mechanisms to deal with online disputes and their accompanying jurisdictional uncertainties (Katsh, 2012). eBay and its payments arm PayPal are recognised to be among the early adopters of tech-enabled solutions for resolving cases arising on their platform (Rule, 2008). Similar tech-mediated systems for grievance redress are now commonplace across online businesses. Examples include the order returns management policies of e-commerce companies, feedback mechanisms of ride hailing companies and content reporting systems of social media firms. Beyond grievance management, e-ADR processes like mediation and arbitration are another popular use case.

The factors responsible for the growth of ODR include its efficiency, reach, cost-effectiveness, and the ability to improve business intelligence through data about dispute management. The possibility of asynchronous communication in many ODR models, which allows parties to respond at their own convenience, is another significant draw. Globally, ODR's reach has expanded to a range of sectors, such as property matters, family settlements, domain name disputes and financial matters (Kinhal et al, 2020). Further, tech solutions have also permeated into different layers of the dispute management process. For instance, negotiation tools like Cybersettle guide parties in making financial settlement bids and communication tools like Our Family Wizard are being used by courts to monitor parental custody settlements.

There are also many cases of institutional adoption of ODR in the public justice delivery system. Notable examples include Canada's British Columbia Civil Resolution Tribunal that uses ODR to handle condominium property claims, small claims, and motor vehicle injury cases, Hong Kong's ODR scheme for COVID-19 related cases, Mexico's Concilianet platform for consumer dispute resolution, and various small value claims courts in the United States (NITI Aayog, 2020).

State of play in India

The ODR industry in India has seen significant movement in the last few years although it still remains in the early stages of development. As per the ODR Handbook, the number of ODR start-ups has grown from 3 in 2018 to 13 by mid 2020. This includes operators like Presolv360, Centre for Online Resolution of Disputes (CORD) and SAMA that are directly involved in delivering online arbitration and mediation services as well as platforms like CREK ODR and Resolve Disputes Online that specialise in offering technology solutions to others.

A pilot project initiated by ICICI Bank in collaboration with SAMA presents one of the early examples of ODR adoption in India. As per the ODR Handbook, this mechanism was used for the resolution of 200 loan repayment related disputes before the introduction of the COVID-19 related loan moratorium. This reportedly led to significant cost and time savings for the bank -- its resolution effort went down from six person-days per case to only half a day (ODR Handbook, p. 61). In another example, SAMA recently organised an e-conciliation camp, called Suljhav Manch, which saw participation from companies like Udaan, Snapdeal and ICICI Housing Finance. An aggregate of over 8,000 loan and customer disputes were recorded for online resolution, of which 1,860 disputes have already been settled.

The COVID-19 situation has also created an impetus for institutional adoption through online filings, electronic court hearings and organisation of e-Lok Adalats in several states (Nair, 2020). Further, in line with RBI's directions for adoption of ODR by payment operators, the National Payments Corporation of India (NPCI) recently went live with its online resolution system for BHIM UPI app users. Others in the payment space are expected to shortly follow suit. The Income Tax Department has also introduced a Faceless Assessment Scheme that is meant to offer greater convenience and transparency in the assessment process.

In another interesting development, last year, the Supreme Court declared that the sole appointment of an arbitrator by a party interested in the dispute would be unlawful, even if previously agreed by the parties (Mehta et al, 2020). This may shift the standard practice of consumer facing companies appointing arbitrators en masse for low value, high volume disputes in favour of the incorporation of ODR clauses in commercial agreements.

Some areas of caution

While the developments above are cited as victories for ODR, the long term trajectory of tech-enabled dispute resolution will depend on a number of factors. First, there is the reality of India's digital divide, which spans across issues of connectivity, device ownership, digital literacy and skills, and social norms. A combination of these factors ends up generating varying levels of digital adoption across demographic groups. While sectors such as digital payments and e-commerce, which cater to an already digital population, are more conducive for ODR adoption, a broader policy push towards mandatory ODR could end up disenfranchising several sections of the population. For instance, the Tax Department's faceless assessment scheme has drawn criticism for the lack of opportunity for individuals to explain their case in person and limitations in technical skills and infrastructural facilities required to comply with the online processes (Chatterji, 2020).

Possible ways to minimise the harms of digital exclusion include keeping ODR adoption voluntary in most circumstances, investing in training and capacity building of intended users, and allowing them to opt for a combination of online and offline interactions. The emergence of a hybrid model where an intermediary can step in to facilitate the engagement between the parities and the technological requirements of the ODR system is another interesting solution. This is illustrated in the work being done by the Aajeevika Bureau to help migrant workers claim unpaid compensation from employers using an ODR process (ODR Handbook, p. 71-72).

Second, there is also the question of how to build trust in the ODR ecosystem in order to facilitate its adoption by businesses and individuals. There are some who argue that a certain level of government intervention and control is a necessary part of trust building (Schluz, 2004) while others have discussed interventions such as increasing knowledge about the process, certification of neutrals, and the existence of a code of ethics as mechanisms to bolster trust (Abedi et al, 2019). This points to the need for a discussion on the role of voluntary codes of conduct in building trust in ODR systems. We discuss this in the next section.

The third area of caution would be to avoid the creation of monolithic technical architectures in the ODR space. All too often in India, there is a temptation to create a state-mandated monopoly in a field, with government controlled technological standards (e.g. the Unified Payments Interface (UPI)) and a government controlled monopoly vendor (e.g. the NPCI). The NITI Aayog's draft report suggests a similar path for the ODR sector. It makes a case for the government's role in developing a 'scalable platform using technology' that will allow for the development of private sector services relying on government-led free and open source software (NITI Aayog, 2020, p. 96-97).

This is a less efficient path for several reasons. Government-mandated engineering designs tend to stagnate over time, and fall out of touch with the requirements of the people and of the technological possibilities. India is highly heterogeneous, and even if an efficient state-run planning process is able to emerge with a sound design for a modal use case, that may only cover a small fraction of the situations in the field. Further, despite being labeled as 'open', such solutions are often designed in a closed environment, with consultations being used as a tool for information dissemination rather than technical collaboration.

Providers and adopters of ODR have the incentives to understand opportunities, customer needs, and figure out innovative solutions. It would, therefore, be more efficient to allow a diverse set of actors to develop technology, protocols and standards in this space. Notably, ODR initiatives would also be bound by existing legal frameworks, such as the rights to data access and portability proposed under the draft Personal Data Protection Bill, 2019 and the safeguards available under competition law. Accordingly, government-backed technical standards are neither the only, nor the most efficient, path to achieving data access, portability, interoperability, and empowerment in this field.

A voluntary code for the ODR ecosystem

While resisting the push for government-backed standards and protocols, we recognise that a sound governance framework could be one of the ways to engender trust in the ODR ecosystem. There are several examples of non-binding ODR principles that have emerged globally. For instance, the International Council for Online Dispute Resolution (ICODR) is a US-based non profit that has put out a set of open standards on ODR. This includes requirements that the ODR programs must be accessible, accountable, competent, confidential, equal, neutral and impartial, legal, secure and transparent. Similar standards and guidelines have also been put out by other institutions such as the UNCITRAL's Technical Notes on ODR and the National Center for Technology and Dispute Resolution's Ethical Principles for ODR. The overlap in the principles outlined in these documents indicates a convergence of ideas on the basic requirements of a well functioning ODR system. Many ODR providers in India have also voluntarily adopted different international standards.

Given the current stage of development of India's ODR system, having mandatory standards or strict legal requirements could impede innovation and create entry barriers (ODR Handbook, p.51). However, this does not preclude the adoption of voluntary codes of conduct that are developed and operationalised by ODR players themselves. This could be done by having a basic set of good practices (see table below for the principles suggested in the ODR Handbook) that may be agreed to among the service providers in an open, inclusive and collaborative manner. Further, voluntary mechanisms such as peer review, ratings and accreditations can be used to verify the extent to which each platform is complying with these principles.


Principle Description
Accessibility Ensuring ODR platforms can be used across devices and by different demographic groups, accounting for the diversity of Indian languages and the ability to engage with technology.
Competence and neutrality Neutrals should possess substantive knowledge and understanding of processes and must be free of conflicts of interest.
Accountability and fairness Adherence to due process standards. Remain mindful of the possibility of unequal bargaining powers between parties.
Information and transparency Proactive disclosure of conflict of interest, risks, and benefits to enable informed consent. Anonymised data on ODR trends and statistics can help in building trust.
Confidentiality and robust data security Adherence to data protection norms, including safe storage and established protocols to deal with breaches, cyber attacks, and disasters.

Besides such voluntary adoption, providers of e-ADR are also bound by the existing laws and principles applicable to ADR processes. However, in many cases, these principles might need to be reframed to account for the impact of technology on ADR processes and the responsibility of ODR platforms and third parties neutrals conducing the mediation or arbitration processes (Rainey, 2014). For instance, use of the online medium might impose additional requirements of how confidentiality in mediation needs to be enforced in practice. This is because the mediator's ability to ensure confidentiality in ODR depends both on their own conduct as well as the design of the ODR platform. The ODR principle for confidentiality must, therefore, account for appropriate technical standards to ensure that the information transmitted on the platform remains confidential and secure. The practitioner also bears the responsibility to convey the risks of online communications to the parties (Rainey, 2014).

Conclusion

Developments in the past year or two have opened a window of opportunity for the adoption of ODR systems in India. As policymakers and private actors start warming up to the benefits of tech-enabled dispute resolution, the immediate goal should be to demonstrate capacity and build trust in ODR systems. This includes the realisation that not all sectors and user groups are equally equipped to immediately transition to ODR. Any kind of mandatory adoption should, therefore, be carefully considered so as to avoid extending digital exclusions into the domains of justice delivery and redress. An emphasis on hybrid models of ODR, both in terms of the choice between offline and online interactions and emergence of intermediaries who can help users in bridging the technological gap, would be useful.

Creating digital trust requires a framework that incorporates accountability, equity, ethics and auditability in its functioning. Thus, another priority at this stage should be to pursue the adoption of a voluntary code of conduct that is conducive to building trust in the ecosystem. Such a code of conduct should emerge, and be implemented, from within the ODR ecosystem rather than being enforced through State coercion. In addition to concerns of stifling innovation through over-regulation, it is also important to avoid excessive central planning in the technical design of ODR systems. This could result in the locking in of specific technologies and standards, hampering the long term prospects of the ODR sector.

References

Chatterji, 2020: B.M. Chatterji, Faceless Assessment: Concerns & Recommendations for Seamless Digital Integration, Tax Guru, 28 November 2020.

Katsh, 2012: Ethan Katsh, ODR: A Look at History, Online Dispute Resolution: Theory and Practice, Mohamed Abdel Wahab, Ethan Katsh & Daniel Rainey (Eds.), Eleven International Publishing, 2012.

Kelkar & Shah, 2019: Vijay Kelkar and Ajay Shah, In service of the republic: The art and science of economic policy, Penguin Allen Lane, 2019.

Kingdon, 2013: John W. Kingdon, Agendas, Alternatives and Public Policies. 2nd ed., Pearson, 2013.

Kinhal et al, 2020: Deepika Kinhal, Tarika Jain, Vaidehi Misra & Aditya Ranjan, ODR: The Future of Dispute Resolution in India, Vidhi Cenre for Legal Policy, July 2020.

Lederer, 2018: Nadine Lederer, The UNCITRAL Technical Notes on Online Dispute Resolution - Paper Tiger or Game Changer?, Kluwer Arbitration Blog, January 2018.

Mehta et al, 2020: Ankoosh Mehta, Maitrayi Jain & Anushka Shah, SC refuses unilateral appointment of single arbitrator, Indian Corporate Law, A Cyril Amarchand Mangaldas Blog, May 2020.

Nair, 2020: Ria Nair, E-Lok Adalats In India, August, 2020.

NITI Aayog, 2020: The NITI Aayog Expert Committee on ODR, Designing the Future of Dispute Resolution: The ODR Policy Plan for India, October, 2020.

ODR Handbook, 2021: NITI Aayog, Agami, Omidyar Network India, Ashoka, ICICI Bank, Trilegal, Dalberg, Dvara Research, NIPFP and Cracker & Rush, Online Dispute Resolution: Shifting from Disputes to Resolutions, April, 2021.

Rainey, 2014: Daniel Rainey, Third-Party Ethics in the Age of the Fourth Party, 2014.

Rule, 2008: Colin Rule, Making Peace on eBay: Resolving Disputes in the World's Largest Marketplace, ACResolution Magazine, Fall 2008.

Schluz 2004: Thomas Schulz, Does Online Dispute Resolution Need Governmental Intervention - The Case for Architectures of Control and Trust, 6 N.C.J.L. & Tech. 71 (2004).

UNCITRAL, 2016: UNCITRAL Technical Notes on Online Dispute Resolution, 2016.


Rashika Narain is lawyer and mediator associated with SAMA and the Centre for Mediation and Arbitration, Mumbai. Smriti Parsheera is a Fellow with the CyberBRICS Project and was previously a researcher with the National Institute of Public Finance & Policy (NIPFP). NIPFP was one of the contributors to the ODR Handbook. The authors would like to thank Vimal Balasubramaniam, Keerthana Medarametla, Renuka Sane and Ajay Shah for valuable inputs.

Tuesday, April 13, 2021

Analysing India's KYC Framework: Can We Do Things Better?

by Rishab Bailey, Trishee Goyal, Renuka Sane, and Ridhi Varma.

Know-Your-Customer (KYC) norms require customers of the formal financial system to establish their identity through certain specific identification documents, prior to engaging in any transactions. According to World Bank's estimates, approximately 32 million adults in India do not have access to an officially recognized proof of identity. This puts the formal financial system out of reach for a significant number of people. Along with creating difficulties for customers, KYC requirements increase compliance costs for businesses including by lengthening customer onboarding time and heightening regulatory risks (Lyman and Noor, 2014). While India has seen progress towards limiting financial exclusions, not least due to the use of Aadhaar-based verification and e-KYC systems, the problems outlined above still remain.

In a recent paper Analysing India's KYC Framework: Can We Do Things Better? we ask what drives the current KYC policy framework? How is the Indian KYC framework different from that in other FATF compliant countries? Is there a possibility of doing KYC more efficiently in India?

Tracing global roots of domestic KYC requirements

The design of KYC norms derive from the requirements imposed by Financial Action Task Force (FATF). The FATF is an inter-governmental body that aims to prevent the use of the financial system for money laundering (ML), terrorist financing (TF) and weapons proliferation (WPF). To this end, it issues recommendations that lay down standards for member countries to adopt. While the recommendations of the FATF are directory in nature, a failure by a member state to adhere to them can have adverse implications on the state's economic interests. Accordingly, the FATFs recommendations shape domestic legislation. One of the cornerstones of the FATFs recommendations pertains to the need for reporting entities (financial institutions and other designated non-financial businesses) to carry out appropriate customer identification and verification. These requirements, broadly speaking, are aimed at ensuring greater transparency and accountability in use of the formal financial system.

Before India became a member of the FATF in 2010, it had implemented customer identification requirements on various financial entities under the Prevention of Money Laundering Act, 2002 ("PMLA") and rules issued thereunder. Sectoral regulators such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) also lay down specific obligations in this regard. Cumulatively, these customer identification procedures are referred to as "Know Your Customer" or KYC norms. The PMLA framework has however been consistently amended, ostensibly in light of India's FATF obligations.

Key Challenges of the Indian KYC framework

While the FATF allows for a certain degree of flexibily in the design of KYC norms, these are not fully utilised in India. We find that India implements extremely stringent KYC requirements in comparison to countries such as Australia, Germany, UK, the EU and the US. Our analysis suggests that there are three main problems with the manner in which India implements KYC requirements:

  1. Over-emphasis on address proof: The address proof requirements in Indian law are excessively detailed and rigid in nature. Indian regulators require customers to provide proof of multiple addresses at the KYC stage - current, permanent, and residence. The need to provide documentary proof of multiple addresses, and the lack of flexibility in this regard can prove problematic for marginalised or vulnerable sections of the population (Lyman and Noor, 2014). This is specially so as significant numbers of Indians, such as migrant labour, as well as nomadic communities, vulnerable communities, the homeless, etc., may not have any fixed or permanent address. Even in cases where the individual has a permanent address, they may not have officially valid documents (OVDs) that demonstrate their "current address". The need for providing a "current address" can be problematic despite the existence of various pan-India identification schemes (such as Aadhaar, passports, voter IDs, etc.). It is difficult and time-consuming to update addresses in these documents. Further, in order to update the address in these documents, the individual needs to provide some proof of a local/current address, which may not always be easily accessible. For instance, many migrants may not be part of the NREGA system (if they work in the private or informal sector), implying that they cannot use a NREGA job card for the purpose. The strict requirements under Indian law can therefore exacerbate the problem of financial exclusions.

  2. Incomplete technological solutions: In order to reduce costs of conducting KYC, regulators have attempted to introduce various technological methods to enhance efficiency. These include the use of electronic KYC (e-KYC) methods as well as video KYC for on-boarding customers. Another technological intervention involves the creation of the Central KYC Registry (CKYCR), a centralised repository of customer KYC information. However, we find that the regulatory framework and implementation of these methods leaves much to be desired.

    For instance, in order to complete the video KYC process, entities under the purview of the RBI and SEBI can only accept ID documents that have been authenticated using the e-Sign facility that is provided by the DigiLocker system. Thus, a video KYC process is unavailable for those customers without a DigiLocker account. The fact that a DigiLocker account can only be created by Aadhaar holders creates another possible hurdle for customers. As per Dalberg's estimates, this requirement excludes around 8% of the population (of which 28 million are adults) from using the simplified KYC procedure. The video KYC process also requires a bank official to conduct the video-call in real time. This is resource intensive, which limits scaling. The video KYC process is also problematic from the perspective of the digital divide (Gera, 2020). The CKYCR process is also said to suffer from various implementation problems.

    Further, while banks are permitted to conduct e-KYC using Aadhaar, NBFCs are not. Even if a customer wants to use Aadhaar based authentication for KYC, non-banks and non-banking financial institutions, are forced to use the offline method of authentication. Anecdotal evidence as well as our interactions with industry practioners suggests that this leads to significantly increased costs for NBFCs. Customers too, are said to struggle with in-person verification processes. This difference therefore creates an uneven playing field, even for entities providing similar financial services.

  3. Poor design of enforcement actions: We find that the unlike in various foreign jurisdictions, the Indian regulatory framework does not provide for sufficient enforcement options of a scaled or proportionate nature. The penalties applicable for even minor violations can be of a significant order - including in the form of criminal sanctions, cancellation of licenses and high fines. By way of comparison, regulators in the US, Australia and the UK have a much broader range of enforcement actions they can adopt, ranging from the issuance of advice or cautionary notices, to securing compliance undertakings.

    When combined with the absence of an appellate mechanism, the strict penalties under the Indian framework can incentivize financial institutions to adopt a conservative, risk-averse attitude. This can lead to businesses exiting markets and customer segments associated with higher risk of compliance failure - particularly where it comes to customer segments with low profit margins (Lowery and Ramachandran, 2015). This, paradoxically, heightens risks of money laundering and other financial crimes that KYC requirements were designed to solve in the first place (Lyman and de Koker, 2018). The significant penalties that can be imposed under the Indian regulatory framework are not only a regulatory risk for businesses, but also make it more difficult for regulators to apply penalties on a consistent basis, particularly for minor breaches. This promotes arbitrariness in enforcement actions.

Recommendations

We suggest liberalising and standardising address proof requirements within the existing FATF framework. The first step towards reform requires regulators to clearly delineate the purposes of securing an address proof. For example, if the purpose of securing documentation is merely to enable correspondence with the customer (as is indicated by a numnber of KYC forms that use the term "correspondence" address interchangeably with "current" address), a number of simpler methods can be used. For example, the Supreme Court has recognised that communications through e-mail and instant messaging can constitute valid service.

Further, entities under the domain of SEBI, IRDAI, PFRDA, in addition to requiring customers to prove existence of a bank account, also need documentary proof of the customer's current address. However, bank accounts themselves can be opened by providing a self-declaration of current address (where an OVD has been submitted for a permanent address). Thus, there appears to be little justification for the additional requirement of proving current address implemented by SEBI, IRDAI and PFRDA. That said, even if the requirement for proving current address is mantained, the manner of doing so could be liberalised. For instance, certain countries such as the United States permit a customer to merely specify a post box as a mailing address, or even use the address of a referee. These methods could be considered in India, as a means to limit the exclusionary effects of KYC norms.

Our analysis suggests that attempts to simplify the KYC procedure by adopting video and eKYC norms have also not achieved their true potential. This is for a variety of reasons concerning both the regulatory structure and implementation issues. For instance, the measures of simplification are largely limited to banks (and not NBFCs). NBFCs constitute a vital channel for financial inclusion. However, the restricted applicability of simplified KYC procedures have hindered their ability to reach customers by increasing operational costs and limiting scaling. In this context, one may consider permitting NBFCs to also utilise simplified KYC processes (though this may come at a cost to privacy interests). Regulators also need to be mindful of the digital divide issue in India. Accordingly, making simplified processes completely reliant on technical infrastructure such as internet facilities may be unwise. Therefore, in addition to simplifying the KYC requirements themselves, regulators must attempt enable multiple channels of verification. One may also consider the need to de-duplicate KYC processes. Notably, the report of the High-Level Committee on Deepening of Digital Payments advocates reducing KYC compliance requirements at multiple levels. For instance, it suggests implementing lower KYC requirements where a customer who already has a verified KYC compliant account, uses this to open a second account or an account with a mutual fund or payments wallet.

Finally, there is a need to streamline enforcement actions and allow for regulators to adopt a wider range of "softer" remedial actions. An appeals process must be provided from RBI decisions. The Financial Sector Legislative Reforms Committee (FSLRC) has made similar recommendations in its report. The FSLRC report, which is now nearly a decade old, advocates for a unified Financial Sector Appellate Tribunal to be created to hear appeals from all the financial sector regulators. Further it suggests that penalties and enforcement actions be reviewed to ensure proportionality. While entities in the banking sector have lobbied for the adoption of the FSLRCs recommendations, and discussions in this regard have taken place at the highest levels of government, no legal developments have yet taken place (Adhikari, 2018).

In conclusion, we recommend that the KYC framework in India be revised to better balance the goals of preventing financial exclusion, creating a level-playing field for businesses, and the need to prevent money laundering and other financial crimes.

References

Lyman and Noor, 2014: Timothy Lyman and Wameek Noor, AML/CFT and financial inclusion: New opportunities emerge from recent FATF action, CGAP Focus Note, No. 98, September 2014.

Isern and de Koker, 2009: Jennifer Isern and Louis de Koker AML/CFT: Strengthening financial inclusion and integrity, CGAP Focus Note No.56, August 2009.

Lowery and Ramachandran, 2015: Clay Lowery and Vijaya Ramachandran Unintended consequences of anti-money laundering policies for poor countries, Center for Global Development, Working Group Report, 2015.

Adhikari, 2018: Anand Adhikari Will the government push for an appellate tribunal for RBI?, Business Today, December 2018.

Lyman and de Koker, 2018: Timothy Lyman and Louis de Koker KYC utilities and beyond: Solutions for an AML/CFT paradox? , CGAP Blog Series, Beyong KYC Utilities, March 2018.

Gera, 2020: Ishaan Gera KYC over video? Yes, RBI makes it possible with tweaks in rules, Financial Express, February 2020.


The authors are researchers at NIPFP.

Thursday, April 08, 2021

Measuring institutional capacity in property tax systems: A case study of ten cities in India

by Diya Uday.

Property tax is ubiquitous with municipal finance. It provides local governments with the means to execute development strategies. In theory, property tax is an ideal candidate for supporting fiscal strategies in decentralised economies because the tax base is immobile making base identification and enforcement relatively easy (Kelly 2013). There are indications, however, that in India, we have not succeeded in doing property taxation well.

A national-level indicator of the performance of property taxes is the percentage of revenue generated from property taxes to the national GDP. Studies indicate that the proportion of revenues from property tax to GDP in India is low when compared with other countries. At the state-level, where property tax is a major source of revenue, there is evidence of revenue shortfalls, indicating the need for reforms. The policy responses for increasing revenues from property taxation, include increasing tax rates, revising taxation criteria and suggesting floor tax rates. But will these interventions be successful in improving the performance of the property tax system in cities?

A key factor in determining the success or failure of any policy intervention is institutional capacity. Policy interventions such as increases in property tax rates assume that ULBs are operating at optimal levels of institutional capacity and therefore increases in tax rates, property values or even improvements in tech infrastructure will optimise revenues from property taxes. In particular, these policies are founded on two main assumptions:

  • that ULBs have adequate human resources and the technical capacity to assess and demand taxes correctly;
  • having assessed taxes correctly, ULBs have the enforcement capacity to collect the entire tax demanded.

To achieve revenue optimisation from property tax it is important to first get tax administration right. Without this, it is unlikely that local governments will be able to capture the full extent of the property tax potential even with tax rate increases or technological interventions. This raises the important question: what is the current capacity of ULBs in property taxation?

In the literature we see indications of deficiencies in the institutional capacity of ULBs in performing some major tax functions like tax collections (World Bank 2004; Mathur et. al 2009; Bandyopadhyay 2014). While these studies give us valuable insights, this literature is not recent. Institutional capacity may have improved over time given the recent concentration of schemes to improve local governance such as the Smart Cities Mission and the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). There is a need for new studies that will give us insights into the current state of institutional capacity.

In this article, we therefore measure the institutional capacity of some property tax functions in a sample set of cities in India. Our aim in doing so is two fold:

  • to gain insights on the current level of institutional capacity in some property tax functions in a sample set of cities.
  • in doing so we attempt to demonstrate that policy interventions must not presume the existence of adequate institutional capacity.

Our findings contribute to the existing literature on the state of property tax administration in India. In addition to this, we question the current approach to measuring administrative functions in the property tax system. We suggest an alternative approach for a more accurate diagnosis of the problems in administration.

A case study of ULB capacity in ten cities

We undertake two levels of analysis. We first examine the institutional capacity of ULBs in property tax collections in a sample set of cities. We then analyse the human resource allocation in the property tax departments in some ULBs. We use our findings to gain insights on institutional capacity in ULBs in a set of sample cities.

Sample selection: Our selection of the cities was driven by the location of the city and the availability of data. Our final selection includes a list of metropolitan and tier-2 cities located across ten different states in India. The selected cities are Chennai, Pune, Indore, Vishakapatnam, Shivamoga, Varanasi, Surat, Warangal, Kota and Bilaspur.

1. Measuring collection capacity

Methodology: We measure collections by calculating the Tax Collection Ratio (TCR), a commonly used method for measuring tax collections. Applying this method, we calculate the TCR as the difference between the tax demand made and the actual tax collected across each of the five years for which the data was available in each of the sample cities (2013-2018). We then calculate the TCR as a percentage value. We use this percentage value as a proxy to demonstrate the level of administrative capacity of a given city by taking 100 per cent as the benchmark. For instance, if the TCR percentage of a given city is 90 per cent, we interpret this to mean that the city has 90 per cent institutional capacity. Such a city has a higher level of institutional capacity when compared with a city in which the TCR percentage is 80 per cent, indicating a higher deficit in tax collections.

Table 1 sets out (i) the average property tax collected in ten cities across five years and (ii) the minimum and the maximum property tax collection across years in the period of study.

Table 1: City-wise average property tax collections (2013-2018)
CityStateAverage TCR (%)Minimum tax collection (as a % of tax demanded in that year)Maximum collection (as a % of tax demanded in that year)
ChennaiTamil Nadu9074 (2013-14)106.60 (2017-18)
PuneMaharashtra96.3687 (2017-18)109.77 (2015-16)
IndoreMadhya Pradesh80.2572.16 (2014-15)106.48 (2016-17)
VishakapatnamAndhra Pradesh114.2924.42 (2017-18)265.52 (2015-16)
ShivamogaKarnataka98.3697.86 (2014-15)99.30 (2016-17)
VaranasiUttar Pradesh9692 (2013-14)98.97 (2017-18)
SuratGujarat84.6576.65 (2015-16)84.21 (2014-15)
WarangalTelangana79.8775.12 (2013-14)82.75 (2016-17)
KotaRajasthan58.8637.04 (2013-14)96.14 (2016-17)
BilaspurChattisgarh90.275.52 (2017-18)122.95 (2013-14)

Source: Author's calculations from Smart Cities Mission data

Findings: We find that no city in the sample has achieved 100 per cent TCR. Only one city i.e. Shivamoga has close to 100 per cent of tax collections. There is a deficit in property tax collection across all the cities in the sample (distance from 100 per cent collection of tax demanded). We do find, however, that half the ULBs in the samples have achieved the goal of 90 per cent efficiency as set by the JNNURM. We also find that there are variations in property tax collection across cities. While in some cities the collections are below sixty per cent (Kota), others have a much higher percentage of collection (Shivamoga and Pune).

We also see a variation in the TCR within the same city. For instance, Kota has a maximum TCR of 96.14 per cent in one year (2016-17) but a low TCR of 37.04 per cent in another (2013-14). Similarly, Vishakpatnam has an over collection of 265.52 per cent in the year 2015-16 but under collection of 24.42 per cent in 2017-18. Even in cities like Pune or Chennai, which have a high average TCR across five years (column 3), the minimum TCR (column 4) and maximum TCR (column 5) vary. In half of the cities in the sample, we also see tax collection exceeding the maximum tax demand in a single year (column 4) for Chennai, Pune, Indore, Vishakapatnam and Bilaspur.

2. Examining human resource allocation

Our second level of analysis examines the human resource capacity in the property tax departments in a set of sample cities. The human resources could affect the TCR in two ways: First, the technical capacity of the human resources to apply the rules correctly. For instance, the ability to correctly identify taxable properties, ascertain property values, apply the assessment formula to a given assessee and determine amounts due. Second, the number of personnel in the department could potentially affect the level of accuracy in tax functions. For instance, an inadequate number of resources could increase inaccuracies. In this analysis, we focus on the second aspect of human resources, the number the personnel to examine whether a higher number officers alone leads to a better TCR.

Methodology: We collected data on the number of officers in the property tax department in the sample cities for which this data was readily available. The cities for which this data was readily available were Chennai, Pune, Vishakapatnam, Shivamoga, Varanasi, Warangal and Bilaspur.

Given the paucity of data on the number of taxable properties in the city, we device an indicator to estimate the number of taxable properties in the city using proxies. For this, we first collect Census 2011 data on the number of households living in permanent structures within the municipal area. We then calculated the number of officers per 10,000 households. We also collect data on the total area (sq. km) of the city and compare this to the administrative strength.

Table 2 sets out the administrative strength of the property tax department, the number of households living in permanent structures within the municipal area, the estimated officer to households ratio (per 10,000 households) and the city area in the sample cities for which this data was available.

Table 2: Comparing city-wise human resource allocation and TCR
CityStateAverage TCR (%)Adminis-trative strength (no. of officers)No. of households in permanent structuresAllocation of officers (per 10,000 households)City area (sq. km)
ChennaiTamil Nadu9027610,40,94831,189
PuneMaharashtra96.36416,83,26717,256.46
VishakapatnamAndhra Pradesh114.29564,25,40916,501
ShivamogaKarnataka98.3612558,826218,477.84
VaranasiUttar Pradesh963211,64,014191,535
WarangalTelangana79.87681,41,7505406
BilaspurChattisgarh90.28057,292146,377

Source: City municipal websites and Census 2011

Findings: We find that some cities with higher a TCR, also have a higher officer to households ratio. For instance, Shivamoga has the highest TCR and the highest level of administrative strength. However, we see that cities with a low TCR, do not have the lowest administrative strength. For instance, Warangal is has the lowest TCR in the sample, but not the lowest officer to households ratio.

We observe that cities with similar TCR scores do not have similar personnel to households ratios. For instance, the officer to household ratios for similar TCR cities such as Varanasi and Pune or Chennai and Bilaspur are false, demonstrating a variation in human resource allocation even across cities with the same TCR levels. Further, cities with a larger area also do not always have a higher allocation of officers. For instance, Varanasi has a smaller area than Vishakapatnam, but a higher number of officers. Chennai has a smaller area than Shivamoga, but a higher number of officers than Shivamogga. We find not consistent pattern in the manner in which human resource allocation is done across cities.

Limitations: (i) We use the number of households living in permanent structures within the municipal limit as a proxy for the number of taxable properties in a city. This does not take into account the commercial property coverage of a city. (ii) Another proxy for the number of properties in a city is the area of a city, however, a larger city may be less dense and have fewer properties than a smaller and more dense city which may have a larger number of properties (iii) The estimates are only as accurate as the data available on government websites.

Learnings for property tax reforms

The findings from our case study offer insights for property tax policy reforms in ULBs:

Presumption of adequate capacity: Our study finds deficiencies in institutional capacity in tax collections across ULBs. From a reforms perspective, even if tax rates are increased, unless the present institutional capacity is improved, revenues from property taxes might continue to be affected. Further, while our study examines the institutional capacity in one tax function - tax collections, it is likely that there are deficiencies even across other functions. This may affect the outcomes from the current set of policy interventions which focus on increasing revenues by changing the design of the tax system rather than fixing the problems in the administration.

Effect of variation across ULBs: Our findings demonstrate a variation in the capacity of ULBs to carry out property taxation. We are therefore likely to see varying levels of success even for the same set of reforms across ULBs because of the different levels of institutional capacity.

Inconsistencies within ULBs: We not only see a variation in the TCR across ULBs, we also see variation in the TCR within the same ULB across different years. This is demonstrated by the variation in the minimum and maximum collection ratios of cities in our sample. This means that even cities with an overall higher average capacity might have low or high collections in a given year. For instance, the minimum TCR in Vishakapatnam is 24.42 per cent across five years and the maximum is 265.52 per cent. Similarly, the minimum TCR in Kota across five years is 37.04 and the maximum is 96.14 indicating a wide variation in the tax collections even by the same authority. While it is unclear why this is the case, this indicates some inconsistencies in capacity levels.

Management of human resources: Our findings indicate that the institutional capacity in property tax systems is not only a function of administrative capacity in terms of the number of personnel. For instance, while we see that Shivamoga has the highest officer to households ratio and the highest TCR, Pune had a lower officer to households ratio but has the second highest TCR. Similarly, despite having a similar TCR, Chennai and Bilaspur have very different human resource allocations. Therefore, increasing the strength of the administration alone may not yield better outcomes in the assessment and collection of property taxes. Instead, improving the technical capabilities of the administration or effective utilisation of the existing human resource capacity by ULBs might yield results. For instance, Bahl et. al 2013, suggest that tax authorities in developing countries are unable to capture economies of scale.

A new approach to measurement

In the course of this study, we found that the existing approach to the measurement of tax functions in the literature has two main problems. First, studies examine tax collections as an isolated administrative function and not as a product of the preceding tax functions. Second, because of this, these studies tacitly assume that the administrative processes that precede tax collections, such as the tax assessment and all the processes that make up tax assessment are accurately done. This in turn affects the diagnosis of the problems in administration.

We posit instead, that the property tax system comprises of a series of interconnected administrative processes that determine the overall outcome of revenue generation from property tax. Each process determines the success of the next. Errors in administering one process will have repercussions for the accuracy and success of the processes and functions that follow. For instance, tax collection is not just a product of the enforcement function of the ULBs. It is also a function of accurately assessing taxes due. Similarly, the accuracy of the tax assessment function is determined by (i) the maintenance of a database of all taxable properties in the city (ii) regular updation of this database, (iii) correct valuation of the properties in the database, (iv) correct application of the tax formula for these valued properties and (v) determining permitted exemptions. Table 3 set outs an indicative list of the functions that work to together form a chain of administrative processes which ultimately determine tax collections.

Table 3: Indicative list of processes involved in tax assessment and collection
FunctionProcesses
A. Accurate tax assessment i. Maintaining a property records database of all taxable properties
ii. Updating the property records database
iii. Correct valuation of properties in the database
iv. Correct application of the tax formula
v. Correct determination of exemptions and concessions
B. Accurate tax collectioni. Making a correct tax demand (= Ai+Aii+Aii+Aiv+Av)
ii. Enforcement to collect tax demanded

When we break down administrative functions into smaller processes and view each function as being linked to the next, the result of measuring of any one administrative function will provide us with insights on the accuracy of not just the function being measured but also the previous functions in the chain of administration. For instance, the TCR of a ULB is an indication of the institutional capacity of not only tax collection but also of assessing tax correctly and getting the processes associated with the functions of assessment and then collection right. In this view, a TCR of 90 per cent potentially indicates not only a failure by the ULB to recover 10 per cent of the tax demanded but also potential inaccuracies in assessment for 10 per cent of the tax demanded, leading to appeals and pending cases on account of which payment might not have been done by assesses.

Our learnings from the case study, therefore, are not indicative of capacity issues just in tax collection, but could also be on account of inaccurate tax assessments. This analysis, in line with reports on poor tax assessments in ULBs.

This approach has two advantages over the traditional approach. It breaks down and highlights all the processes involved in property tax administration. In doing so, it allows us to more accurately diagnose the specific function at which the process fails.

Conclusion

We carried out this case study to demonstrate the importance of institutional capacity in the property tax system of ULBs. We have two main findings which are as follows:

First, we demonstrate that the problems in institutional capacity exist across a majority of our sample cities. This signals that there are potential capacity problems in many if not all cities across India. It is unclear therefore whether the present set of interventions to increase property tax revenues will yield optimum outcomes. Our findings demonstrate that it is important to precede policy interventions with the measurement of institutional capacity in the property tax system. We cannot presume the existence of adequate institutional capacity. This is in line with the literature that suggests that infrastructure and institutions are the foundation for achieving effective policy outcomes (Kelkar and Shah 2019, Pritchett et al 2012, Subramaniam and Felman 2021).

Second, deficits in the TCR are not just signals for improving capacity in tax collections and enforcement but also in tax assessment and all allied administrative processes. It is therefore difficult to diagnose which part of the property tax administration requires reform. A failure at any one point of the system has repercussions for the remaining functions. We, therefore, need a comprehensive framework for measuring institutional capacity at the level of each process of the property tax system, some of which are illustrated in Table 3.

Our study also demonstrates that while most cities have some way to go, some cities have achieved higher levels of TCR than others, indicating that they have perhaps learnt to do assessments and collections better than others. We also see that some cities appear to have achieved better utilisation of administrative strength than others. There are perhaps lessons in tax assessment and collection in these cities that other ULBs in India can learn from. A case study of the good practices in collection and assessment in these cities might offer insights for better property tax administration in other cities in India.

References

Arvind Subramaniam and Josh Felman, The Economy and Budget: Diagnosis and Suggestions, January 2021.

Matt Andrews, Lant Pritchett, Michael Woolcock, Looking Like a State: Techniques of Persistent Failure in State Capability for Implementation, CID Working Paper No. 239 June 2012.

O. P Mathur, Debdulal Thakur and Nilesh Rajyadhyaksha, Urban Property Tax Potential in India, National Institute of Public Finance and Policy, 2009.

Roy W. Bahl, Johannes F. Linn and Deborah L. Wetzel, Governing and Financing Metropolitan Areas in the Developing World, Lincoln Institute of Land Policy, Pages 1-30, 2013.

Simanti Bandyopadhyay, Municipal Finance in India: Some Critical Issues, ICPP Working Papers 14-21. May 2014.

Roy Kelly, Making the Property Tax Work, ICEPP Working Papers. 42, 2013.

Vijay Kelkar, Ajay Shah, In Service of the Republic: The Art and Science of Economic Policy, 2019.

World Bank, India: Urban Property Taxes in Selected States, 2004.

Diya Uday is a senior researcher at the Finance Research Group, Mumbai. The author would like to thank Ajay Shah, Susan Thomas and the anonymous referee for their valuable insights, comments and guidance for this work.

Thursday, March 25, 2021

Towards better enforcement by regulatory agencies in India

by Trishee Goyal and Renuka Sane.

India is on the verge of establishing yet another regulator, the Data Protection Authority (DPA), to implement the provisions under the Personal Data Protection Bill, 2019. As per the Bill, the DPA will regulate anyone who collects data for commercial use with a turnover of more than INR 20 lakh annually. This would cover entities from small time telemarketers to social media behemoths. The scope of its regulated entities will thus be more extensive than any of the regulators previously established in India. The DPA has the power to either suo motu or on a complaint take action against a data fiduciary or a data processor who may be violating the law. It can, inter alia, issue directions, call for information, conduct inquiries, issue orders for injunctive relief, suspend or cancel the registration of businesses.

With such an expansive responsibility, it is important to get the design of the enforcement processes of the DPA right. Failure to follow due process in enforcement would be damaging to the ease of doing business, to the digital and start-up ecosystem and damage India's chances of dominance in these spheres. More importantly, such failures will have adverse consequences on the justice and dignity of the regulated entities.

In a new working paper, Towards better enforcement by regulatory agencies, we study the gaps in enforcement at the Securities Exchange Board of India (SEBI) and the Competition Commission of India (CCI). The gaps pertain to whether processes of natural justice have been adhered to during the conduct of enforcement activities. We reflect on the lessons this might have for the DPA.

In India, there exists a small literature on the problems with the legislative functions (some examples include Burman and Zaveri, 2018; Bhandari and Sane, 2019), and the judicial functions (see Datta et. al., 2019). In this paper we focus on the executive, or the enforcement, functions of a regulator. Our paper also connects to a larger literature across the world on the dilution of accountability at the 'new administrative state'. Administrative agencies are increasingly built with legislative, executive and judicial mandates. Such agencies are expected to draft subordinate legislation, be responsible for licensing and enforcement actions, and also adjudicate on investigations usually carried out by itself. Questions on checks and balances and due process that were reasonably settled in liberal democracies when it came to government functioning are now being debated once again w.r.t regulators.

Why SEBI and CCI?

Before we discuss questions on natural justice, a word on why we chose to study SEBI and CCI. The Justice Srikrishna Committee Report on data protection suggests that the DPA will be modeled along the lines of other Indian regulators such as TRAI, SEBI, CCI etc. Among the regulators discussed in the report, we found that SEBI has been considered the most effective, as far as its enforcement actions are concerned. CCI is relevant as it is a more recently established regulator. A study of CCI comes at an interesting checkpoint in the development of regulatory governance. As the DPA will be modeled on these regulators, it is important to understand how enforcement is currently taking place and whether there is an inherent problem in the structure of enforcement. For example, Roy, Shah, Srikrishna, and Sundaresan (2019) argue that Indian regulators have too often veered into controlling as opposed to regulating, and that enforcement has been selective and weak, and failed to adequately follow the rule of law, especially on due process. State capacity is known to be weak in India, suggesting the need to move beyond existing models of regulatory design.

Three elements of natural justice

Natural justice is a vast area. We focus on the three most basic elements of natural justice - how are notices served, whether parties are allowed to examine material and cross-examine witnesses, and whether there is separation of powers, especially between the investigation and adjudication functions.

Procedural failures at SEBI and CCI

In the case of SEBI, we studied orders of the Securities Appellate Tribunal (SAT) for a six month period (October, 2019 to March, 2020) where we found that 33% of SEBI orders were over-ruled on failure to adhere to principles of natural justice. Of the cases over-ruled, 86% were related to issues of notice and 14% to issues of examination of materials. SEBI fares poorly on separation of powers. With respect to CCI, a survey of appellate orders passed by the Competition Appellate Tribunal and the Supreme Court, pointed to the lack of due process being ingrained in enforcement procedures. However, CCI maintains separation of powers with a far greater degree as compared to SEBI. The design of the enforcement structure also allows for application of mind by the Commission at multiple stages - at the time of formation of prima facie opinion, at the time of issuance of direction for investigation and lastly, at the time of penalty proceedings.

Importance of codification

Why is it that there are such procedural failures? Legislation in India confers certain powers of a civil court to a regulatory agency, and expects that the regulator will comply with the principles of natural justice. There is, however, no guidance on how regulators should comply with these principles (Burman & Krishnan, 2019; Sundaresan, 2018). Common law in India has held the view that principles of natural justice are not considered embodied rules -their application has been made dependent on a variety of factors such as the nature of the tribunal in question, the controversy in question and the facts and circumstances at hand. As a result, the development around principles of natural justice in administrative law has been in an ad hoc manner. There is very little by way of standardised procedures that an administrative body can source from common law.

What would improve these processes? We look at the structure of regulators in other countries - namely the US and the UK. We find that the processes that Indian law just assumes will be followed, are actually codified in laws, regulations and process manuals in these countries. Codification is important as a study of CCI also shows - while the CCI does better in terms of structural separation, issues of due process continue to remain due to scanty guidance available in the Competition Commission of India (General) Regulations, 2009 on other aspects. Codification of processes on legislative powers, such as having more prescriptive rules on the requirements of consultation, have led to better regulation making processes (Burman & Zaveri, 2018).

Lessons for the DPA

We have the following recommendations for the DPA. The objective is to provide adequate guidance to the regulator as it discharges the enforcement function, as well as to the broader community as it continuously evaluates the performance of the regulator on these counts.

  1. There should be an inclusion of the procedural rights in the statute itself. These provisions would specify a detailed outline of the show cause notice, the scope of the right of examination of materials, the procedure to be followed in case of ex-parte orders and the timelines of providing representation against each of the processes where such representation can be made.

  2. Further, regulations should include the manner in which notice is to be served, the manner of providing opportunity of hearing (written submissions), the form in which materials are to be submitted to the regulated entity under its right of examination of materials etc.

  3. The law, regulations, as well as detailed manuals should be available in the public domain.

  4. At the very least, there should be a cadre of administrative law officers who would not be engaged in any functions of the regulator except performing the quasi judicial functions. There should be an Administrative Law Member in the Board of the agency whose specific task would be to manage the cadre of administrative law officers. This would lead to the insulation of quasi judicial functions of the regulator from executive, investigation and inspection functions.

Conclusion

The concerns raised by us have begun to get recognised in India. For example, in 2011, the Financial Sector Legislative Reforms Commission (FSLRC) Report laid out a regulatory framework imbibing the principles of natural justice. More recently, in 2019, the Report of the Competition Law Review Committee, reviewed the enforcement processes in the CCI. Similarly, the Sahoo Committee Report set up to examine development and regulation of valuation professionals, while laying out the regulatory design for the said purpose, emphasised the need of principles of separation of powers, reasoned orders, independence and accountability. The follow through on the recommendations, however, has been scarce. We think that a statutory formulation of the administrative law requirements would strengthen the rule of law in enforcement actions.

References

Bhandari, V., and Sane, R. (2019) A Critique of the Aadhaar Legal Framework. 31 NSLIR Rev 1-23.

Burman, A., & Krishnan, K. (2019). Statutory regulatory authorities: Evolution and impact.

Burman, A., & Zaveri, B. (2018). Regulatory responsiveness in India: A normative and empirical framework for assessment William & Mary Policy Review , 9 (2), 1-26.

Datta et. al. (2019), How to Modernise the Working of Courts and Tribunals in India. NIPFP Working paper 258.

Roy, S., Shah, A., Srikrishna, B. N., & Sundaresan, S. (2019). Building state capacity for regulation in India. Devesh Kapur and Madhav Khosla (eds.), Regulation in India: Design, Capacity, Performance, Oxford: Hart Publishing.

Sundaresan, S. (2018). Capacity building is imperative. Column titled Without Contempt in the editions of Business Standard dated August 2, 2018.


The authors are researchers at NIPFP. This paper was produced as part of the Data Governance Network. We thank Somasekhar Sundaresan for useful discussions.

Tuesday, March 23, 2021

Strategic patience and flexible policies: How India can rise to the China challenge

 by Gautam Bambawale, Vijay Kelkar, Raghunath Mashelkar, Ganesh Natarajan, Ajit Ranade, Ajay Shah.

A paper, Strategic patience and flexible policies: How India can rise to the China challenge, has been released by the Pune International Centre. Key ideas of this paper are presented here.

After the war in 1962, the India-China relationship was frozen till 1988. After that, both sides agreed on a framework of holding border disputes in abeyance and pursuing increasing economic engagement. Procedures and protocols were established for handling situations on the border, if they should arise.

In recent years, China has dismantled this arrangement and established a more hostile stance towards India with simmering military conflict. This raises important questions for policy in India. How should India navigate this landscape? When the conflict became kinetic in Doklam and then Ladakh, the immediate impulse was of course about mobilising troops. There was an outcry in the press, nationalistic fervour, and emotional boycotts of Chinese goods.


It is important to see these problems on a larger scale, in terms of space, time and force. It is not just about a few weeks in Ladakh involving a few thousand troops. There is much more at play. If India merely responds with troop movements and winter gear, this may set the stage for future reverses. Indian thinkers need to address deeper questions. What are the forces shaping Chinese behaviour? What is the best path for India in the short term and the long term? How can diplomacy and economic policy work in an intertwined fashion, to best further India's interests?


At present, India is in a weak position when compared with China. Whether we look at raw GDP, state capacity, the capabilities of the best firms, the extent of internationalisation, the mastery of science and technology or the quality of the top intellectuals: at present, China is significantly ahead of India. This superiority can be used by China to put pressure on India in many ways. Some examples of this include a sheer display of military strength to grab land at the border, the use of a variety of levers to foster friction for India with neighbouring countries, and nudging decision making at international organisations in ways that hinder India's interests.

Looking into the future, if the gap between Chinese and Indian economic growth rates continues, these problems will be amplified. As an example, we must visualise a future scenario where Chinese carrier groups prowl the Indian ocean, and the Indian navy is out-matched.

In this scenario, how best should India proceed? There is a useful distinction between the short run and the long run.


In the short run, Indian diplomacy faces a new situation. Never before has India faced a hostile nation with significantly superior strength. China in 1962 was at roughly Indian levels of GDP; Pakistan is a smaller country. This is the first time that India has   hostilities with a substantially stronger nation. Confronting China alone would be unwise. It is essential to build coalitions.

There are three groups of natural allies for India: the great democracies of the world, who worry about the global prominence of an authoritarian China; the countries on China's borders, who are all facing difficulties just as India is; and the countries in India's region who can potentially have positive exposure to Indian success given that proximity matters greatly in cross-border economic and cultural activities.

India needs to embark on a process of building deep ties with about 20 countries. The genuine depth of these relationships requires linkages in trade, finance, investment, education, travel, migration and shared values. India will need to modify domestic policy positions in ways that suit the interests and values of these partners. Diplomacy needs to play a much bigger role in domestic policy making, than has ever been the case in Indian history. The coming decades need to become a golden age of diplomacy.

In the short run, there is debate about protectionist measures that will harm Chinese exports or investment in India. A significant proportion of those moves are self-defeating in that they harm India more than they harm China. There is a case for three groups of restrictions : Limit companies controlled by the Chinese state from a controlling stake in a hotlist of sensitive infrastructure assets; steering clear of Chinese-controlled technological standards; and blocking surveillance of Indian persons.

Strategic thinkers in Indian firms need to rethink business plans in the light of these complexities. In some areas, China-centric sourcing and technological dependance can elevate business risk. For these, a selective retreat from economic engagement with China, and increased emphasis upon the global market, is optimal. In other areas, India can become the dominant alternative to the China-centric supply chains of the past, addressing the desire of global firms to reduce their exposure to China.


In one scenario, India remains smaller than China for an indefinite future, and the strategy of coalition-building will remain central. There is, however, the possibility that India can roughly match Chinese strength in about 20 years. This is not just wishful thinking, and this is not predicated upon Chinese stumbles. It requires reversing the growth malaise of the post-2011 period. This requires foundational change in public policy frameworks around three main ideas: the increasing scale of government micro-management of the economy, the expanding administrative state and the growing erosion of the rule of law. A critical element of this 20-year journey lies in innovation policy. India needs to match and improve upon China's achievements in fostering research institutions and the intellectuals that inhabit them.

Becoming an advanced economy has always been the objective in India, right from the freedom movement and the creation of the Republic. What has changed in recent years is Chinese hostility, which has given a fresh dimension of urgency on solving the growth malaise, on learning how to be a mature market economy located in a liberal democracy. The judicious use of self reliance ("atmanirbhar") grounded in self confidence ("atmavishwas"), where a confident India engages with the world without insecurity, forms alliances with like minded countries, and leverages democracy and a skilled workforce to good effect, is the path through which the China challenge can be addressed.


Gautam Bambawale is former Ambassador of India to China, Pakistan and Bhutan. Vijay Kelkar is Vice-President, Pune International Centre. Raghunath Mashelkar is President, Pune International Centre. Ganesh Natarajan is Chairman of 5F World and of Lighthouse Communities. Ajit Ranade is Chief Economist, Aditya Birla Group. Ajay Shah is Research Professor of Business, Jindal Global University.

Grievance Redress by Courts in Consumer Finance Disputes

by Karan Gulati and Renuka Sane.

India has made progress on financial inclusion through the use of digital payments and fintech. As more and more consumers interact with the consumer finance industry, there will invariably be greater frictions and an increasing number of grievances. In an environment with a good consumer complaints system, these should get resolved by the financial service provider (FSP), and if not the FSP, then the regulator. However, this is not so in India. Courts are often the preferred recourse for retail consumers. For example, in the ongoing dispute regarding Yes Bank's written off AT-1 bonds, consumer courts seem like the last remaining alternative for retail investors. Unless grievances are satisfactorily resolved, we may hurt the progress made on financial inclusion. While India needs to set up good regulator-based grievance redress mechanisms such as a Financial Redress Agency, it also needs to improve the functioning of courts to provide effective relief in consumer finance (and other)disputes. In a recent paper, Grievance Redress by Courts in Consumer Finance Disputes, we review 60 judgments on consumer finance to study the position that courts have taken on these disputes. We also describe the challenges in court functioning that have a bearing on the efficiency of courts in dealing with issues of grievance redress.

The structure of courts

In 2020, India enacted a new Consumer Protection Act (CPA). The Act aims to protect consumers' interests and provide timely and effective settlement of disputes. It entrusts courts to redress consumer grievances. A complainant can approach specialised courts i.e. consumer commissions established by the CPA. However, these are additional remedies. Cases may also be decided by the High Court of various States and the Supreme Court of India.

The powers to grant relief depend on which court the complainant approaches. Consumer commissions are bound by the CPA. They may order a party to: (i) remove defects, (ii) return the price of the goods or the charges for the services along with interest, (iii) pay compensation or punitive damages, and (iv) withdraw the goods or services from the market. High Courts are bound to decide cases either within the confines of a statute under which they are approached or the constitution. Going one step further, the Supreme Court has held itself not restricted in any way to grant adequate relief.

Banking and insurance disputes

Litigation is disproportionately costly and troublesome for small consumers. Very rarely can an ordinary consumer go through the prolonged ordeal of fighting with a bank. For this reason, courts have granted relief to individual consumers, given that they come with clean hands.

This has not been the case when interpreting insurance contracts. If consumers knew about the terms, courts have enforced the terms of the contract, regardless of whether the terms themselves were unfair, one-sided, or opaque. On the other hand, if the terms were kept hidden from the consumer, courts have granted relief to consumers. This is true both while entering the contract and settling claims.

Several consumers have been introduced to complex products and contracts, but these consumers have insufficient know-how. They are vulnerable to mis-selling. The strategy in Indian finance has historically focused on the caveat emptor doctrine -- let the buyer beware. Though the new CPA gives consumer commissions the power to declare certain unfair terms as void, it does not address the ability to understand the terms. Thus, consumers have been left to their own devices, and unaware consumers are unlikely to get their desired remedy if they approach a court.

Challenges to court functioning

We find the following challenges in court functioning as they deal with consumer finance disputes.

  1. Low Compensation: Courts tend to award low compensation that does not adequately compensate the complainant. For example, in Dr Virendra Pal Kapoor v. Union of India and Ors, a senior citizen had invested INR 50,000 in a unit-linked product in 2007. Upon payout in 2012, he had lost the entire sum except INR 248 on account of hidden charges. Though the insurer was directed to repay the original Rs. 50,000, no interest was awarded. The reason for low compensation seems to be that there are no guidelines for courts to follow. There is no expert analysis of the loss. In the absence of financially prudent legislation, courts often tend to award compensation that only makes sense when the legislation is enacted.

  2. Delay: Low compensation becomes more severe when it takes too long to settle disputes. The CPA provides that cases should be decided in no more than five months. However, as per the case management system of the National Commission, it takes 1.99 and 2.38 years to settle banking and insurance disputes, respectively, i.e. more than five times the statutory guideline. In fact, in February 2020, the National Commission adjourned a matter till January 2021 - almost a year after the hearing.

  3. No Class Action: If consumers cannot understand complex financial agreements, they may benefit from pooling their knowledge and approaching courts as a class. Plaintiffs can share evidence, expert witnesses, and litigation costs. However, unlike other countries, such suits are few and far between in India. This may be because of unclear substantive law and strict rules on financing litigation. This makes it difficult for class members to come together. Courts have left it to their discretion to evaluate whether the class is adequately represented and whether financing agreements are fair. Moreover, the legislature had prohibited contingency fees. This creates a system that either prohibits or disincentives class actions.

  4. Specialisation: Consumer courts in India resolve all consumer disputes. Though the members are highly qualified individuals, they lack specialization in finance. This is unlike other common law countries where sectoral experts adjudicate finance disputes. They have adopted extensive adjudicatory legislation regarding financial products and services. On the other hand, laws in India regarding finance have been restricted, leaving courts to start from a clean slate. If timeliness and predictability can make India's finance regime more appealing, specialization by adjudicators could prove valuable.

Way forward

One obvious way to improve the system is by general improvements in the judiciary's capacity and knowledge on matters related to finance. This will, however, take a long time. Policymakers should also consider adopting certain targeted interventions.

There are two types of interventions that are required. The first is on the legislative front. Like the targeted legislation in other countries, the legislature could enact separate rules for financial transactions mandating clear and understandable disclosures. Policymakers may also consider prescribing adequacy requirements in class action suits and transitioning towards contingency fees for lawyers and third-party investors. Any such changes in legislation would also benefit from an advisory council on consumer finance. The council may be responsible for making representations about policies; reviewing, monitoring, and reporting their effectiveness; and highlighting its views on new rules and regulations.

The second is on the judicial front. One problem we identify is low compensation. This may be addressed by updating and consolidating the rules governing compensation considering modern market understanding. Other jurisdictions often order disgorgement (surrender of profits earned through illegal means) or grant a remedy of restitution. This seeks to measure actual damages. On the question of delays, courts may also separate their judicial and administrative functions. This will likely reduce the time it takes to conclude hearings since members of the commission would have more time to focus on their judicial tasks. The National Commission can also exercise its power to call for statistics from State Commissions and conduct systematic reviews.

These solutions can have significant consequences, especially in India, where financial literacy is low and regulatory enforcement appears weak. Though they were developed after studying consumer finance disputes, they may have consequences outside this domain and yield better functioning courts. Market-oriented compensation, without delay, when parties can come together as a class would be beneficial in any dispute. In a growing financial landscape such as India, redress bodies such as the judiciary become increasingly important. A specialized consumer protection law is a step in the right direction, but it can benefit from targeted interventions.

References

Department of Economic Affairs, Report of the Financial Sector Legislative Reforms Commission: Volume 1, March 2013.

Dhirendra Swarup, Establishing the Financial Redress Agency, January 27 2017, The Leap Blog.

Dr Virendra Pal Kapoor v. Union of India and Ors, May 29 2014, Allahabad High Court.

Karan Gulati and Renuka Sane, Why do we not see class-action suits in India? The case of consumer finance, May 03 2020, The Leap Blog.

Karan Gulati and Shubho Roy, India's low interest rate regime in litigation, March 11 2020, The Leap Blog.

Murali Krishnan, Supreme Court urges consumer forum to look into grievance of year-long adjournments, August 16 2020, Hindustan Times.

National Informatics Centre, Computerization and Computer Networking of Consumer Forum in the Country.

Neil Borate, Those mis-sold Yes Bank AT1 bonds face long haul, May 11 2020, LiveMint.

Pratik Datta, Mehtab Hans, Mayank Mishra, and others, How to Modernise the Working of Courts and Tribunals in India, March 25 2019, NIPFP Working Paper No 258.

Reserve Bank of India, National Strategy for Financial Inclusion, January 10 2020.

Supreme Court Bar Association v. Union of India, April 17 1998, Supreme Court of India.

Tinesh Bhasin, RBI sees 387% rise in complaints against NBFCs, 58% rise against banks, February 08 2021, LiveMint.


The authors are researchers at NIPFP.