In a liberal democracy law making should be a transparent affair. Transparency allows constructive public debate before a law is imposed on the society. In USA, the secrecy surrounding the drafting of the Senate Health Care bill meant to repeal Obamacare has been widely criticised. In contrast, we in India are so used to secrecy in legislative drafting that we do not even question it. We are content that bills introduced in the Lok Sabha and Rajya Sabha are at least publicly available.
Even this minimal transparency is denied to Indian citizens when the same bill is sent by the Cabinet to the President for 'promulgation' as an ordinance. The draft of the ordinance is not released in public domain till the President signs it and brings it into force. Unlike Parliamentary laws, there is no opportunity for public debate and discussion around a draft ordinance that has been approved by the Cabinet till it is imposed on the society. We saw this happen with the recent Banking Regulation (Amendment) Ordinance, 2017:
- There had been speculation in the media since March 2017 that the Government was planning to take steps to resolve the stressed assets problem in the banking sector.
Figure 1: Google searches on 'NPA Resolution'
The graph above plots data from Google Trends. It shows the interest over time in the words 'NPA Resolution'. The graph plots the number of web searches done between the weeks starting March 5, 2017 and May 14, 2017. From March 19 onward, there was a sharp increase in the number of searches that used the words 'NPA Resolution'. The interest subsided in the week starting April 23 and picked up significantly in the week starting April 30, the same week when the NPA ordinance was first announced and then publicly released. From March 2017 onward, there were also news in the media that the Government was planning to empower the Reserve Bank of India to deal with stressed asset problem (see here and here).
- On May 3, 2017 the Cabinet approved the Banking Regulation (Amendment) Ordinance, 2017. The media carried reports about the Cabinet approval but the text of the draft ordinance was not publicly available (see here and here). Around 7:49 pm on May 3, 2017, the Finance Minister mentioned in a media briefing that the Cabinet's recommendation has been sent to the President. He did not disclose any further detail on the ground that: There is a convention that when some proposal is referred to the President, then details of it cannot be disclosed till it is approved (sic).
- On May 4, 2017 the President signed the Ordinance. The text of the signed ordinance was still not publicly available.
- On May 5, 2017 the ordinance was released in public domain when it was uploaded onto the e-gazette at 12:38 PM.
In other words, even after the Cabinet approval on May 3, the text of the ordinance was withheld from the public till May 5. What was the impact of this secrecy convention? In this post we answer this question by examining the movement of the Nifty, the Bank Nifty and the PSU Bank Nifty indices before and after the public release of the ordinance.
Impact of the secrecy convention
Once the Cabinet provisionally agrees that an ordinance is needed, a bill is drafted. The draft bill is then sent to the President for promulgation as ordinance. As per the unwritten convention cited by the Finance Minister, the text of the ordinance is kept secret from the public till it gets uploaded on the egazette website. However, as seen during the promulgation of the Banking Regulation (Amendment) Ordinance, although the text was kept secret, selected information about the ordinance was released by the government to the media. There
was much speculation in the media about the details of the proposed ordinance.
The graphs above plot the three stock indices for the trading days around May 5. They run from the start of the trading day on May 2 to the close of trading on May 8. Trading was closed on the weekend of May 6 and May 7. The first two graphs from the top show the cumulated market model residuals of the Bank Nifty index and the PSU Bank Nifty index, respectively. The bottom-most graph shows the movement in the Nifty index around the event. The event identified in the graphs is the public release of the NPA ordinance at 12:38pm on May 5.
After the Finance Minister's press briefing on the evening of May 3, Nifty traded higher on May 4 than on the previous two trading days. Right after the ordinance was made public at 12:38pm on May 5, it fell till about 1:40pm before correcting marginally and ended the day lower than the previous two trading days.
A similar price movement is seen in the Bank Nifty index. The movement is much more pronounced in the PSU Bank Nifty index. Both the Bank Nifty and the PSU Bank Nifty indices went up between May 3 and May 5 (before 12:38 pm), the time period during which the secrecy convention was supposedly being followed. This suggests that the Finance Minister's media briefing on the evening of May 3 and the selective release of information was treated as positive news by the market. However the upward price movement came to a halt when the full text of the NPA ordinance was made public at 12:38pm on May 5 following which the prices fell sharply. The decline was more pronounced for the PSU banks.
It is worth noting that the prices had actually started falling a little before 12:38pm on May 5, particularly for the PSU banks. So it is possible that news of the text of the ordinance got leaked to the market even before the official release of the ordinance.
The graphs above show the volatility in the returns of the three indices around the release of the NPA ordinance. There was an increase in the volatility of both the Bank Nifty and the PSU Bank Nifty indices after the ordinance was made public on May 5. The volatility increase was much more prominent for the PSU banks.
Market's negative reaction
The negative reaction of the market following the public release of the ordinance reflects the mismatch between market expectations and the final text of the ordinance. Between May 3 and May 5 (before 12:38 pm), market expectations were fuelled in the absence of the full text of the proposed ordinance. The selective release of information by the government triggered expectations in the market that the proposed ordinance would offer a comprehensive solution to the stressed asset problem of the banking sector. However, once the text of the ordinance was made publicly available at 12:38 pm on May 5, it was not evident to the market how the ordinance would be able to tackle the NPA crisis. The ordinance gave rise to more questions than it answered (see here). Consequently, the market reacted negatively.
Secrecy has been an inherent trait in ordinance-making since the times of the British Raj. Post-independence, while giving ordinance making powers to the President, the Constitution framers did extensively deliberate on the potential misuses of such powers. But they never questioned the secrecy around ordinance making. Consequently, Article 123 of the Constitution empowers the President to promulgate ordinances but does not explicitly require transparency in the ordinance-making process. It is then hardly suprising that even the Supreme Court has over time accepted that open legislative debates and discussions do not apply to ordinances.
It is high time we question this secrecy. As we have seen above, the secrecy convention coupled with the discretionary release of partial information about the recent Banking Regulation (Amendment) Ordinance, 2017 led to information asymmetry in the stock market, causing market inefficiencies. To avoid such inefficiencies, the government should make the ordinance-making process transparent by discarding the age-old secrecy convention and officially releasing the proposed ordinance immediately after it is approved by the Cabinet. Complete transparency in ordinance-making will also be in sync with the broader philosophy of legislation-making in a modern liberal democracy.
Pratik Datta is a researcher at the National Institute of Public Finance and Policy, New Delhi and Rajeswari Sengupta is a researcher at the Indira Gandhi Institute of Development Research