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

Undeclared Emergency: We are like that only

Voices for and against argument that there is an undeclared Emergency gets shriller every year

It is that time of the year — the last week of June — when the Emergency is remembered, various commentators lament the attempt to kill the spirit of the Constitution and others celebrate how the system fought back. Increasingly, the last week of June has also come to entail a discussion on a state of “undeclared Emergency”. The voices for and against the argument that there is an undeclared emergency gets shriller every year.
Some home truths are critical. First, no party in power is innocent of the charge of introducing elements of an “undeclared Emergency”. Be it the Congress-led United Progressive Alliance (UPA) or the Bharatiya Janata Party-led National Democratic Alliance (NDA), every successive government has contributed its share of draconian laws, subversion of Parliament, blasé violation of constitutional principles with law officers finding ingenious arguments to defend them in the courts. Each government builds on the foundation laid or fortified by the earlier government, regardless of political hue. Each Opposition screams against “undeclared Emergencies” and only builds on the foundation when voted into power.  
Examples will make this point clear. The UPA effected draconian amendments to the law governing foreign contributions to the social sector that have resulted in foreign-funded non-government organisations (NGOs) being barred from indulging in an ambiguously-and-widely defined “political activity” even while foreign-funded business enterprises face no such restrictions. Corporates with foreign shareholding are free to lobby for changes to law and lobby Members of Parliament and senior bureaucrats, while NGOs with foreign donations simply cannot meet these worthies to influence their thinking and express their points of view. The administration during the NDA government built on this well-laid foundation and started actually knocking NGOs hard.  
Likewise with interventions with media businesses or just crony capitalism. Bennett Coleman and Co, the owner of The Times of India, was hounded by the Enforcement Directorate during the United Front government comprising a bunch of 13-odd political parties led by Deve Gowda first and I K Gujral next, followed by the NDA. Tehelka and NDTV can write full primers on what can go wrong when you get on the wrong end of the state machinery. Tehelka’s substantial financier Shankar Sharma faced the music under both regimes — the NDA and the UPA (the allegations for which his broking firm had been punished in 2001 were levelled again to punish him personally, this time under the UPA). The Vedanta Group came in for serious stick under the UPA. Cairn India was forced to apply for approval for a change of ownership, and then given approval with the condition that substantive litigation against the government must be withdrawn. 
Second, a government in power has to be really very stupid to formally use the E-word and declare a state of emergency. It can now do so only if it were to entirely lose all faith in the democratic system to come to believe that it would get away with it. Indira Gandhi’s declaration of Emergency fell in the former category. Her termination of the Emergency showed that she too had not lost faith entirely and by the time she realised her cronies had gone too far, it was really late. Today, with the love and glory for the armed forces being felt so widely, as a society we may be heading towards a tipping point towards the latter — a loss of faith in democratic politics. However, no politician who has a decent career would have the capacity to come out the closet and declare an Emergency by design. 
The situation is much like the discourse and debate in Israel, where awareness of discrimination under Hitler’s Germany is always highlighted in the incessant debate over the “undeclared apartheid” against Palestinians. It would be stupid for Israel to embrace the epithet of “apartheid” and therefore, it would always highlight how apartheid in South Africa was different in vital features from the discrimination in Israel. Our social debate on “undeclared Emergency” is quite similar. One can keep pointing out that there is no official censor to review news reports, but others can point out that when the situation does not demand an official censor, you do not need to appoint one. The actions of the “Censor Board”, as the film certification board has come to be known, are adequate pointers to the social state.
Finally, as a society, Indians have always craved for a dictator they can elect. Ruthlessness has always been an admired trait in large sections of the Indian electorate and society. Indira Gandhi was popular in her day. The PM in office is as popular today. Their decisiveness and sense of direction is a matter of envy of the other politicians and pride for the layman. Therefore, it is not at all really necessary for a formal declaration of emergency. You can blame Indira’s indiscretion on being blinded by her cronies — astrologers and Sanjay Gandhi’s disjointed blokes and being cut off from ground realities. Let us remember that it was not the feeling of constitutional injury that led to her downfall right after Emergency — it was the forced nasbandi by population-control vigilantes that led to the disaffection of the masses. The government that succeeded her was as draconian — a simple example of trying to arrest a former PM without even a warrant should do to make the point. Morarji Desai had sought to put down the Maharashtra movement in the Bombay Presidency with a firm hand — directing firing on protestors.  
Perhaps a more honest way to handle this debate is or all to acknowledge by saying, “We are like that only.”
This column was published “Without Contempt” in the Business Standard edition dated June 29, 2017

Keep official abuse of governance in check

Last week, India’s media was abuzz with reports of a meeting that did not take place — the one between officials of the Ministry of Finance and members of the Monetary Policy Committee (MPC) of the (RBI). Around the same time, the sacked chief of the United States’ Federal Bureau of Investigation deposed with candour about his interactions with US President Donald Trump, in the midst of a probe into whether the latter had obstructed justice.

 

Both the events point to one question: What level of intervention by the “government” is acceptable in the functioning of governmental institutions that have their own institutional governance mechanisms? For many, the point of discussion itself is meaningless: To their minds, once an institution is “governmental”, the government in office has every right to dictate terms on how to “govern”. If you believe in that approach, feel free to stop reading further. If not, remember this is an issue even more critical for India than for the United States. Here’s why.

 

Most Indian economic legislation — the Acts that led to setting up regulators for the capital markets, insurance sector, pension funds or telecommunications and airports, and so on — have specific provisions that enable the central government to issue directions on matters of policy to regulators. If more than one view is possible on what constitutes “policy”, the government’s view is final. For many policy wonks, such a legal position is adequate for the government to have an unconditional say in the running of a regulatory or investigative institution.

 

Indeed, when controversy over interference erupts, government servants usually point to these provisions. Worse, potentially diabolically, it is usually pointed out that in fact government records have no evidence of these provisions being actually put to use. Indeed, there is even a reluctance to use these powers formally. For example, when the finance ministry could have issued policy directions to the regulators of the capital markets and the insurance sector to resolve their differences over how to regulate unit-linked insurance plans that appeared to have features of both insurance policies and mutual funds, the finance ministry instead asked the regulators to litigate. Formal use of the policy-direction power requires taking a stance in writing and exposing the decision to accountability in the form of judicial and academic review. Informally, the clubby-chummy world of “moral suasion” enables unbridled intervention and “guidance” with no statutory accountability involved.

 

This is the context in which traditional central bankers were chafing at the very mention of the idea of setting up a MPC — where nominees of the finance ministry would engage in discussion with central bankers — although the central bank would have the last word thanks to a casting vote of the governor. The finance ministry’s thinking in wanting to meet the committee members points to the central problem with governance in India, whether it is corporate governance or statutory governance. When a governance system entails representation in the form of people trusted by the nominating authority being appointed to a forum, it would not follow that the nominee is a postman or a spokesman at the forum for the nominating authority. She is not meant to be a messenger or agent, who is to carry out instructions of the nominating authority.

 

For example, once a director is nominated by a shareholder to the board of directors of a company, the director has to play her statutory role in the governance of the company. If the fact that she is a shareholder-nominee were to be a licence for the nominating shareholder to dictate terms to her and to the board where she sits on how business must be conducted, not only the very office of the director but also the entire forum of governance, that is, the board of directors, stands eroded. They would be rendered as rubber stamps in reality and office-bearers only on paper.

 

It would be akin to the mob’s view in “people’s rule” (yes, that sounds Maoist) prevailing over the rule by those voted to power, because it is the people who voted them to power and the mob belongs to the people. It is this principle that led the United Kingdom’s Supreme Court’s ruling in the Brexit case, too. It was for Parliament to take a decision and pass a law on leaving the European Union and not say that it had no role on the premise that the people had spoken through a referendum. Identical is the case with a gay marriage plebiscite in Australia, where wary of popular reaction either way, members of parliament sought to wash their hands of the matter and sit on the fence by referring the question to a plebiscite.

 

Instituting the MPC with governmental representation does not mean the government can tell the committee what it must do. Having chosen them, it is for committee members to function and take independent decisions of their own volition. Indeed, there is one very important element in all this: Such a nuanced governance narrative could push underground, the influencing of the committee members by the government.  Instead of openly seeking meetings, these discussions would be pushed to the sidelines of think-tank discussions, the cocktail circuit and the drawing rooms of those influential in the lobby.

 

However, the potential abuse of rightful conduct of governance does not mean that right governance systems should themselves get shunned. It is for transparency systems such as the law on right to information, or parliamentary oversight (indeed that is what led to the deposition in the United States) to keep in check abusive underground activity in governing a nation.

 

This column was published in the Business Standard’s edition dated June 15, 2017 under the title Without Contempt