About justice & conspicuous consumption

When a crime is committed, everyone seems to have a view on who has done wrong, and regardless of judicial outcome through due process of law, theories of how justice was done or not done mushroom

By Somasekhar Sundaresan
The Allahabad High Court has set aside the conviction of the Talwars in the tragic twin of teenager Aarushi Talwar and domestic help in The High Court ruled that the evidence was not adequate to secure conviction of the parents. The trial itself could have well qualified for mistrial in other jurisdictions going by the media coverage fed by the investigators and prosecutors, but that is now par for the course with any trial in India.

 

The same public drama that unfolded during trial has erupted all over again. There are those who have no doubt that the parents are guilty of murdering their child. They have come up with cynical arguments such as: “Therefore, nobody killed Aarushi.” Or, “The court has only said evidence is inadequate. They are of course guilty.” Or, indeed, with statements such as “What a successful peddling of innocence through a book and a movie!”

 

Others, with a contrary disposition, make arguments such as: “How could one even dream of accusing parents of murdering their child to begin with? There was no case here.”

 

In short, society is divided largely between those who believe the Talwars were guilty and those who believe they could never be guilty. Almost everyone has a certainty of belief stronger than what any eyewitness could harbour. Of course, there was none in this case.

 

hile this is a physical criminal case involving murder, in the corporate-business-financial sector, such an approach of society is consistently universal. In every single case, everyone in society has a clear view on who has done wrong, in what manner, and regardless of the judicial outcome through due process of law, theories of how was done or was not done mushroom.

 

In most financial sector laws, the enforcement folks do not even have to convince a court of of their story — they themselves can pass orders indicting an accused. In appeal, it is the defence that is on trial — the appellant has to convince the relevant tribunal that the order is not sustainable. Justice, in such circumstances, has become a matter of conspicuous consumption. It is easy to assail a victorious appellant as someone who got away for want of proper evidence — an alias for saying society will treat an accused as guilty even if courts do not believe her to be guilty.

 

Add to the mix, the practice of passing ex parte orders (orders passed without even a hearing) with clear and firm conclusions even before investigations are completed. A regulator can take a public position, however wrong investigations may subsequently prove them to be, and pass orders imposing restraints on the suspect. Having done so, the process of a “post-decisional hearing” and the suspect’s efforts at getting the restraints removed necessarily entails the defence being put on trial. The regulator gets a lot of mileage by attacking the credibility of the defence, without caring to first demonstrate the basis and validity of the unilateral ex parte order in the first place. In the eyes of society, that the state machinery has found fault with someone and believes that she has done wrong, is enough to make the suspect a convict.

 

Little wonder then that colourful use of language often seeks to make up for absence of articulated reasons in such orders. Indeed, even in the Aarushi case, the trial judge who wrote the order buying into the prosecution story, is reported to have taken pride in an interview with Avirook Sen (author: Aarushi; the interview is set out in Sen’s book on the case) in how he flew down his son, whose command over English was put to use to write a good quality order.

 

No one can really predict what will eventually happen to the Talwars in the judicial process. A further appeal is likely to follow — it may or may not succeed. The Supreme Court will eventually rule. That court is necessarily right because it is final. It is not final because it is right. Regardless of judicial outcome, sections of society have very clear and firm views on their guilt or on their innocence.

 

Worldwide, even after final rulings by supreme courts, convicts have been pulled out of prison or even out of death row because of relentless efforts by journalists and television documentaries, whose intrigue about a case refuses to let them accept what meets the eye and what is dished out to selective ears. That a book even got written on this case in India, with an independent resolve to probe facts rather than re-hash the versions given by prosecutors, is the Indian media’s saving grace.

 

That a movie-maker even took interest in a story of this nature to risk a commercial film on it is also not common. For a movie like Talvar, that is accused of influencing the outcome in the appeal, there has also been a movie such as No One Killed Jessica, which spoke about accused being wrongfully absolved (unwittingly, the name has laid down a popular expectation that when there is a crime, if the accused has not done it, the crime never took place). That movie too followed meticulous journalistic work proving how witnesses had lied during trial.

 

Somehow, the sight of a specific person going to prison for a crime seems to warm many an Indian heart as compared with the sight of seeing the evidence stacked up against an accused just not withstanding judicial scrutiny. There is a nice coinage that has been developed for this concept: “collective conscience”.The concept was, for example, relied on to confirm the death sentence for an accused in the case involving the attack on Parliament, even while acknowledging that the evidence and the quality of trial was weak.

 

In other words, if a case shakes up society well enough to have its attention rivetted, the standard of would practically vary. Therefore, the incentive for prosecutors and regulators is perversely weighed in favour of scandalising a case strongly enough for society’s attention to stay rivetted to the lurid details dished out, leaving it open to ignore facts and evidentiary standards. Of course, whether someone going to jail or someone being let off is more acceptable for a society’s collective conscience is a pointer to what kind of society we are as a collective.

 

This column was published under the title Without Contempt in the Business Standard editions dated October 19, 2017

Between what’s said and left unsaid

If at the end of reading this piece, you feel it is an “impractical” and “theoretical” approach to “Indian realities”, you may not be alone. Yet, the following has to be said: Our policymakers just demonstrated doublespeak in relation to market integrity. They have flinched in making truth available to financial markets, a vital element for informed market decisions.

A terse one-line press release, appropriately drafted in passive voice, was issued by the (Sebi) on September 29, 2017. It read: “It has been decided to defer implementation of Sebi circular no CIR/CFD/CMD/93/2017 dated August 4, 2017, until further notice.”

The press release is significant for what it did not say rather than for what it did. What the circular being deferred was about, when it was meant to take effect, what weighed with the regulator in introducing it and what weighed with the regulator to indefinitely defer its introduction, what transpired in the time between the two events were all left unsaid.

This column is not another iteration of lawlessness in the process of law-making. Indeed, pre-legislative consultations are to be expected only for measures that the regulators are reluctant to introduce or repeal. On measures that could beget bouquets or brickbats, it is normal not to expect any pre-consultations.

Back to the circular that has been put off. On August 4, 2017, Sebi issued a circular to provide that effective October 1, every listed company would have had to disclose within one day, the occurrence of any default in payment of interest or principal on the due date. A simple measure that would have brought cleanliness and transparency to financial markets, it would also have spurred the solvent but indolent to buck up and ensure they did not inadvertently err in servicing financial obligations.

The measure was vital for integrating the with the rest of the financial market system. That a company is unable to meet its obligations when due could be material information that would inform investors’ decision on what to pay for or what to expect for the securities of that company. The disclosure obligation was introduced on this premise. However, the known inability to pay would make it clear to the market for banking and financial services that a company, which is unable to pay its debts when due, is borrowing from the system. This would enable a clearer profiling of the risk in dealing with such a borrower.

When the circular was issued, a retiring whole-time member of Sebi spoke about its virtues at length in public interviews. Sebi was happy to take credit for being the harbinger of a game-changing measure. The withdrawal, on the other hand, has been made in a whimper.

However, it seems these are not good times for dissemination of bad news.  Perhaps it was felt that a spate of disclosures of defaults would follow, lending credence to the gnawing belief that the economy is in a spiral, headed for a hard landing. Inexplicably, without any articulation of the cause for change of heart, the regulator has given credence to that assumption.

“India is not ready for it” is an argument one usually hears in relation to any inconvenient policy reform measure — for example, making an open offer to acquire all the residual shares during a takeover of a listed company; and getting every listed company to publish a prospectus-type document to bring material information about the state of affairs into the public domain even without a securities offering being involved.

This circular had also imposed a statutory obligation on listed companies to inform credit rating agencies about such defaults. Virtually every credit rating agency of relevance is facing proceedings with Sebi for not having downgraded a certain listed company’s debt-servicing capacity. When this company’s inability to service debt was discovered, the effect was so severe that a certain mutual fund with exposure to that debt had to shut the gate for redemption of units. If the regulator now believes that full and clear transparency to rating agencies is not in public interest, surely it should stop making fall guys out of them.

Sebi is quick and prone to lashing out with premature actions against alleged insider trading. Even bank accounts get impounded for periods longer than the law permits in the garb of securing proceeds of insider trading. The introduction of an obligation to make timely disclosures would have served the regulatory war against insider trading. It would have prevented wrongdoing and obviated punishment — the quicker the dissemination of material information, the lesser the scope for those in possession of it, thereby reducing the ability to trade ahead of the rest of the market, without fear of also violating the law mandating dissemination.

The leadership at Sebi has been actively involved in a policy game changer in the financial system — the introduction of the Insolvency and Bankruptcy Code, a legislation that has so far largely received a resounding endorsement from the higher judiciary. World markets were looking at this circular as a game changer in aiding the effectiveness of this new law. Now, it is not to be.

If media reports are to be believed, the circular was considered to be utopian enough to make many in the banking system chicken out. If we send a signal that bringing out the full truth would be unpalatable not only for listed companies but also for banks that have exposure to such listed companies, it would mean that we are happy to let the truth — not just about borrowing listed companies but also listed banking companies — be shoved under the carpet.

“Being practical” is in itself a dangerous phrase. Many a social problem today ranging from domestic violence to female foeticide has been compounded by living in denial and enforced silence. Perhaps, we just got the financial markets version. If inadvertent payment defaults by solvent companies sending avoidable panic signals to the markets was what the Sebi was worried about, it could have tweaked the timing of the mandatory disclosure to the date on which the cure period for the default expires without the default getting cured.

 

This column was published as Without Contempt in Business Standard editions dated October 5, 2017

 

Sebi on the right path over control of companies

Its decision to desist from amending the Takeover Regulations is acknowledgement of the fact that one size doesn’t fit all

The (Sebi) has announced that it would refrain from amending the Takeover Regulations to specify situations in which it would rule that there is no change of control over a listed company. This is a right step for a variety of reasons.

When one acquires control over the management and policy decisions of a listed company, an offer to buy shares from other is mandatory.   Likewise, acquisition of shares with voting rights of 25 per cent or more mandatorily triggers an open offer. Typically, acquisition of control occurs along with acquisition of shares. However, the regulations contain a provision that makes it an obligation to make an open offer when acquiring control regardless of the quantum of shares acquired.

This is an important regime. One can acquire control without crossing the 25 per cent voting rights that would trigger an open offer. This could take shapes and forms that cannot be predicted in advance — through contractual rights and arrangements embedded in documents to which the listed company is bound. Now, when investors execute investment agreements with listed companies and desire a degree of say in decisions that could alter the very foundation of the company they invested in, the question often arises whether they have taken over control.

For example, if a company that manufactures paper seeks to change its activity to manufacturing steel, and an investor secures a contractual right to stop it, that would not represent the capacity to control the day-to-day management of the company. It would only be a right to insist that a company stays its course truthfully. On the other hand, if an investor were to have a right to approve every contract above a threshold value, it would point to control over how to manage the company.

Life is never led in either extreme, but there is a lot of truth in between the two extremes. For example, an investor may secure a right to object to a transaction that is a substantial component of the value of the net worth of the company — in other words, the right to scuttle a risky proposition.  What the size of the net worth is and how much percentage of it is the threshold, what nature of transaction is sought to be covered — these are all factors that would answer the question of whether such a right constitutes control over management and policy decisions. For example, the right to approve the room tariff policy of a hotel owned by a listed company could be control over the company if the only business of the company was to run that one hotel. Such a right over one hotel, which does not constitute a major source of revenue for a company that owns multiple hotels, would not constitute control.

Now it would be impossible to stipulate by legislation what constitutes control in a manner that wold cover all possible factual situations. Therefore, beyond stating that rights, which merely constitute some influence over material and fundamental changes to the ordinary course of conduct would not necessarily constitute control, it would not be possible to stipulate more. Such guidance could emerge from rulings and case law rather than by legislation that would lay down hard rules, which may not fit every situation. That even undertook a public exercise of considering these issues points to its acknowledgement that a one-size-fits-all approach of alleging control would be wrong — just as it would be impossible to provide immunity that certain types of rights would never constitute control.

In recent orders, has adopted a mature stance of acknowledging this position. Other legislation, too, have references to “control” and pretty much sail in the same boat. To legislate that unless 25 per cent is owned there would be no control would be a lazy option and can have a deleterious effect, with an incentive to fly just under the radar and actually wield control. To legislate that certain types of rights can never ever constitute control or that they would always and necessarily constitute control would also be fundamentally flawed. This is why the Achuthan Committee, whose draft is the basis of the current version of the Takeover Regulations (Disclosure: The author was a member), consciously left this to case law to evolve on the facts of each case.

Indeed, can issue guidance notes explaining the principles that it would apply in its approach to enforcement in this regard. Beyond that, whether or not any person has acquired control will necessarily be left to a “question of fact” to be answered from the facts and circumstances of each case. It may well sound like a fallback on the Justice Potter Stewart’s famous ruling in a case involving a charge of “hard-core pornography” against a movie. He ruled: “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description, and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.”

This column was published as Without Contempt in editions of Business Standard dated September 21, 2017

A tale of two jurisdictions

By Somasekhar Sundaresan
The standard for treating as illegal, by those tipped off with price-sensitive information by insiders, underwent yet another yo-yo in the last week. The constant change in standard on what constitutes illegal insider is a hallmark of insider law in that country.

 

An appellate court has ruled that it would not be necessary to show that the person, who receives a tip-off from an insider, has to have a “meaningfully close personal relationship” with the latter. The same court had ruled in December 2014 that such a relationship would be vital to hold that insider took place. In that case, two men, who had traded in securities, were held to have had only vague and casual acquaintance with the source of the inside information. In the absence of any meaningfully close personal relationship, it was held that they could not be said to have been gifted or sold the tip by the insider for the to be violative. In short, no benefits could be inferred for those giving them the information.

 

Two years later, in December 2016, the ruled in a case that involved by a person, based on information received from a sibling who was the insider, that there would be no need to look for a benefit or gain to provide the tip. Applying that rationale, the appeals court has now ruled that there is no real need for any “meaningful close personal relationship” to exist to render the illegal. The court has gone on to say that if an insider were to give a tip to a doorman instead of a tip in the form of money, he would still be achieving his objective of providing gratification and, therefore, the by the person receiving the tip would be illegal.

 

Cut to India. Virtually every man on the street here would believe that the US has a far greater regime for punishing insider and that India is lax on the matter. The truth is far more nuanced. First, under Indian law, by definition, any person receiving unpublished price-sensitive information becomes an “insider”. Therefore, by the recipient of any price-sensitive inside information would become violative “insider trading”. Second, the very act of communicating unpublished price-sensitive information has been rendered illegal by law in India — unless, of course, a legitimate purpose for such communication can be shown, for example, providing an auditor with draft accounts.

 

In practice, how this is enforced makes in securities quite dangerous in India. It is now becoming routine for any trade by any person to be rendered vulnerable to attack as being illegal if a link between the person who traded and an insider, however tenuous, is found. It is this extreme that the is zealously wary of — an exposure of innocent traders to the charge of insider leads that system to err on the side of caution in favour of presuming bona fides by those  The Indian regulator has chosen to err on the side of caution in favour of presuming mala fides by those trading: So long as some form of link is found, it would be presumed to be illegal motivated by inside information, regardless of whether information was actually communicated.

 

Surprisingly, despite the law having been amended to empower the regulator to demand and get call data records from telecom companies to demonstrate circumstantially the communication links between the insider and the person who has traded, the regulator never uses this power. Usage of such power would bring with it the necessity of having to prove the intensity of the link. Worse, informal guidance has been issued to say that without even going into evidence of communication between a discretionary portfolio manager and his client who may be an insider, trades on behalf of an insider by the portfolio manager, even if made without reference to his insider client, would be illegal (not “could be illegal if the client indeed exercised his own discretion in the decisions”).

 

The legal status of a person, who has actually received unpublished price-sensitive information from an insider, as an “insider” is easy to understand if evidence (circumstantial evidence) reasonably shows that the person who traded indeed received such information. However, for those who are actually insiders themselves, the treatment becomes even more dangerous. A “connected person” is one who is reasonably likely to have access to inside information. Whether such a person indeed had access and who would need to show that she had such access are questions that are routinely given the go-by, hoping that courts would give enforcement a long rope.

 

This is the kind of outcome that a dissenting judge in the appeal judgment has warned against. According to her, prosecutors would “seize on this vagueness and subjectivity”, which, to her mind, “radically alters insider law for the worse”.

 

There is one material distinction that makes the problem exponentially worse in India. US enforcement agencies have to satisfy a neutral judge of the strength of their charges, with cogent evidence. This leads to the finely nuanced and, at times, abstruse judicial analysis of the standards necessary to bring home a charge. In India, the regulator has to convince no one for declaring a person to be guilty of insider  How well it has to explain itself depends on the quality of the challenge mounted in an appeal that can only be filed after the event of being held guilty.

 

Twitter: @SomasekharS

This column was published under the head Without Contempt in the Business Standard editions dated September 7, 2017

ON EX PARTE ORDERS, IT PAYS TO BE CIRCUMSPECT

It is raining ex parte orders again in the Indian securities market.  Essentially, orders that are passed without hearing the person against whom it is passed, the practice is justified in the eyes of the law if the circumstances demonstrate grave urgency and warrant action.

Yet, when an ex parte action is taken, the authority taking the action is expected to do its homework to demonstrate the urgency and get its facts right to defend the action when challenged.  Take the case of the 331 listed companies, which the capital market regulator was told — by none less than the Ministry of Company Affairs — were “shell companies”.

A shell company is one that is merely a shell — without substance in its operations and functions.  The Securities and Exchange Board of India appears to have blindly taken the list it received and declared all these companies to be shell companies.  Media reports suggest that some noteworthy names have been declared in one sweep to be “shells”. Declaring them to be shell companies, suggesting forensic audit of their existence and giving them pariah status on the stock market, where trades in them would be permitted only once a month, would cause serious injury to every holder of securities in these companies.

Some investors would have pledged their shares to lenders, who would determine such an event to be one of default. The underlying asset over which they had security would suddenly become illiquid. Others would have taken trading positions in these securities with a certain assessment of facts in; if they were suddenly told that regardless of facts, these companies deserved to be shunted to the periphery of the stock market, it would cause them serious losses.

Such a drastic action would, therefore, warrant giving notice to the parties concerned, giving them a chance to explain themselves. At the least, one would expect basic due diligence to be carried out before action were taken so that the (well-intentioned) objective of investor protection, far from being met, is not undermined. If a basic internet check would have shown that some of these are well-functioning, profit-making, loan-taking operating companies, the embarrassment of terming them “shells” could have been avoided.

The history of financial markets is replete with examples of such decisions. Ex parte orders purporting to be interim measures get passed and routinely become permanent measures. They are often known to continue for as long as five years.

Examples of every kind of sudden shock and surprise are now easily available. We have had securities being introduced into the derivatives segment in the middle of a month. We have had securities removed from derivatives in the middle of a month. Issuers of securities with derivatives riding on them, declaring record dates in the middle of a derivatives trading cycle, too have been seen.

Abnormal or extraordinary decisions invariably also point to the need to check if there was any abnormal pattern of trading just before they were announced. Often, that leads to probes and allegations of insider trading. In fact, a recent ex parte order froze every bank account of every individual named in it overnight, rendering them penniless. The suspicion in that order was that publicly known regulatory proceedings against a company had been the motive for every sale in listed securities of affiliates of that company.

Another type of development is in the risk of being repeated so often that it would become a trend. Relying on private “forensic reports” (often conducted by accounting and audit firms with little training in the rigours of investigative discipline), regulators take ex parte actions. Typically, these reports are riddled with disclaimers that render them poor evidence in law. However, in the post-truth world, by the time it can be demonstrated that there is no real legal evidence, the damage is done, and destruction of individuals and institutions is complete.

Is there a better way to handle this?  Surely, if one asks oneself multiple times if the use of emergency powers to pass ex parte orders is warranted, the reckless usage of such a blunt weapon would get tempered. The value one attaches to the concept of the “rule of law” is best tested when the most provocative circumstances present themselves.

 

It is easy to adhere to the rule of law if one’s patience is not being tested to the brink. If one loses all vestiges of being circumspect and stops checking and regulating oneself, the rule of law would be replaced by the rule of men, risking the very credibility and majesty of law enforcement.

(This was published as a column titled Without Contempt in the Business Standard editions dated August 10, 2017.  Disclosure: The author represents (after publication) for some companies affected by it.)

Last resort shouldn’t turn into first choice

By Somasekhar Sundaresan
The of India is reported to have blessed a settlement between a litigating lender and a corporate borrower after the process for insolvency under the newly-legislated had been set in motion.

 

The parties settled their differences and their settlement terms were approved setting aside the process, using the court’s powers under of the  This is a material development and points to the need to take a close re-look at some of the policy choices made in the new bankruptcy law, which is now about nine months old.

 

First, the process brings on par with lenders, who may have thousands of crores in loans to a borrower, any operational creditor (say, supplier of furniture) who claims dues of just over a lakh of rupees, in the legal capacity to trigger the “resolution process” under the code.  The grounds on which the National Company Law Tribunal might refuse to set the process in motion are limited — for operational creditors, the primary ground is the existence of disputes before the claim is made. In other words, only uncontested dues on which there is a default would lead to the being attracted. The case in the was not of an operational creditor but of a financial creditor, but that does not matter for the analysis here.

 

Second, once the resolution process is set in motion, a moratorium kicks in. No debt can be enforced on the company against whom the claim was made. While this might seem normal about “bankruptcy protection” it works well only for companies that are truly bankrupt. For companies that are solvent but have bona fide disputes over claims made by counter parties, this results in a prompt trigger of pariah status. If your promises cannot be enforced against you, no one would transact with you. This is all the more reason for the setting of the process into motion to be done with a great deal of care and caution. Until a recent ruling by the National Company Law Appellate Tribunal, various benches of the National Company Law Tribunal, which administers the new law, had taken a position that unless actual litigation had been initiated, no claim of any operational creditor could be regarded as disputed.

 

Third, not only would a moratorium kick in, but also an “interim resolution professional” would stand vested with all the powers of the board of directors of the company. The powers of the board of directors would stand suspended forthwith. The moratorium and the change of control are certainly fantastic features to handle the best interests of stakeholders of a truly insolvent company but they are certainly poisonous and not medicinal for a company that is solvent but can be threatened with initiation of the resolution process. Therefore, the very threat of a possible initiation of this process leads to coerced recovery that could in fact hurt a larger segment of lenders, who truly have the long-term financial interests of the company at heart.

 

This is why HDFC Bank Managing Director Aditya Puri’s statement that resorting to the insolvency courts is not the best solution unless the borrower is a wilful defaulter makes immense sense. In his reported words, this is a law of “last resort” and not the “first thing”. The capacity of any goods or services provider — an operational creditor — to set such a serious process in motion as the first thing, is worrisome. Once the moratorium kicks in, even the financial creditors of a company for which a moratorium has kicked in, would get hit and be unable to recover their dues.

 

Indeed, the creditors’ committee that is supposed to work during the moratorium could comprise a majority of creditors, who see a future in the company and can drown out the voice of the lone creditor who does not. Therefore, theoretically, if one does call the bluff of an aggressive operational creditor or a disgruntled financial creditor, and stays the course, the initiation of the resolution process can eventually come to mean nothing. However, this is theoretical and not practical. Once the world at large rearranges its view of a company whose promises cannot be enforced and has to deal with a chartered accountant or company secretary acting as a resolution professional without experience in running a business, even a reasonable view of creditworthiness of a doubtful debtor has to change to a perception of a bad debtor.

 

In this context, the coding in the law that entails no roll-back once the resolution process is set in motion is a hard and blunt weapon of last resort, which can cause more injury than warranted when used as the first resort. When the uses “for doing complete justice” and takes on record the settlement terms between a creditor, who has set the resolution process in motion and the debtor on whom a moratorium has kicked in, it is because really unjust and unintended consequences can emerge from the working of this law.

 

For the long-term health of the effectiveness of the bankruptcy law, it would have been better to help the new law build its core strengths by generating capacity and getting the resolution professionals and bankruptcy professionals to build bandwidth and gain competence before unleashing the burden of handling the entire society’s corporate debts on them. The burden of private corporate debt recovery could have been held back from imposing itself on the enforcement machinery until the immediate task of serious financial debts working itself through. The Supreme Court, which has powers to intervene and roll back a moratorium in the interests of justice, having used this power, it is time for a serious and quick rethink and pilot short amendments to make this law effective with a review scheduled for after two years.

 

This column was published in the Business Standard’s editions dated July 27, 2017 under the title Without Contempt

How lines of role clarity are getting blurred

By Somasekhar Sundaresan
The question of whether the Reserve Bank of India (RBI) can dictate terms to a quasi-judicial tribunal that presides over enforcement of loan recoveries is making news, with the Gujarat High Court asking how the central bank had the powers to regulate tribunals. That the RBI believed it could dictate terms to a quasi-judicial body is not important. What is important — rather, scary — is how easily role clarity can officially get mistaken in the running of our public institutions.

 

The foundational blunder that embeds wrong policy choice into the DNA and blurs role clarity is the Presidential that specially empowered the RBI to direct commercial banks on the action banks must take towards recovery of dues owed by borrowers. This is a classic example of a simplistic policy solution, which is an outcome of its authors presuming that everyone else before them had not been clever enough to see an obvious fix to a serious problem.

 

It is not the RBI’s job to take enforcement decisions for commercial banks. But having been given a cloak and a shining armour, the RBI perhaps came to believe that it could issue directions even to the National Company Law Tribunal on what it must do. Giving the RBI powers to direct banks on how to act under the newly-legislated Insolvency and Bankruptcy Code presumes that commercial banks were napping despite having been empowered by a new law. By vesting in the RBI the executive function of banks that it regulates, in other sectors, too, such interventions could follow. The insurance regulator could be asked to run insurance companies, the securities market regulator could be asked to operate mutual funds, and the pensions regulator may be asked to run pension funds.

 

Worse, the foundation has also been laid for vigilance agencies to knock on the doors of RBI officials, say, five years down the line, for bad decisions that were taken in the course of such enforcement. The banks’ problems will have become the RBI’s problems. This is a real possibility as the poor non-performing assets may provide next to no recovery, and buyers of some of these assets may make profits buying assets cheap — fertile ground for the Central Bureau of Investigation to say in the future that even the RBI has become tainted by corruption.

 

The RBI jumping in to notify a declaration on what the tribunal must do is also a replication of a classic policy choice in the past few years. The very creation of the National Company Law Tribunal, with powers to take serious judicial decisions such as award of damages as if it were a civil court, is based on the erroneous policy choice of creating new institutions to deal with problems that hurt the performance of existing institutions. Since justice administration is ineffective (due to myriad problems that cannot be reduced to populist reasons such as length of court vacations or lack of judges), successive governments have been getting to make empowering regulators to play the role of the  The requisite training and capacity building to discharge such roles are never invested in. Every disappointment with such experiments leads to even more egregious experiments, further blurring the lines of role clarity.

 

Examples abound. Sweeping powers given to capital markets regulator, the Securities and Exchange Board of India, despite being an executive organisation, to take serious quasi-judicial decisions without imparting judicial training, is a great example. Likewise, even the quasi-judicial tribunals that are being set up with serious responsibilities, face resource constraints. The National Company Law Appellate Tribunal is now empowered to play the role of an appellate tribunal not only for company law but also for competition law, as indeed in appeals from decisions under the new bankruptcy law.  However, the tribunal has just two members — one is a retired Supreme Court judge, the other a retired officer from audit and accounts service. One seat is lying vacant. The Securities Appellate Tribunal has been empowered to hear appeals against decisions of the insurance regulator, but it took forever for the government to even complete appointments to achieve a full bench.

 

When the alleged scam in the telecom sector was making news, many “creative” policymakers advocated involving the Comptroller and Auditor General in executive decision-making before a decision is made, so that the auditor does not later find fault with propriety of decision-making.  This was an example of how little inter-institutional checks and balances are appreciated and how easily they can get disrupted if the clamour for “change” gets loud enough to drown out reasoning.  Getting the banking regulator to take decisions that regulated banks must take on their own is in the same vein.

 

It is highly possible that sometime in the near future, desperation over capacity constraints in “insolvency professionals” not being able to cope with the burden imposed on them under the new bankruptcy law could lead to the Insolvency and Bankruptcy Board of India to being given powers to play the role of the professionals it regulates.  Nothing could be a bigger blunder in the gestation of a nascent ecosystem.  Such a measure would weaken the ecosystem of insolvency professionals, the same way commercial banks are being weakened today by having the RBI decide on their behalf how to handle bad loans.

 

In parallel, another role ambiguity is hurting the ecosystem. Under the new bankruptcy law, any operational creditor may initiate a “resolution process”, which, at the threshold, suspends the powers of the debtor’s entire board of directors, and imposes a moratorium on recovery of any dues from the debtor.  The abuse of this provision has begun in earnest. Instead of servicing the financial creditors whose firefighting needs the system’s support, the enforcement system is being clogged with anyone claiming Rs 1 lakh or more being able to hold all the financial creditors to ransom, to extract a settlement by threatening a snowballing effect of a moratorium. The pain of having the moratorium presents a perverse incentive to small operational creditors who can derail the financial creditors’ engagement with complex decisions, which can involve weighing recovery, enforcement, revival strategies and exit planning, all at once. Clearly, overzealous knee-jerk policy is only going to cause more problems, far from solving existing problems.

 

This Without Contempt column was published in the editions of Business Standard on July 13, 2017