Interesting Readings

What ails the economy? by Ajay Shah in the Business Standard, 6 February 2017.

A CEO's tale on demonetisation, by an Anonymous CEO, on Scroll, 5 February 2017.

Protecting the consumer by Dhirendra Swarup in the Business Standard, 4 February 2017. Also see.

How to Build an Autocracy by David Frum in The Atlantic, March, 2017.

Ila Patnaik on the budget in the Indian Express, 2 February 2017.

A conservative budget that comes up short by Ajay Shah in the Business Standard, 2 February 2017.

Dangerous Fruit: Mystery of Deadly Outbreaks in India Is Solved by Ellen Barry in The New York Times, January 31, 2017.

Tesla's Battery Revolution Just Reached Critical Mass by Tom Randall on Bloomberg, January 30, 2017. Also see.

Playing with Economic Matches by Ashoka Mody in Project Syndicate, January 30, 2017.

A great article on health economics by Shankkar Aiyar on BloombergQuint, 29 January 2017.

Reflections on the Art and Science of Policymaking , the C. D. Deshmukh memorial lecture by Vijay Kelkar at NCAER, January 27, 2017.

Rethinking the seniority convention by Arghya Sengupta in Mint, January 27, 2017.

FRBM report is out. This is why it matters to you by Monika Halan in Mint, January 25, 2017.

The future of photography is about computation by Glenn Fleishman in Fastcompany, January 24, 2017.

The right processes for a good budget by Pradeep S. Mehta in Mint, January 24, 2017.

How Do We Improve Delhi's Graded Responsibility Action Plan for Better Air Quality? by Sarath Guttikunda on The Wire, January 23, 2017.

Truth, Lies and the Trump Administration by Gideon Rachman in the Financial Times, January 23, 2017.

How social media is crippling democracy, and why we seem powerless to stop it by Jason Perlow on zdnet, January 19, 2017.

A Warning to Trump From Friedrich Hayek by Cass R. Sunstein on Bloomberg, January 17, 2017.

Science and Subjectivism in Audio on Douglas self, August 17, 2012.

Reserved Bank of India by Ila Patnaik in Indian Express, January 14, 2017.

The Problem in English by Simon Kuper in Financial Times, January 12, 2017.

Internet of Birds by Accenture Labs in collaboration with BNHS in Internetofbirds.

Distortions in the Indian land collateral market

by Bhargavi Zaveri.

In conventional finance theory, land is considered to be good collateral for three main reasons: it is easily traceable and cannot be siphoned off as easily as movables, it is easily re-usable, and unlike movables, it does not depreciate in value (at least in India). While the data on the size of the Indian land collateral market is not publicly available, the notion that land constitutes a significant proportion of the security against outstanding loans is generally accepted. However, the fragmented nature of the Indian land market has significantly increased the cost of enforcing land collateral in India (Krishnan and others (2016)).

In 2002, India enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), which amongst other things, allowed banks to re-possess and enforce their security without the intervention of the Court. SARFAESI was perceived to be a watershed moment in the history of secured creditors' rights in India.

In 2016, the Supreme Court delivered two important judgements in relation to land-collateral that have opposite outcomes for secured creditors under SARFAESI. One of these judgements holds that secured creditors' rights, under SARFAESI, over-ride State laws that restrict the transfer of land held by tribals to non-tribals. The other judgement holds that secured creditors' rights, under SARFAESI, do not over-ride State rent control laws that protect the rights of tenants. Effectively, this means that while banks can, under SARFAESI, sell tribal land governed by State laws without Court intervention, they cannot sell tenanted premises governed under State laws without Court intervention.

In this article, I argue that the inconsistent approach in these judgements (a) accentuates the prevailing uncertainty on secured creditors' rights in relation to land collateral in India; and (b) underscores the need to dispense with the fragmented legal regime governing the Indian land market since the 1960s and usher in the next generation of land reforms in India.

Secured creditors' rights do not over-ride State laws governing protected tenants

Rent control laws enacted by State legislatures confer certain protections on tenants of premises covered under such laws (hereafter, "protected tenancies" and "protected tenants"), such as capping rentals and restricting the grounds on which a protected tenancy can be terminated.

In January 2016, a case where the landlord of a protected tenancy had mortgaged the premises to a bank and had defaulted on the loan, reached the Supreme Court. In this case, the Supreme Court faced the question of whether the bank could, under SARFAESI, ask a protected tenant under the Maharashtra Rent Control Act, 1999 (Rent Control Act) to vacate the premises, which were mortgaged by the landlord to the secured creditor.

Ruling in favour of the protected tenants, the Court held that a secured creditor's rights under SARFAESI did not over-ride a protected tenant's rights under the Rent Control Act. A secured creditor could not enforce her security under SARFAESI without following the Court-driven process prescribed under the Rent Control Act. The Court reasoned that if the provisions of SARFAESI are allowed to over-ride the provisions of the rent control laws, it would render the entire scheme of all Rent Control Acts operating in the country as useless and nugatory. It observed that:

Tenants would be left wholly to the mercy of their landlords and in the fear that the landlord may use the tenanted premises as a security interest while taking a loan from a bank and subsequently default on it...Under no circumstances can this be permitted, more so in view of the statutory protections to the tenants under the Rent Control Act...

The judgement, thus, (a) was largely premised on the social policy underlying the Rent Control Act, that is, protection of protected tenants; and (b) made limited reference to the question of whether a Parliamentary law on the enforcement of a security over-rode the State law governing the rights of protected tenants.

Secured creditors' rights over-ride State laws governing occupants of tribal land

Several States have enacted laws that restrict tribals from transferring the land occupied by them to non-tribals.

In December 2016, another bench of the Supreme Court considered whether secured creditors' rights over-rode a State law that restricted the transfer of land occupied by tribals to non-tribals. Here, ruling in favour of secured creditors, the Apex Court held that secured creditors' rights over-rode the State laws which mandate that tribal land cannot be sold to non-tribals. To arrive at this conclusion, the Supreme Court relied on the constitutional doctrine of pith and substance, and held that since SARFAESI governed the entire field of secured creditors' rights in India, SARFAESI would prevail over the State laws governing land occupied by tribals. The principle underlying the judgement is re-produced below:

94. Although Parliament cannot legislate on any of the entries in the State List, it may do so incidentally while essentially legislating within the entries under the Union List. Conversely, the State Legislatures may encroach on the Union List, when such an encroachment is merely ancillary to an exercise of power intrinsically under the State List. The fact of encroachment does not affect the vires of the law even as regards the area of encroachment. ... This principle commonly known as the doctrine of pith and substance, does not amount to an extension of the legislative fields. Therefore, such incidental encroachment in either event does not deprive the State Legislature in the first case or Parliament in the second, of their exclusive powers under the entry so encroached upon. In the event the incidental encroachment conflicts with legislation actually enacted by the dominant power, the dominant legislation will prevail (emphasis supplied).

Thus, unlike the judgement of the Court in January 2016, this judgement (a) was largely based on questions of interpretation of Constitutional provisions governing the powers of the Union and State legislatures to make laws on field assigned to them; and (b) barely referred to the social policy underlying the restriction on transfer of tribal land.

Similar social policy, opposite judicial outcomes

The social policy underlying the laws which restrict (a) the grounds on which a protected tenant may be evicted from her premises, and (b) tribal land from being transferred to non-tribals, is similar: these laws were intended to protect a class of land occupants, who the State believed, need protection. In the judgement of December 2016, the Court referred to the judgement of January 2016 only in passing, and stated that the judgement of January 2016 "seemed" to support the principle of pith and substance that the Court was relying on. However, while the judgement of January 2016 takes the refuge of the underlying social policy to hold that secured creditors' rights do not over-ride the rights of protected tenants, the judgement of December 2016 ignores the social policy underlying the law, and instead relies on constitutional doctrine to conclude that SARFAESI occupies the entire field on secured creditors' rights.

State laws impose several similar restrictions on the transferability of land (examples). The abovementioned judgements leave open the question of whether secured creditors' rights under SARFAESI over-ride such restrictions generally. Since the cost of credit is intrinsically linked to the ease with which collateral can be liquidated, such uncertainty increases the cost of credit to the borrower. Ironically, landholders protected by State laws may end up borrowing at relatively higher rates owing to the protections conferred on them by State laws.

Next generation land reforms

Inconsistent judgements of this kind are only one adverse fall-out of the artificial restrictions created by law in the land market. In an earlier article on this blog, we had advocated dismantling the restrictions on transferability of land by demonstrating the working of the securities markets, where for listed entities, there are no regulatory barriers restricting the rights of security-holders to monetize their securities (by sale, pledge, etc.).

Most barriers on transfer of land are the product of reforms between the 1950s and 1970s, which were primarily motivated by concerns of social justice (eg. abolition of zamindari and security to the tiller of land) and central planning (eg. enhancing agricultural production). Artificial restrictions, created by law, on a land-holder to monetise her land when she needs it, are counter-productive to the beneficiaries of such reforms. Similarly, laws which require the permission of some authority for the owner to transfer her land, increase the bureaucratic overhang and indirectly tax transactions in land. For example, in the four States that have still not repealed the Urban Land Ceiling Act, 1976 (a law that imposes ceilings on the amount of vacant land that a person may hold in urban areas), stories of corruption by officers under the law are plentiful (example, example).

Conclusion: Political economy of land reforms

The popular discourse suggests that the States lack incentives to dismantle barriers to the transferability of land. However, the story of land reforms of the 1990s indicates otherwise. In 1976, 17 State Governments and three Union Territories adopted the Urban Land Ceiling Act, 1976 (ULCA), which imposed a ceiling on the amount of vacant land that people could hold in urban agglomerations. Nearly 20 years later, it was found that ULCA actually reduced the amount of land which became available for development in urban areas and vested excessive discretion in the State administration. In the late 1990s, the push towards urban development resulted in the Central Government nudging the States to repeal ULCA.A similar push is now required to dismantle other like restrictions which continue to distort the land market in India.

References

K.P. Krishnan, Venkatesh Panchapagesan and Madalasa Venkataraman, Distortions in Land Markets and Their Implications to Credit Generation in India, IGIDR Working Paper WP-2016-005, January 2016.

Bhargavi Zaveri is a researcher at the Indira Gandhi Institute of Development Research, Mumbai.

Are States Really at the Centre? Myth and Reality

By M. Govinda Rao.

Ever since the Fourteenth Finance Commission (FFC) recommended the tax devolution of 42% of the divisible pool to the States, many have held it responsible to the fiscal woes of the Union government. It is not surprising when the Finance Minister complains about it for all his fiscal difficulties, as he has to find a scapegoat. However, when a respectable senior editor such as Mr. Ninan, in his widely read editorial ruminates about "...the overly generous recommendations of the Finance Commission" resulting in the "... Central transfers to State governments ballooning by an astonishing 60 per cent in 2014-15" resulting in the total revenues in that year growing by 32%, we need to look at the matter more seriously.

Is the FFC really the demon responsible for the Centre's fiscal woes, or is it a fall guy? Incidentally, the FFC's recommendations came into effect in 2015-16 and not in 2014-15, and there must be something missing in Ninan's story of transfers to States ballooning by 60% in 2014-15 that needs unravelling. But, before that, it is important to understand how generous the FFC's "bonanza" really was. Indeed, 42% tax devolution, as compared to the 32% recommended by the previous Commission, looks a quantum jump. But, as the Terms of Reference of the FFC required it to consider total revenue expenditure requirements of the states without making a distinction between plan and non-plan, the Commission had to subsume the grants for State plan schemes (Gadgil formula grants) in its recommendations. This was equivalent to 5.5% of the divisible pool.

In addition, as the Commission included the area under forest cover as one of the factors to determine the share of individual States in tax devolution, and also decided that it will not give any grants other than those to achieve the States' budgetary balance, local governments and disaster relief. The amount saved on those discretionary grants was equivalent to 1.5% of the divisible pool. Thus, the increase actually is from 39% to 42%! How did it translate in terms of actual numbers? The accompanying table and the graph give the real picture of the volume of Union transfers to States.

Central Transfers to States
	% of GDP			% of Central Tax Revenues (Gross)
Years	Tax Devolution	Grants	Total Transfers	Tax Devolution	Grants	Total Transfers
2011-12	2.89	3.43	6.32	28.70	34.09	62.80
2012-13	2.91	2.99	5.90	28.10	28.90	57.00
2013-14	2.78	2.46	5.24	27.95	24.67	52.62
2014-15	2.71	2.74	5.45	27.13	27.40	54.53
2015-16 RE	3.73	2.31	6.04	34.68	21.51	56.19
2016-17 BE	3.79	2.32	6.11	35.00	21.46	56.46

In terms of % of GDP, tax devolution increased by one point in 2015-16 due to FFC's recommendation, but grants declined by 0.4 of a percentage point. Similarly, the share of tax devolution in Union taxes increased by 7.5 percentage points in 2015-16 over the previous year, but the increase in total transfers was just 2 percentage points! In fact, if one looks at a slightly longer time series, despite the Finance Commission's "bonanza", the total transfers relative to GDP actually declined from 6.3% in 2011-12 to 6% in 2015-16. The decline in the grants was due to the inclusion of plan grants in FFC's recommendations and partly due to the restructuring of the Centrally Sponsored Schemes.

Central Transfers to States (% of GDP)

As mentioned earlier, FFC's recommendations came to effect in 2015-16 and the sharp increase in the transfers noticed in 2014-15 was actually not an increase, but an accounting change. It may be recalled that until 2013-14, grants to various Central schemes were given directly to the implementing agencies, bypassing the States. This practice was reversed in 2014-15 and the increase was due to change in budgetary practice and nothing else. Why did FFC decide to give slightly higher tax devolution, albeit marginal of about 3% of the divisible pool? FFC's analysis showed that between 2002-05 and 2005-11, Union government's revenue expenditures on State subjects increased from 14% to 20%, and on Concurrent subjects the increase was from 13% to 17% (see para 6.17 of the report). Thus, the Union government never found the lack of fiscal space a constraint in foraying into spending on various activities in the State List, quite a few of them in the nature of transfer payments. The arguments by the States was that why should the Finance Commission leave so much fiscal space for the Union government to intrude into their area though various Centrally Sponsored Schemes? While some of the Central Schemes are meritorious and it is therefore important to ensure minimum standards of services in respect of them across the country, FFC decided to provide greater flexibility to the States to spend on the subjects under their jurisdiction. The fact of the matter is, in the prevailing situation, it is not the Finance Commission, but the Union government that determines the total volume of transfers to the States, and blaming it for Centre's fiscal woes is like looking for a fall guy. The Finance Commission can only determine the volume of untied transfers, and that is what FFC did. The Finance Commission cannot be held responsible if the Union government did not pass on the benefits of lower oil prices but decided to levy cesses and surcharges on petroleum products to use the funds to initiate more schemes and expand on the existing ones.

The author is an Emeritus Professor, NIPFP and Chief Economic Adviser, Brickwork Ratings. He was a Member of the Fourteenth Finance Commission. The views are personal.

Establishing the Financial Redress Agency

by Dhirendra Swarup.

The Ministry of Finance has recently invited comments on the report of the Task Force to establish the Financial Redress Agency (FRA). The FRA is planned as a one stop forum for speedy and convenient settlement to complaints of retail financial consumers. In this article, I tell some of the back story, highlight the shortcomings of the current regime, and present the design principles of the FRA.

The issue

Consumer protection involves prevention and cure. Prevention requires laws that set financial regulators on the objective of obtaining fairplay by financial firms. Cure requires effective complaint handling mechanisms. The current financial regulatory regime is lacking on both counts.

Gaps in prevention have resulted in unfair sales practices (e.g. see problems in bank led distribution) and poor product design (see problems in insurance). Such gaps have contributed to numerous crises involving abuse of consumers in recent years.

For the cure, we have consumer courts and ad-hoc arrangements by regulators. The consumer courts are over-burdened. They lack human and other resources to deal with financial products. Their interface with financial firms and financial regulators is inadequate. The arrangements put in place by regulators consist of multiple forums. These are SEBI, RBI, the banking ombudsman, the insurance ombudsman, IRDAI, and PFRDA. Consumers need to figure out which is the right one, depending on the situation they are placed in. For some products, like chit funds, one needs to approach the relevant forum in the concerned State. This framework has many weaknesses:-

Consumers are given the runaround. There are many locations in India through which the existing redress forums operate: 16 locations for the banking ombudsman, 17 for the insurance ombudsman and one by PFRDA. SEBI and PFRDA primarily rely on online systems. The consumers are burdened with identifying the right channel and bearing the travel and other related costs.

Lack of uniformity. Consumers and financial service providers (FSPs) have to deal with variations in approach, processes, capacity, service levels and powers across these forums. SEBI runs a facilitation system and is not empowered to award compensation. Therefore, it cannot do much if FSPs deny wrongdoing. PFRDA's system is quite similar to SEBI's. However, last month it appointed a part time ombudsman who can award compensation. The banking and insurance ombudsmen do award compensation. However, the approaches vary significantly. The banking ombudsman awarded compensation in 18 cases in 2015-16, out of over one lakh complaints. In contrast, the insurance ombudsman awarded compensation in nearly 25 percent of the 30,000 cases.

In addition to variations in the redress systems, there is a lack of uniformity in legal frameworks and supervisory capacity of regulators. This leads to regulatory arbitrage. FSPs try to push expensive and opaque products where they spot regulatory gaps or sub-optimal redress mechanisms.

Lack of specialisation. Cross functional teams are required for effective redress in forums like ombudsmen, which aim to resolve matters mainly though mediation. These teams bring together skill and experience in mediation and adjudication, domain expertise, industry experience and appreciation of consumer protection issues across consumer markets. The current system does not offer such possibilities.

Gaps in sectoral redress. Financial markets are converging. As a result, most intermediaries sell a variety of products. For example, banks are also the leading mutual fund and insurance distributors. An unhappy consumer may struggle to identify the party at fault and the relevant redress forum. Problems of this nature have been highlighted in the past. An IRDAI committee on bancassurance had emphasised making banks accountable to the banking ombudsman for insurance policy servicing complaints.

Conflicts between regulators handling individual complaints. Conflicts may arise if a regulator has an ability to deny or delay admitting to systemic problems. A redress forum dependent on the regulator would suffer from this flaw. A weak formal feedback loop between redress and regulatory functions leaves the system vulnerable. For example, the mis-selling in ULIP products may have flourished for an extended period owing to this. Moreover, levying fines on FSPs and awarding compensation to consumers is populist, but can mask prolonged existence of deeper failures of regulation. For instance, FSPs may be under pressure to comply even when they believe they are not in the wrong. This can be due to the fear of regulatory retaliation in some manner, in a non rule of law environment.

When uninformed consumers are asked to navigate this landscape, they are often hesitant and likely to avoid the formal financial system. This will give a sustained bias in the portfolio allocations of households, which is bad for the economy.

The shortcomings in the current consumer protection regime should no longer be ignored. The push for financial inclusion has gained significant momentum. First time consumers account for 260 million bank accounts, 130 million insurance policies and 8 million pension accounts. The push towards cashless payments has similarly brought millions of new consumers to financial payment providers. These new consumers have limited resources, low literacy and even lower financial literacy. There is an urgent need to build the financial regulatory machinery that will protect consumers better.

The journey to consumer protection in Indian finance

In 2009, the Raghuram Rajan committee on financial sector reforms highlighted the regulatory gaps, overlaps, inconsistencies and regulatory arbitrage in the financial sector due to the many laws and agencies. It recommended that regulators work through a collective process to protect consumers and raise financial literacy levels.

In the same year, the Committee on investor awareness and protection, led by me, documented the widespread mis-selling that retail consumers face. It built a case for common minimum regulatory standards for retail financial advisers.

In 2011, the Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B. N. Srikrishna, began its work to review the laws governing financial sector. It cemented the understanding that consumer protection was the essence of why we do financial regulation. In 2013, it conceptualised a framework for consumer protection and the FRA. The accompanying draft Indian Financial Code, a model financial sector draft law, placed consumer protection at the centre of financial law.

In 2015, the finance minister, in his budget speech, announced the setting up of a Task Force to establish a sector-neutral financial redress agency. Later that year, the Sumit Bose committee to recommend measures for curbing mis-selling further strengthened the case for a unified FRA. It identified regulatory arbitrage; mis-aligned distribution incentives; poor product design; and disclosure norms as key reasons for mis-selling. In 2016, the Task Force submitted its report to the finance minister. This report has now been released for public comment by the Ministry of Finance.

Foundations of consumer protection

The Task Force, chaired by me, has recommended that a financial consumer protection and redress law be enacted. This should provide for the following basic protections to be uniformly implemented across the entire Indian financial system:

1. FSPs must act with professional diligence;
   
2. Protection against unfair terms;
   
3. Protection against unfair conduct;
   
4. Protection of personal information;
   
5. Requirement of fair disclosure; and
   
6. Redress of complaints by FSPs.
   

Enacting this law would reduce the extent to which consumers seek redress. On the FRA, the blueprint focuses on four attributes:-

Easy access. Consumers of all financial products would go the unified FRA. They would not need to know which regulator is involved. Consumers would be able to access FRA in a user friendly manner in multiple languages through letters; telephone; missed call service; email; mobile apps; text messages; and video. In addition, local facilitation centres would be available to handhold consumers. Consumers would receive regular status updates on their complaint.

Timely redress. FRA's processes, quality and capacity of teams, use of technology, quality of regulations and regulatory supervision: all these would be optimised to deliver timely redress. There would be a fast-track mechanism for simple complaints.

In each case, FRA would first ask the financial firm to offer a solution. Then, the FRA would form a preliminary view and discuss this with the consumer. The complaint would be resolved if a consumer is satisfied at this stage, or through mediation on conference calls. If mediation does not work, FRA would make a decision through adjudication based on facts. It would avoid court like processes.

Regulatory feedback loop. FRA would be independent of regulators, and have no incentive to cover up problems. It would create valuable databases about complaints, and give feedback to regulators to help improve regulations and supervision.

Accountability. FRA's accountability would be ensured through disclosure requirements and performance reviews. The FRA Board would be appointed by the regulators. It would have an Independent Assessment Office to consider complaints against its standard of service. In addition, orders by FRA would be appealable at the Securities Appellate Tribunal.

Building State capacity in FRA

In Indian public policy, there are many good policy proposals, but the implementation capacity is often weak. It is difficult to construct State capacity in the various agencies of the government. The report has worked out the detailed project planning for the construction of FRA.

The Ministry of Finance has setup many new financial agencies in the past. These include SEBI, IRDAI, PFRDA, SAT, FIU, etc. In my knowledge, most of these projects had suffered from lack of adequate preparatory work with consequential delay in implementation. The project planning for FRA has avoided these pitfalls and provides a comprehensive blueprint for establishing this agency.

Consumer protection is the reason why we do financial regulation. The existing financial regulatory system requires major reforms in order to reorient it towards the objective of consumer protection. This will be a long journey. Implementing the FRA Task Force report would be an important step in that journey.

The author was formerly Secretary (Expenditure & Budget), Ministry of Finance; Chairman, PFRDA; Member-Convener, Financial Sector Legislative Reforms Commission and Chairman, Public Debt Management Agency.

How would demonetisation have shaped up under an improved RBI board?

by Bhargavi Zaveri.

Demonetisation has brought fresh attention to three aspects of RBI's board: autonomy, accountability and transparency. Patnaik and Roy (2017) demonstrate how the RBI Act lags behind sound international practices on these three counts.

The main financial reforms process in India has been the gradual enactment of the draft Indian Financial Code (IFC) drafted by Justice Srikrishna's Financial Sector Legislative Reforms Commission (FSLRC). In this article, we refer to version 1.1 of the IFC.

FSLRC strongly emphasised resolving deeper public administration problems that have bedeviled State capacity in India. One would assume that IFC solves many flaws in the functioning of the RBI's board which have been revealed in the demonetisation episode. However, both the FSLRC report and IFC have been previously criticised for undermining RBI's autonomy. After the demonetisation event, the IFC has been criticised for recommending a smaller RBI board.

In this article, using information available in public domain, we try to piece together what transpired at the RBI board when the decision to demonetise 86% of the currency in circulation was taken. We compare the RBI Act against the IFC. We play a `war game' of thinking through the demonetisation drama under the IFC, and examine the extent to which IFC might have produced a stronger and more capable RBI. This war gaming sheds new light on how to create State capacity in India.

What was the role of the RBI Central Board in the demonetisation decision?

The notification demonetising the currency notes of Rs. 500 and Rs. 1000 was issued pursuant to the recommendation of the RBI Central Board (hereafter, RBI Board). The RBI refused to disclose the minutes of the meeting where the RBI board decided to recommend the demonetisation decision to the Central Government. However, a response given by RBI to a RTI query reveals the following:

1. The recommendation was made in a meeting of the RBI Board held on 8^th November, 2016.
2. When the meeting was held, some of the seats on the board were vacant and some of the members did not attend. Table 1 gives an overview of the RBI board composition and attendance at the meeting held on 8^th November, 2016:

   Table 1: Board composition and attendance at the meeting held on 8th November, 2016
   	Sanctioned	Appointed	Number of members who attended the meeting	Number of votes allowed to be cast at the meeting
   Governor	1	1	1	1 (plus a casting vote in case of equal votes)
   Deputy Governors	4	3	2	0
   Directors of local RBI Board	4	1	1	1
   Independent Directors*	10	3	2	2
   Nominees of the Central Government	2	2	2	0
   Total	21	10	8	4 (plus Governor's casting vote)

   *Independent directors are employees of neither the Central Government nor the RBI.

   Under the RBI Act, only the Governor, the members of local RBI boards and independent directors are allowed to vote at meetings (Section 8(3), RBI Act). Table 1 indicates that out of the maximum sanctioned strength of 21, 11 seats were vacant on November 8, 2017. Out of the 10 appointed members, 8 members attended the meetings, and only 4 of them could vote. Amongst the voting members, 2 were independent members. There has been no public disclosure about voting by the members present on 8^th November, 2016.

Composition of the RBI Board: RBI Act vs. IFC

RBI has a (a) central board comprising of Governors and Deputy Governors and (b) four regional boards. One member, to be nominated by the Central Government, from each of the regional RBI boards is a member of the RBI Central Board. The discourse faults FSLRC for having abolished the regional RBI boards, and downsizing the RBI Central Board. Table 2 compares the provisions of the RBI Act and IFC on board composition.

Table 2: Comparing Board constitution
Feature	Under the RBI Act	Under IFC
What is the size of the RBI Board?	Minimum 17, Maximum 21 (Section 8, RBI Act)	Minimum 6, Maximum 12 (Section 10, IFC)
How many full-time members does the RBI Board have?	Minimum 1, maximum 5, that is, Governor and a maximum of 4 Deputy Governors (Section 8, RBI Act)	Not more than half the size of the current board (Section 10, IFC)
How many directors of local RBI boards are members of the RBI Board?	4 (Section 8, RBI Act)	NA
How many nominees of the Central Government, does the RBI Board have?	2 (Section 8, RBI Act)	Minimum 1, maximum 2 (Section 10, IFC)
How many independent members does the RBI Board have?	10 (Section 8, RBI Act)	The balance remaining after filling the seats (Section 9, IFC)

Table 2 shows that under IFC, regulatory power and accountability are centralised in the RBI Board, as opposed to dividing it between a central board and local boards. Thus, there is one board that is empowered to carry out all the actions of RBI and accountable for the entire financial agency. Also, while the overall board strength has been reduced, IFC imposes a cap on the number of members who are not independent directors. Assuming the full strength of the board, today's RBI Board has more "independent members" as compared to the FSLRC recommendations. There are three takeaways from this:

1. Popular discourse has faulted the IFC for making the RBI Board vulnerable to Central Government's influence. Table 2 shows that on the contrary, the provisions governing board composition in IFC have tilted the board strength towards members of the board who are RBI employees.
2. Despite a large sanctioned strength and being overloaded with independent directors, the RBI board is now being accused of having not exercised sufficient independent discretion at the meeting held on 8^th November, 2016. Thus, the sheer board size did not have the intended outcomes.
3. Modern thinking on the size of committees and boards suggests that a size range of 17 to 21 is excessive. It is likely to create a greater free rider problem and inferior discussions.

Consequences of not filling up vacancies on the board: RBI Act vs. IFC

The obligation to fill up vacancies on regulatory boards is crucial. The board-size becomes moot if the seats of independent directors are vacant. At the time the decision was taken by the RBI Board, only 3 out of the 10 independent members were appointed. Table 3 compares the provisions of the RBI Act and IFC on the consequences of not filling up vacancies on regulatory boards.

Table 3: Vacancies on the RBI board
Feature	Under the RBI Act	Under IFC
Time-limit for filling vacancies on the RBI board	None	Vacancy must be filled within (a) 15 days from the date on which the vacancy arose, where the board-size falls below 6; and (b) 180 days from the date on which the vacancy arose, in all other cases. (Section 25, IFC)
Consequence of the Central Government not appointing independent directors on the board of RBI	None	Central Government to prepare a report within 90 days from the expiry of the timelimit, stating the reasons for the failure; and lay it before Parliament in an ongoing session or where the Parliament is not in session, in the immediately next session. (Section 25, IFC)

Meetings of the RBI board: RBI Act vs. IFC

Decision-making by members of a board is inherently connected with the way meetings are convened and conducted. Table 4 gives a comparative overview of the provisions in the RBI Act and IFC governing the conduct of meetings of the RBI Board.

Table 4: Convening and conduct of meetings of RBI board
Feature	Under the RBI Act	Under IFC
Notice for convening board meetings	1 month (Regulation 8, RBI General Regulations, 1949)	7 days. (Schedule 2, IFC)
Can a meeting be convened at shorter notice?	Yes, with sufficient notice to be given to every Director who is in India to enable him to attend (Regulation 8, RBI General Regulations, 1949)	Meetings may be convened in special circumstances with shorter notice, provided the special circumstances are recorded in writing at the meeting. (Schedule 2, IFC)
Can members request the Governor for a meeting to be convened?	Yes, 4 members may request a meeting to be convened (Section 13, RBI Act)	Yes, 2 members may a request a meeting to be convened (Schedule 2, IFC)
What if the Governor does not convene a meeting at the request of the members?	No implication (Section 13, RBI Act)	Members may convene the meeting without the Governor. (Schedule 2, IFC)
Can quorum be constituted without independent members?	Yes (Regulation 8, RBI General Regulations)	Yes (Schedule 2, IFC)
Who is entitled to vote at meetings?	Only the Governor, the directors of local boards and the independent members. (Section 8, RBI Act)	All members are entitled to vote at meetings of the RBI board. (Section 26, IFC)
Can members attend meetings through technological means?	Yes (Regulation 10A, RBI General Regulations)	Subject to physical attendance at atleast one meeting a year, yes (Schedule 2, IFC)

There are four main takeaways from Table 4:

1. First, both IFC and the RBI Act are lacking in the details to be furnished to members of regulatory boards before the meeting is convened or at the time the meeting is held. Unlike commonly accepted secretarial standards which require an agenda and notes on each proposal tabled at a meeting of corporate boards, the laws governing regulators do not elaborate these requirements. Presumably, this has been left to the regulator's bye-laws which governs the internal affairs of regulators.
2. Second, again, contrary to popular perception, IFC vests more voting power in the full-time members of the RBI board, as compared to the RBI Act. It puts all board members at par with each other, in so far as their voting rights are concerned.
3. Third, while IFC requires a shorter notice to be given for meetings, as compared to the RBI Act, it has more robust processes for convening meetings at notice shorter than that required under law, including recording reasons for such shorter notice.
4. Under both the RBI Act and IFC, the quorum can be constituted without independent members. This is problematic and needs further deliberation.

Relationship between the RBI and the Central Government: RBI Act vs. IFC

The way the relationship between the Central Government and the RBI is codified in the law, can hamper or increase the independence of regulators. Table 5 gives a comparative overview of this relationship, as codified in the RBI Act and IFC.

Table 5: Relationship between the Central Government and the RBI Board
Feature	Under the RBI Act	Under IFC
Can the Central Government give directions to the RBI board?	Yes (Section 7, RBI Act)	No.
Can the Central Government supersede the RBI Board?	Yes (Section 30, RBI Act)	No
Can the Central Government remove any member of the RBI Board?	Yes (Section 11, RBI Act)	Yes, on the limited grounds specified in the law (Section 22, RBI Act)
What is the process for removal of a member of the RBI Board?	The law does not specify any process.	The process involves a hearing before an inquiry committee comprising judges of the Supreme Court and a High Court and experts in the field of finance (Section 23, IFC)

Table 5 indicates that the IFC has provided for an arms' length relationship between the Central Government and the RBI. While the RBI Act gives considerable powers to the Central Government to supersede the board and issue directions to members of the RBI Board, such powers are absent from IFC. To be clear, it is nobody's case that the Central Government had used its direction-making powers under the RBI Act in connection with the demonetisation decision. However, being de jure indicators of independence, they are necessary though not sufficient conditions for ensuring independence.

Internal and external accountability mechanisms: RBI Act vs. IFC

Accountability can be ex-ante or ex-post. Ex-ante mechanisms comprise of processes which must precede the performance of any function. IFC requires all quasi-legislative instruments to be issued through a robust regulation-making process comprising a cost-benefit analysis and a public consultation process. It requires the RBI Board to review regulations made after every three years. These measures are absent from in the RBI Act.

As regards executive and quasi-judicial functions, IFC provides for a time-bound licensing process, specific grounds for rejection of licenses, an administative law wing that is independent of the other departments of the RBI, for taking enforcement actions, and appeals against executive orders of RBI. These are ex-ante mechanisms to ensure that each function is discharged as per process and rule of law.

However, the power to "recommend" demonetisation is neither a quasi-legislative power nor an executive or quasi-judicial power. Hence, these ex-ante mechanisms built in IFC may arguably have not been applicable to the proposal.

Ex-post accountability mechanisms generally perfrom the function of auditing performance and conduct. Table 6 gives a comparative overview of other accountability mechanisms that would have been applicable in the exercise of a recommendatory power.

Table 6: Internal accountability mechanisms
Feature	Under the RBI Act	Under IFC
Is the RBI board bound to have its own performance audited?	No.	Yes, by an internal audit committee comprising of atleast two independent members.(Section 39, IFC)
What does the internal audit include?	NA	(a) Whether the RBI is functioning in accordance with applicable laws, (b) Whether the bye-laws governing internal processes of the RBI promote transparency and best governance practices, (c) Whether the RBI is complying with the decisions of the RBI Board, and (d) Whether the RBI is managing the risks to its functioning in a reasonable manner.
Is the RBI Board bound to set parameters for measuring its own performance at regular intervals?	No.	Yes (Section 42, IFC)
Are the results of the audit, paramaters for measuring performance and their results, published?	NA	Yes, alongwith the annual report of the RBI (Section 43, IFC)
External accountability mechanisms
Are the financial statements of RBI audited by an external auditor?	Yes, by auditors appointed by the Central Government (Section 50, RBI Act)	Yes (Section 44, IFC)
Is the performance and efficiency of the RBI reviewed by an external team?	No	Yes, the performance and efficiency of RBI is reviewed by a team of external experts every three years (Section 45, IFC)

Tables 6 shows that the RBI Act does not compel RBI to maintain any internal accountability or other mechanisms to review its own efficiency and performance. More importantly, the law does not mandate RBI to set goals or parameters against which its performance can be measured. IFC has, on the other hand, built in internal review and performance-setting obligations against which the regulator as well as external observers can measure its performance.

Transparency of proceedings of the RBI board: RBI Act vs. IFC

Finally, ex-post accountability is greatly strengthened by transparency requirements. Table 7 gives a comparative overview of the transparency requirements imposed on the RBI, under the RBI Act and the IFC

Table 7: Transparency of meetings of the RBI board
Feature	Under the RBI Act	Under IFC
Is the agenda for a meeting of the RBI board to be published?	No.	Yes, within 3 weeks of the meeting (Schedule 2, IFC)
Are the minutes of meetings of the RBI Board required to be published?	No. Regulation 8 of the RBI General Regulations, 1949 requires the proceedings of meetings of the RBI board to be circulated to the board members.	Yes, within 3 weeks of the meeting (Schedule 2, IFC)
Are the votes casted by the members of the RBI Board at a meeting to be published?	No	Yes (Schedule 2, IFC)
Is there flexibility for redacting parts of the minutes of meetings before publishing them?	NA	Yes, on grounds listed in the law (such as where such publication can significantly frustrate the implementation of an action proposed by the RBI board)
Is there a process for deciding which portions of the minutes ought not to be published?	NA	Yes, reasons for not publishing must be recorded at the meeting, voted upon by a majority of the members of the Board and the vote of each member on the proposal to redact or not publish, must be published.
Do redacted portions of minutes ever get published?	NA	Yes, within six months, or as soon as the reasons for their delay cease to be applicable, whichever is later.

The main takeaways from Table 7 are that while one has to rely on the RTI Act to obtain a copy of the minutes of the board meetings of RBI. Application under RTI involves a monetary and non-monetary cost, and such attempts could fail. IFC mandates publication of the minutes, on an automatic basis, including in particular votes casted by members.

War-gaming demonetisation under the IFC

The comparative overview given above should help visualise how the recommendation to demonetise currency might have unfolded under the FSLRC framework. We attempt to do this through a prism of questions and answers.

Table 8: Visualising the role of RBI in the demonetisation decision under the FSLRC framework
Question	Under the RBI Act	Under IFC
Is the recommendation of the RBI Board required for the Central Government to issue a notification demonetising currency?	Yes	Yes
Is the RBI bound to honor the promise on the currency that has been demonetised?	RBI Act is silent	Yes (Section 278, IFC)
Could the quorum for the meeting where the demonetisation proposal is taken up, be constituted without the presence of independent members?	Yes	Yes
How many seats were vacant when the decision to recommend demonetisation was taken by the RBI Board?	11	NA
Was there a time-limit for filling up the vacant positions of independent directors on the RBI Board?	No	Yes (See Feature 1 of Table 3)
Does the law obligate the Central Government to report reasons for not filling up casual vacancies?	No	Yes (See Feature 2 of Table 3)
Is the RBI bound to publish the manner in which the members who attended the meeting, voted?	No	Yes (See Table 7)
Is the RBI bound to publish the agenda and minutes of the meeting?	No	Yes (See Table 7)
Will there be an internal audit of whether the RBI breached any law in making the recommendation to the Central Government?	No	Yes (See Table 6)
Will there be an external audit of the performance and efficiency of RBI in replacing the currency notes?	No	Yes (See Table 6)
If the RBI board did not recommend the demonetisation, could the Central Government have compelled it to do so?	Yes, by exercise of its powers to issue directions, supersede the board or removal of members.	No, as it does not have the power to issue directions or supersede the board.(See Table 5)

Conclusion

Post demonetisation, the discourse on RBI board governance has focused on either the independence of RBI or the conduct of former Governors or the present Governor. This is problematic, as it misses the woods for the trees. The demonetisation event has shown us that neither sheer board strength nor a brute majority of independent directors, can ensure regulatory independence.

Independence, accountability and transparency are intrinsically linked. The fact that the conduct of board members at meetings, together with details of who voted in what manner, will be published, incentivises people to vote responsibly. Hence, any argument for autonomy is rather incomplete unless it simultaneously asks for transparency and accountability.

A good fallout of the demonetisation event is that it has re-invigorated debates on regulatory governance and its importance on outcomes that we generally underplay India. We must not waste this opportunity and the lessons learnt to continue our reform agenda on regulatory governance.

References

Ila Patnaik and Shubho Roy, The RBI board: Comparison against international benchmarks, Ajay Shah's blog, January 24, 2017.

Bhargavi Zaveri is a researcher at the Indira Gandhi Institute of Development Research, Mumbai.

The RBI board: Comparison against international benchmarks

by Ila Patnaik and Shubho Roy.

Transparency and governance in central banks

There is renewed debate about the working of the RBI board, after the demonetisation decision. In a recent article in the Indian Express, we linked the observed outcomes to the faulty institution that is the RBI board. The Public Accounts Committee (PAC) of Parliament has questioned the Governor about the role of the board. At a conceptual level, Parliament, controls the functioning of the executive and other statutory bodies through two steps:

1. Making laws that govern the executive or statutory bodies (such as RBI, SEBI, etc.); and
   
2. Reviewing, through the committee system, whether such bodies are acting in accordance with the law.
   

An institution, as an inanimate object, does not have a human personality; it cannot reflect on its actions and change its behaviour. Rather, an institution's DNA is the law that governs it. When this institution functions in an unexpected way, one must look at the legal structures governing it.

For example, in 2013, a series of unexpected corporate scams starting with Satyam rocked India. These created fresh urgency for Parliament to amend the Companies Act (1956) to address the issue. We did not stop at discussing whether Mr. Raju was a good person or a bad person; we went deeper and changed the Companies Act in ways that make such a crisis less likely.

RBI's Central Board controls the functioning of the body corporate, i.e. RBI itself. Hence, the sound functioning of RBI requires sound functioning of its board. The RBI Act (1934) determines the working of RBI's Central Board. Hence, we need to examine the RBI Act, and ask whether it features sound provisions for the working of the board.

In this article, we document how, when compared with similar laws in other jurisdictions, the RBI Act has many gaps in terms of transparency and accountability. Regulations are made by the Board to govern itself, which violates basic requirements of hygiene. The flaws in the RBI Act help us understand how the demonetisation event happened, and show the direction for reform.

Board transparency

RBI does not publish either the agenda or the minutes of any Central Board meeting. All that comes out is a press release. For a contrast, consider the Bank of England (BoE), which is grounded in the same legal tradition as India. It releases the minutes of every board meeting, 6 weeks after the meeting. This flows from the Financial Services Act of 2012 . These minutes go back historically, with minutes available for as far back as 1694. By this yardstick, RBI in 2017 lags the Bank of England of 1694.

Similarly in the U.S., the Federal Reserve Board (FRB) and numerous government entities are governed by a transparency law that is aptly called the Government in the Sunshine Act. This act lays down transparency and accountability measures that government regulatory bodies must comply with, covering both the way meetings of a regulator are conducted and how the regulator makes regulations. Board meetings are divided into two types of meetings, open meetings and closed meetings. For open meetings, subsection (a)(2) of the law mandates:

"every portion of every meeting of an agency shall be open to public observation."

Under this law, prior notice stating the meeting agenda must be given for every open meeting (Example). Accurate minutes or transcripts are published after each open and closed meeting (Example), and a live video is provided for open meetings. If board members knew that the nation was watching each word that they uttered, each would be more responsible.

To maintain confidentiality when required (such as in relation to commercially sensitive matters or pending investigations), some meetings are closed to the public. This provision can be easily abused to achieve opacity. Hence, the Government in the Sunshine Act explicitly specifies the following four procedural requirements before a meeting can be deemed secret:

1. Ten clear criteria are provided under which a meeting may be closed. An item has to fall within this exhaustive list to justify closing a meeting. Public choice theory teaches us that the Agent, i.e. the agency, is biased in favour of opacity. Hence, this list of permitted exclusions should be controlled by the Principal, i.e. Parliament. The contents of this list cannot be modified either by the executive or the agency. As an example, the grounds for exemption under India's Right to Information Act are written into the law and cannot be modified by the executive (e.g. Ministry of Finance) or an agency (e.g. RBI).
   
2. Public notice: Even when a meeting is closed, the agency must issue a public notice containg a suitably abridged agenda, and stating that it proposes to hold a secret meeting.
   
3. Transcripts and minutes: The agency must maintain transcripts and minutes of closed meetings. Any agenda item discussed that does not meet the criteria closing the meeting is made available to the public. The rest of the proceedings are kept in order to be released once the reasons for confidentiality cease to exist.
   
4. For parts of a meeting to be closed and minutes withheld, the majority of the entire membership of the agency (not just those present and voting) must vote in favour of each agenda item or portion of the meeting to be closed.
   

The working of RBI, which is coded in the RBI Act, 1934, is inconsistent with contemporary thinking in Indian public administration. As an example, six years ago, the Chief Information Commissioner ordered RBI to disclose minutes of the board meeting. Oddly, this instruction appears to have been ignored.

Quality of minutes

The purpose of maintaining public records of meeting discussions is to demonstrate that the persons appointed to positions of responsibility and power are discharging their duties with care and diligence. The most recent press release only records attendance, and provides a two line summary which reads:

The Board reviewed the current economic situation, global and domestic challenges and other specific areas of operations of the Reserve Bank of India.

Let us compare this against the equivalent institution, the Court of Directors of the Bank of England. They publish detailed minutes of each meeting. These minutes record attendance and, excluding confidential elements, report in detail the views of each member on various issues such as risk profile; supervision functioning; monetary policy report; financial stability report, etc.

Similarly, while minutes of a single meeting of the New York Federal Reserve Board are around 6000 words, and those of the BoE Court of Directors are around 2100 words, RBI's press release is 142 words long. This either shows that the Central Board does not deliberate, or that the deliberations are not being released.

Board Committees

Most Central Banks have created committees based on modern principles of governance. For example the Bank of England has the following committees written into the general regulations of the Bank of England:

1. Audit and Risk
   
2. Nominations Committee for promotions within the Bank
   
3. Remuneration Committee for fixing pay
   
4. Transaction Committee for large value transactions which are not in the ordinary course of business
   
5. Sealing Committee to governing the affixing of official seal on Bank documents
   

These are in addition to committees mandated by law, such as the Monetary Policy Committee and the Financial Stability Committee. Similarly, the Federal Reserve Board, has created sub-committees to conduct specific functions:

1. Committee on Board Affairs
   
2. Committee on Consumer and Community Affairs
   
3. Committee on Economic and Financial Monitoring and Research
   
4. Committee on Financial Stability
   
5. Committee on Federal Reserve Bank Affairs
   
6. Committee on Bank Supervision
   
7. Subcommittee on Smaller Regional and Community Banking
   
8. Committee on Payments, Clearing, and Settlement
   

Each of these committees has specific terms of reference specifying their authority and duties. In contrast, apart from statutory committees, RBI's general regulations create one Committee of the Central Board. There is no risk committee; audit committee; remuneration committee, etc. Regulation 15 of RBI's General Regulations gives wide and sweeping powers to the Committee of the Central Board:

The Committee of the Central Board shall have full powers to transact all the usual business of the Bank except in such matters as are specifically reserved by the Act to the Central Government or the Central Board.

There is no provision for board committees with identified duties. The composition of the Committee is quite unusual. Regulation 10(i) if the General Regulations states:

A committee which shall be called the Committee of the Central Board, consisting of the members of the Central Board who may at the time be present in the area in which the meeting is held,

The quorum for the Committee of the Central Board is quite unusual. Regulation 10(ii) states:

Two directors of whom one shall be a director nominated under section 8(1)(b) or 8(1)(c) or 12(4) of the Act shall form a quorum for the transaction of business.

RBI has a sanctioned strength of 21 directors. However, only 10 are currently appointed. But, since the Committee of the Central Board can take most of the decisions with just two directors, the debate about the size and vacancies on the Board becomes moot. This committee can carry out all tasks, except those specifically allocated to the Central Board.

Financial Accountability

The RBI budget seems to suggest poor oversight. There is no evidence that the Central Board actually discusses the budget. While the RBI budget for 2014-15 was Rs.13,356 crore, evidence that the Central Board looked at expenditure items is lacking; a large budget was approved without any observation. In contrast, BoE releases detailed comments on its financial dealings. Discussing the draft annual report for 2013, the released minutes of the Court of Directors notes:

Mr Jones noted that the Accounts were likely to show an onerous lease provision of £24mn, reflecting the Bank's assumption of the unused space at Canary Wharf formerly occupied by the FSA, unless tenants could be found. Negotiations with several possible tenants were in train.

The Central Bank of Canada, among other disclosures, also provides a list of all contracts above CAD 100,000 every quarter. For example, in the 3rd quarter of 2016, Bank of Canada paid Diebold Company of Canada, a manufacturer of ATMs and security systems CAD 150,000.

Conclusion

Under the rule of law, agencies and persons should be judged against set principles of law. However, in India, Parliament has set very low standards of transparency and accountability in the RBI Act (1934). Parliamentary committees with the power to hold government agencies accountable is a healthy feature of democracy. However, with the present silences in the RBI Act, the current approach where the Legislature questions RBI's functioning is yielding inadequate outcomes.

The correct approach for the legislature is to first formulate a law mandating transparency and accountability, from the Central Board and the organisation. The draft Indian Financial Code addresses most of the current concerns. After that, Parliament it must conduct regular oversight meetings (through the parliamentary committees) to hold the agency accountable against the mandated standards.

Ila Patnaik and Shubho Roy are researchers at the National Institute of Public Finance and Policy, New Delhi. The authors thank Nelson Chaudhuri, and Sanhita Sapatnekar of NIPFP for their inputs.

Judicial Procedures will make or break the Insolvency and Bankruptcy Code

by Pratik Datta and Prasanth Regy.

The key test of any default resolution process is: how much value is recovered by the lender? The most important factor that determines this amount is the time taken to complete the resolution. India has set up many recovery mechanisms that have given us long delays and low recovery rates. Most of the delay in the resolution is due to poor judicial processes that enable parties to obtain repeated adjournments.

The Insolvency and Bankruptcy Code (IBC) offers us a new beginning to fix the problem of low recovery. It imposes several timelines on its Adjudicating Authorities (National Company Law Tribunal (NCLT) for corporate defaults and Debt Recovery Tribunals (DRT) for individuals). For instance, it requires these tribunals to complete insolvency resolution in 180 days. It also requires NCLT to ascertain the existence of corporate default within 14 days of an application. Commentators have pointed out that without digitised credit data from Information Utilities (IUs), it will be difficult to adhere to these timelines. In this article, we argue that even with the IUs in place, it will be difficult to meet the timelines unless NCLT's procedures are redesigned.

1  Triggering Insolvency Resolution

As an example of an IBC time-limit, consider the process laid out by the Code in the case of a corporate default. A creditor can apply to NCLT to initiate an Insolvency Resolution Process (IRP) against the debtor. Along with the application, the creditor needs to do two things: furnish evidence of default recorded in an IU (or other evidence of default); and propose the name of a resolution professional (RP).

On receipt of the application for IRP, NCLT has 14 days to accept or reject it. The application is accepted only if NCLT is satisfied that default has occurred, and that the proposed RP has no disciplinary proceedings pending against him. Now let's see how this process will actually work out under the current NCLT rules.

2  Current procedure

Matters filed in NCLT under IBC are governed by the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under this, the procedure for making an application under IBC is the same as that for company matters before NCLT. These rules require applications to be:

type-written, lithographed or printed in double spacing on one side of standard petition paper with an inner margin of about four centimeter width on top and with a right margin of 2.5. cm, and left margin of 5 cm, duly paginated, indexed and stitched together in paper book form.

E-filing is promised eventually: the application ... shall be filed in electronic form, as and when such facility is made available. Online payment of fees is not allowed: fees can be paid only by means of a bank draft.

NCLT has to make a reference to IBBI to check if there are any disciplinary proceedings pending against the proposed RP. This reference will be sent by post, and the reply from IBBI will likewise come by post. It is not clear how IU records are to be submitted to NCLT: if the Tribunal requires that all IU records need to be certified by a senior officer of the IU (like in the case of bank records) it will lead to more delays.

All these have to be done while the NCLT is dealing with its workload under the Companies Act. On top of these, it is estimated that under the IBC, about 25000 cases will be transferred to NCLT from Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), the High Courts, and DRTs. This combination — a gargantuan workload, and slow processes to deal with it — makes it unlikely that the NCLT will be able to respect the IBC timelines.

3  Redesigning procedures

The Bankruptcy Law Reforms Committee recognised this problem and suggested the extensive use of technology by NCLT and DRTs to achieve efficiency. If we are serious about meeting the IBC timelines, NCLT's procedures will have to be designed anew.

Let us revisit the previous example in this light. Submission of the application for initiating IRP should be electronic: all documents, including IU records, should be submitted online. This will make it easy to verify the evidence of default. The tribunal must not require any certification from IU officials that the IU record is authentic — the digital signature on the IU record should suffice. Verifying the RP's antecedents with the IBBI should be automated: it should only involve a computer at the NCLT querying another computer at IBBI. With these processes, the tribunal stands a far better chance of meeting the 14-day timeline.

Of course, meeting this deadline in and of itself is no fix to the issue of delayed recoveries. However, this deadline is crucial for two reasons: firstly, because insolvency resolution cannot begin till the application is accepted, so any delay in this process delays the eventual resolution as well; and secondly, once a precedent of ignoring IBC timelines is established, there is no reason to respect the sanctity of any other timelines in the Code, including the 180-day limit on resolution. The Code will lose one of its most compelling features.

4  Conclusion

India has been here before. We have created a long list of mechanisms to facilitate the recovery of debts. This includes the BIFR set up in 1987, the Company Law Board set up in 1991, the Recovery of Debts Due to Banks and Financial Institutions Act passed in 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act passed in 2002. The RBI also has tried several schemes, including Corporate Debt Restructuring (2001), Joint Lenders' Forum (2014), Strategic Debt Restructuring (2015), and the Scheme for Sustainable Structuring of Stressed Assets (2016). None of these have been successful in resolving defaults efficiently.

We have another list of laws (including the IBC) that seek to impose deadlines on the judiciary. In the absence of rigorous process design, such attempts to eliminate judicial delays through legislative fiat have not worked either. Instead, there is ample precedent of ignoring these deadlines.

Now the IBC affords us yet another opportunity to achieve the goal of prompt recovery of debts. High-quality intellectual work is required to design and implement good judicial procedures for NCLT and DRT. If we do not make this investment now, IBC will also be a failure.

References

Bankruptcy Law Reforms Committee. The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design. Government of India, 2015.

Prasanth Regy, Shubho Roy and Renuka Sane. Understanding Judicial Delays in India: Evidence from Debt Recovery Tribunals. Ajay Shah's Blog, May 18, 2016.

Pratik Datta and Ajay Shah. How to make courts work? Ajay Shah's Blog, February 22, 2015.



The authors are researchers at the National Institute of Public Finance and Policy, New Delhi. We thank Anirudh Burman, Suyash Rai, and three anonymous referees for helpful comments.