All that is needed is political courage to clean up PSBs’ governance

It is important to take a close and hard look at how to clean up poor and ineffective governance of public sector banks

By Somasekhar Sundaresan

The last edition of this column spoke about the unaddressed vital reform of ownership of public sector banks that is holding back governance of these institutions to a body of law and an era that is out of sync with the legal regime that governs private sector banks. Meanwhile, a vibrant controversy has broken out with the Reserve Bank of India’s (RBI) governor and the Bank Boards Bureau chief publicly airing their views on the issue. The RBI governor’s lament about not having full powers to sack public sector bank boards does appear self-serving but does not deserve to be dismissed as wholly irrelevant.

Is fraudulent activity in any bank, public of private, a cause for introspection on what went wrong, and how it could have been prevented better by the regulator? Unconditionally, yes. Is the absence of power in the hands of the RBI to dismiss the Board of Directors the only reason for the fraud? No. Would the fraud not have occurred if the RBI had that power? Not at all — frauds could take place in private sector banks too despite the having the power to approve or sack the CEO.

Frauds can take place in any institution, regardless of how the institution is owned. However, how the institution is governed indeed has a role in whether it is prone to frauds. If frauds are rampant in public sector banks, despite bank employees being regarded as “public servants”, and despite government ownership resulting in stringent and draconian oversight of the central investigation and vigilance agencies, it would be reasonable to conclude that the model is indeed flawed, and needs to be fixed. Therefore, the biggest risk to a real systemic clean-up is a dismissal of any discussion on the need to reform ownership and governance of public sector banks, by branding the point as an excuse or justification of occurrence of fraud in these banks.

Therefore, what the governor says about dual oversight of public sector banks is correct. It would of course be self-serving to suggest that this naturally means the has no responsibility to bear, and that aspect would be incorrect. However, it is important to ensure that the duality of responsibility has to be cleaned up. As the saying goes — no man can serve two masters. In the collision of multiple truths, the clash of ideology in the approach to regulation, ownership and governance, can lead to losing sight of the important, overwhelmed by the immediate.The immediate often trumps the important, but it is really important to take a close and hard look at how to clean up poor and ineffective governance of public sector banks, and the approach of treating the board of directors as policemen instead of strategic overseers.

This government has many firsts to its credit in being resourceful with law-making — promulgating presidential ordinances to bring in substantive law; and effecting serious amendments to laws by embedding them in Money Bills (obviating the need to get the amendments cleared by the Rajya Sabha). The resourcefulness needs to be brought to bear with The pace with which new law on fugitives is being piloted ought to be repeated with cleaning up state ownership of and the attendant governance shortcomings.

At the least, a simple legislation to convert each of the public-sector banks into a public limited company governed by the newly-introduced (now nearly four years old) company law should be passed, which would bring each of these institutions under the more effective, uniform and standard norms of corporate governance that are applicable to private sector banks as well. Without this measure, simply building up a with an extremely ambiguous role — ranging from the problem to being the search-and-selection agency for staffing bank boards — would be of no consequence.

The next step would be to dilute state ownership in these banks to a minority holding. The vigilance and investigation oversight of these banks would need to end — they have failed to contain the scale of fraud on these banks, and worse, they have ended up terrorising honest bank officials into becoming indecisive, further hurting the interests of the bank. Bank officials involved in the credit appraisal and sanctioning function are known to trip before they rise up the ranks with their career records being spoilt by vigilance and corruption cases, leading to a vacuum in the leadership and a lack of available bandwidth for senior management.

The implicit sovereign guarantee underlying every public-sector bank is borne out by each of the banks being recapitalised with sovereign money. The capital market regulator is again issuing a series of exemption orders exempting the government from having to make an open offer under the takeover regulations upon infusing more funds into these banks, whose shares are listed on stock exchanges. Resolution of weak banks and spreading the commercial pain of bank failure across its depositors is a political hot potato only because of this implicit guarantee. Therefore, sovereign funding of these banks through new capital could come the next time with strings attached — the legislative changes discussed above. Since it would involve state funding, they would in fact be Money Bills. All that is needed now is political courage.

This column was published in Business Standard under the title Without Contempt in editions dated March 22, 2018

Don’t waste the bank scam crisis

Think out of the box and bring in serious changes in the governance of public sector banks

By Somasekhar Sundaresan 

It is a welcome crisis: scams are tumbling out of the closet at banks. That a crisis is welcome may sound very odd. They allegedly involve several billions of depositors’ money, and indeed taxpayers money (since it is the state that has kept pumping money into public sector banks). Yet, crises are welcome for they are the harbingers of long-term reform measures — whatever the colour of the political parties in power. Four years ago, when one government was on the verge of going away and another was poised to take charge, a committee set up by the Reserve Bank of India under the chairmanship of Dr P J Nayak, submitted its report. The Committee made very specific recommendations for long-term reform incorporate governance in the banking sector, with particular regard to addressing the ominously-growing spectre of non-performing assets in banks. (Disclosure: the author was a member of this committee.)

The report documented the breakdown in the governance of  This was attributed to these banks being governed by outdated legislation that nationalised them — outdated because new company law that governs all companies has marched light years ahead of what had been thought about in the 1960s and later when banks were nationalised. The report empirically pointed out how the deep micro-management by their shareholder (government of India) rendered governance not just ineffectual but also wasteful, with the attention of the board of directors mandatorily being spent on issues that the government insisted the boards of directors must discuss, ignoring the real need for what needed the boards’ immediate attention. Of course, how the boards of directors must be populated was also picked on, and the need for professional search and selection was underlined.

The report called for a phased reduction of government stake to minority ownership. A key recommendation was to first hold the entire government stake in in a wholly-owned holding company owned by the government and to over time dilute government stake in the holding company to a minority. Meanwhile, a Bank Boards Bureau, an agency that was possible to set up within the scope of existing legislation, to search and select who may staff the boards of directors of banks, was recommended. The Bank Boards Bureau would be the precursor to what would be the board of directors of the holding company.
The report was part of what was discussed in the very first meeting between the then Reserve Bank of India governor and the new Prime Minister. The reception to the recommendations was warm. Great expectations were built up about how a new government with a new mandate would be able to take some critical long-term decisions. “Gyan sangams” were held and an “Indradhanush” (a seven-point programme) was born. A Bank Boards Bureau was formed, chaired by Vinod Rai, the go-to guy for all matters of reform, him having been the propriety auditor of all government functioning as the Comptroller and Auditor General of India. The mandate and role of the Bureau was nowhere near what the Nayak Committee Report envisaged —its role was envisaged as a panacea of all that is evil with banking.

There was no sign of reducing government stake in banks. The government moved in the opposite direction — one of the seven points of Indradhanush was to infuse ~700 billion of fresh money into  There was no sign of setting up a holding company. Media reports talked of setting up one holding company for every public sector bank — a clear indication that someone somewhere had decided to kill the idea. There had been a lot of hope that was riding on the fact that under the earlier National Democratic Alliance (NDA) government before the two terms of the United Progressive Alliance (UPA), a Bill had been tabled in Parliament to bring government stake in down to 33 per cent (that Bill lapsed) but all that hope was simply dashed.

Today, we have one banking scam after another coming out of the closet in rapid succession. In less than two months, the new year has already turned into an annus horribilis for the state-owned segment of the banking sector. There can be no better time than now to initiate bold measures of reform. The utterly non-impactful nature of the labyrinthine architecture of micro-management by government in its role as a shareholder of has been exposed. Greater dosage of an expired medicine can never turn into a cure of a long-standing ailment.

It is time to think out of the box and bring in serious changes in governance of  The holding company model needs immediate execution. Dilution of government stake to minority by infusion of private equity funds into banks will ensure a disciplined and tyrannical turnaround of these banks — a case study of how the Centurion Bank was turned around with this route is readily available in recent banking history. It is time to embrace the fact that we must not let this crisis of scams go waste.


This column was published as Without Contempt in the March 8, 2018 editions of Business Standard

Retrograde Gag Order from Stock Exchanges

By Somasekhar Sundaresan

It is an extraordinary and unprecedented measure. All the players in a market got together to execute an agreement. They issued a joint press release. A press release that read more like legislation than like a piece of commercial communication being sent to the market. The only three relevant came together to announce that they would stop feeding price data to 

“It is observed that for various reasons the volumes in derivative trading based on Indian securities including indices have reached large proportions in some of the foreign jurisdictions, resulting in migration of liquidity from India,” the release said, adding for good measure, “which is not in the best interest of Indian ” With words straight out of the Act, this was an unprecedented press release that sounded like an order usually passed by citing Sections 11 and 11B of the Act, which empowers the market regulator to issue directions “in the best interests of the securities market”.

The content of the press release has to be read to know the unprecedented nature of what is being done. In a nutshell, the self-styled “Indian exchanges” announced the following:

  • Indian exchanges and their affiliates will not directly or indirectly provide data on data discovered on their platforms to any foreign stock exchange or platform that trades or settles derivatives in any form outside India;
  • Indian exchanges, their affiliates and also their third-party vendors will blank out any price data to index providers who construct or compute indices outside India;
  • indices that have an element of Indian securities too would be starved of price data if 25 per cent or more of the weightage involves Indian securities, and derivatives are written on the back of such indices;
  • Those who get price data from Indian exchanges would “not be permitted to use” it for any structured product or participatory notes traded abroad;
  • All existing agreements to provide such data will be terminated immediately with notice period commencing forthwith, and within a month, all arrangements would be terminated or modified to “comply with the contents of” the press release; and
  • The final closing prices of securities would be displayed on the stock exchange website and forwarded to media organisations, two hours after the close of the market.


Essentially, a on price discovery. An agreement of this sort is what is typically called a “horizontal agreement” under competition law — one in which competitors enter into an agreement. The effects of this agreement can impair competition in the global market for price discovery. The phone lines between the Competition Commission of India and the Securities and Exchange Board of India could be burning with activity (they are statutorily obliged to talk to each other). Overseas competition regulators and overseas securities regulators could demand explanations from their Indian counterparts. The seeds of a cross-border trade diplomacy spat seem to have been sown.

Soon, state agencies may need to take a call on whether to wash their hands off, terming this a private agreement from private market players to combat overseas competition, or whether to take ownership of the measure, or, at the least acknowledge having blessed it if not having authored it. If this measure had the blessings of the regulators, it would have had the blessings of the government.

Both competition law and securities law have provisions enabling the government to issue directions on matters of policy. There could emerge international pressure for government to use this power and direct the regulators to get involved — similar to the pressure to intervene in the spat that occurred years ago between the securities market regulator and the insurance market regulator over unit-linked insurance plans.Putting aside the tone and tenor of the press release, the content does read like the proclamation of an emergency measure.

The philosophy of such policy measures is precisely the philosophy underlying prohibitions, censorship and bans — cases in example are moratoriums on remittances abroad, prohibition on import of gold, and at an extreme, overnight prohibition on usage of certain denominations of currency. Such measures typically push economic activity underground — the expansive and unofficial flow of alcohol in states that have imposed prohibition are a great example.

As Indian companies go global, interest in how their securities are priced in India can only grow across the globe. The demand for live price data of Indian securities would necessarily expand. A great policy response to overseas competition could be to permit Indian platforms to enable trading derivatives on foreign securities within India. These could be denominated in Indian rupee and have foreign securities and foreign indices as their underlying. The Sahoo Committee recommendation to allow such activity through a concept called “Bharat Depository Receipts” has met with stiff resistance from the regulators and is gathering dust. (Disclosure: the author was part of the committee that has made this rejected recommendation.)

Instead, the argument that “we should prevent export of the Indian market” seems to have taken firmer root. This philosophy was used to effectively stop overseas listing by Indian companies. However, a well-known but little-acknowledged fact is that any initial public offering of securities in India is as much a securities offering made outside India as it is a domestic fund-raising exercise.The approach of starving global of Indian price data, risks the Indian market itself. It is like a throwback to the pre-1990s era, where imports and exports needed licensing with a view to protect the interests of the Indian market and instead distorted the domestic market.

This Without Contempt column was published in Business Standard edition dated February 15, 2018

Electoral bonds for political funding: A cloak to hide the daggers?

After a concerted effort by political parties to circumvent disclosures under the RTI Act come the electoral bonds that will confer on them the benefit of pretending to not know who has donated

By Somasekhar Sundaresan


While the nation’s attention stands rivetted to divisions in the Supreme Court with political parties jumping in to seek mileage over recent events, the noise has succeeded in deflecting public attention from a massive retrograde step. A new year gift to all political parties is the Central government delivering on its threatened promise of enabling a white-wash of anonymous political funding through “electoral bonds”.

Electoral bonds were conceptually discussed briefly last year after the Union Budget was presented. While political parties are merrily commenting on the need for transparency in all institutions, they are happily engaged in a conspiracy of silence over how electoral bonds have cemented their ability to raise money without accountability and propriety being addressed.

Here’s how the bonds would work. The State Bank of India (SBI) would issue these bonds with a validity of just 15 days. You buy a bond from SBI. Within 15 days you donate the bond to a political party with full secrecy guaranteed by depositing the bond in designated accounts of political parties — no trail required. Neither do you need to disclose that you acquired the bonds nor do you need to disclose to whom you made the donation. The political parties can purport not to know who the donors are. This is facetious only because they would clearly know who donated to them through electoral bonds just the way they know today who donates them cash. However, through the figment of anonymity, they stand relieved of the obligation to disclose the colour of money received.

This is a fantastic concept for full exemption for political parties to follow any know-your-client norms. After the concerted conspiracy across party lines to circumvent disclosures under the Right to Information Act, electoral bonds will confer on them the benefit of pretending not to even know who has donated to them.The root cause of corruption in India is the hoarding of monies by political parties to fund elections. Parties that have lost their key treasurers in unforeseen circumstances have had adverse electoral impact. Every party would like to believe that that party alone is good for the nation. Each party would claim in its head that its winning is important to save the nation. Party leaders offer the delusion that they are not really corrupt because they only take monies for party funding, which is driven by notions of nation-building. Corporates generate cash through their operations and that finds its way to political parties. Many an immoral action has for long been masked by such specious and self-serving notions of national interest.Money changers and launderers thrive in the business of converting cash into bank balances. Now electoral bonds will trigger some disintermediation – political parties can now cut out the shroffs and hawala agents through whom they convert cash into bank balances, but the work would shift to those who fund them, who would buy electoral bonds with the cash they launder.The political parties that are entitled to make use of electoral bonds have brazenly flouted the Chief Information Commission’s direction to disclose their sources of funding. Electoral bonds will now give them the cloak beneath which they would wield their daggers.

Last year, one of the many substantive amendments smuggled into the “money bill” that was passed as the Finance Act, 2017, removed the cap on corporate funding of elections.Now that electoral bonds are actually in, none other than the SBI would know who has acquired electoral bonds of what size, and in whose account these bonds have been deposited. The SBI should be able to co-relate the purchase of the bonds and the receipt of bonds. The bank is state-owned and whichever government is in power would get an edge over this confidential information.

The possession and safeguarding of confidential information in a state agency is always suspect — the Competition Commission of India is the only state agency that has so far lived up to its statutory assurance of confidentiality.What is known to the SBI would be amenable to intelligence gathering by the government. For the common man to know which corporate has funded which political party would be impossible. This is where the concerted conspiracy of silence across political parties matters. Corrupt political funding has now received a veneer of respectability by pinning one point of the chain to banking channels.

Funding of political parties is not an area where political parties would blow the whistle on competitors. On the matter of sources of funds, they all have a proven track record watching out for one another and ensuring that no real transparency and reform of political funding ever takes place.Every party would disclose aggregate amount of funding received through electoral bonds, but not the identity. Neither the donor nor the donee would then have to make data public. By bringing in the bonds and given the role of SBI, the bonds are being touted as replacement of cash. All this means the burden of laundering cash will shift to the donors from the political parties, allowing the latter to claim clean funding through electoral bonds.

There are two seemingly benign pointers to all I have said here, in the government’s official defence of electoral bonds. A press statement issued by the Press Information Bureau states that the bonds will bring in “some element of transparency” and suggests that criticism of the bonds fall in the domain of “impractical suggestions” that would consolidate preference for cash donations. In short, the political parties that are in glee over judges who were briefly in public conflict over institutional systems, have privately firmed up institutionalising anonymous corporate funding without having to account for propriety in doing so.

This post was substantially published as my column titled Without Contempt in the Business Standard editions dated January 18, 2018

Three Extremes from 2017

2017 was marked by 3 extreme developments in law – surprising result in the 2G telecom case, changes in Insolvency and Bankruptcy Code and the push given to ‘Money Bill’ provisions of the Constitution


By Somasekhar Sundaresan


It is that time of the year — as 2017 draws to a close, it is tempting to look at developments in the area of law that impacted business enterprises during the year. It was a year marked by three extreme developments.


First, the biggest development that came at the fag end of the year – the all-surprising outcome in the 2G Telecom Scam (or should we now go back to saying “alleged scam case”). A classic example of a judicial overreach in cancellation of 2G spectrum licenses by a two-member bench of the Supreme Court, had led to the apex court correcting the law on allocation of natural resources when ruling upon a Presidential Reference. The Supreme Court had then taken great care not to disrupt the final ruling of the final court of the land in the 2G case, but had pretty much cleaned up the implications of the ruling for all other allocations of resources, doing away with the hard-and-fast rule of mandatory grant of resources to the highest bidder that the two-judge bench had earlier laid down.


Cut to 2017. The trial court judge, who through the trial, had pretty much denied every single interim application by every powerful applicant (whether it was from prominent industrialists seeking permission to travel, or from powerful political scions seeking bail) ruled that no case of criminality had been made out. Many commentators had been deeply invested in the idea that if the Supreme Court had already pronounced a bunch of persons guilty of impropriety, the criminal trial was just a formality to reach a foregone conclusion that the dramatis personae were guilty. They are still reeling in shock.  For now, the best way to summarize the situation is that all improprieties need not be criminal in nature although all crimes necessarily constitute impropriety.


The last word in the 2G case is not out. Appeals will follow. The zeal with which the earlier government had been attacked politically seems to be dead now. The zeal with which another bench of the apex court would eventually consider the last appeal that may eventually get filed many years down the line, will determine the real final outcome.  However, for this year, leaving merits of the specific case aside, this is a landmark development. The ruling cancelling telecom licenses were seen as bringing in uncertainty in the conduct of business. The ruling in the criminal trial underlines that the uncertainty can be uncertain.


Meanwhile, the silver lining is that regulators in the business of direct enforcement (without having to bother with proving themselves to courts of law in the first instance) would do well to learn that merely because they had taken strong positions on an interim basis, they do not have to conclude that violations took place. If the most high-profile case of the land can lead to acquittal, regulators must learn to look at every quasi-judicial trial presided over by them, with an open mind and without the fear of being seen as having sold their souls if they acknowledge that they were initially wrong.


Second, the law on insolvency affected business environment most materially this year. The very functioning of the newly-legislated Insolvency and Bankruptcy Code has taken off, with a bunch of cases reaching the apex court rapidly, and the law getting laid down. That even a newspaper vendor can initiate the insolvency process and bring a defaulter to his knees is good for business contracts. However, some extreme measures, however well-intentioned could kill the very efficacy of this law. One of them is the central bank taking charge of recovery decisions by banks — a position brought about through a Presidential Ordinance. The other is an evermore extraordinary Presidential Ordinance by which a blanket ban on anyone remotely connected to a defaulter gets disqualified from resolving any and every insolvent in the country.


Earlier, this column has analysed the unreasonable sweep of both these developments, here and here and therefore will not repeat itself. Course correction and tempering is expected, particularly with the latter.   For now, all that stout defenders have to say is: “Don’t expect the course not to be ever corrected — for now we need these imperfections.” Quite apart from this being a sorry position to take, if correction remains elusive, the new insolvency law could be stultified. Simply put, no affiliate of any insolvent anywhere in the world can bid to resolve an insolvent, if this position is not corrected.   And one is not being alarmist at all —indeed, this was the intention behind this latest Presidential Ordinance — since business failure and insolvency of every nature has been automatically stigmatised.

Finally, one would be remiss without reminding that the use of the “Money Bill” provisions in the Constitution of India — the only check and balance being the Speaker of the Lok Sabha, was taken to an extreme this year. Multiple tribunals constituted through Acts of Parliament passed by both Houses of Parliament have been abolished through a chapter in the Finance Act, 2017. In fact, the Foreign Exchange Management Act, 1999, which decriminalised violation of exchange controls by both Houses of Parliament, was re-criminalised through another recent Finance Act. That was not noticed loudly enough, and criminalising any conduct hardly evokes outrage in our society. The abolition and mergers of tribunals through this back door, certified by the Speaker to be worthy of a money bill legislation, will eventually be considered by the Supreme Court.

In a nutshell, the money bill envelope has been pushed to the farthest extreme. One could well be mistaken – a newer extreme may be achieved next year. Work on the Finance Bill, 2018 ought to have started in the cold corridors of North Block. Watch this space.
This was published as the Without Contempt column in the Business Standard editions dated December 28, 2017

SC’s wake-up call with bail law

The abolition of grant of bail without hearing govt’s position, and requirement to satisfy court that accused is not guilty, has become so rampant that it has now found place even in basic company law
By Somasekhar Sundaresan

The recent judgment of the striking down as unconstitutional, the provisions on bail contained in the Prevention of Money Laundering Act, 2002, (PMLA) is a long-overdue wake-up call. The law mandated two conditions for grant of bail — first, the public prosecutor must be given a chance to oppose the request for grant of bail; and second, the court must be satisfied that the accused is not guilty and is unlikely to commit another offence when on bail.

Now, this unconstitutional provision has in the past been upheld as constitutional in dreaded “anti-terror” laws such as Terrorist and Disruptive Activities (Prevention) Act, 1987, (Tada). This was obviously canvassed with the in arguments in support of the provision. However, the court differentiated the context of the earlier judgment (terror law) as compared with the (which has now covered within its sweep multiple laws across the board). In fact, it is provisions such as these that made society dread  Once suspected of terror activity and arrested, the onus literally would shift to the accused to satisfy the court system to stay out of jail — remember consideration of bail is before the trial gets underway.

Interestingly, across governments (headed by political parties of supposedly varying colour), legislation with the bail provisions now held to be unconstitutional have been introduced. The abolition of grant of bail without hearing the government’s position, and the requirement to satisfy the court that the accused is not guilty has become so rampant that it has now found place even in basic company law. When fraud is alleged, the onus of satisfying the court considering the bail application that the accused is not guilty, and is unlikely to commit another offence, shifts to the accused under the Companies Act, 2013. Besides, the public prosecutor necessarily has to be heard — which simply means that even if she is unavailable and seeks a few adjournments, the person arrested has to stay inside jail even before trial. Moreover, the court must be satisfied that the person accused is unlikely to commit any offence when out on bail.

Time was when bail was the rule and jail was the exception. Today, across legislation, jail is the rule, and bail, the exception. Meanwhile, society fed by media, builds firm views on innocence or guilt. Not too many are unsure about Salman Khan not having been behind the wheel or Indrani Mukherjee not being guilty of killing her child — and indeed, it took a film and a book for society to question facts in the  In fact, a large segment of society resents the Talwars being exonerated on the grounds that their guilt is not proven. Now picture having to satisfy junior judiciary and magistracy that the judges should be satisfied that accused are not guilty. A perverse outcome of such provisions of law is that the judge would worry if the grant of bail would mean that the judge is satisfied that the accused are not guilty and that would be used a clean chit when the trial is actually conducted.

In the case, the was told that its earlier decisions had upheld actions under these provisions, but the apex court rightly pointed out that in those decisions, the question before the court did not involve a challenge to the constitutional validity of the provisions.

The started as a check on laundering of proceeds of crime earned out of a narrow set of specific serious offences. The list of these offences, set out in a schedule to the (titled “scheduled offences”), kept growing through amendments. Heinous crimes like human trafficking and drug running, the original big ones on the list of scheduled offences, suddenly found violations such as failure to make an open offer under takeover regulations, keeping them company.

This kind of legislative thinking is what has led to bail provisions usually seen in laws prohibiting drug trafficking to find their way into law governing the running of companies. In other words, the risk of being accused of fraud when running a company is as high as the risk of being accused of drug trafficking when it comes to personal liberty and the ability to be granted bail. In the decision, the has built multiple scenarios of the timing of initiation and conduct of trial under the primary law and the trial under the to show how mindless and arbitrary the formulation has been, and has held the conditions for grant of bail to be unconstitutional.

When differentiating from the earlier ruling upholding these provisions as constitutionally valid in Tada, the has also extracted portions of that earlier judgment, which show that the had then taken note of the existence of such provisions in other laws affecting revenue. However, the constitutional validity of these provisions in those revenue legislation had not been challenged — they were only noticed by the court then. Now that these provisions have been held to be unconstitutional in the context of PMLA, it is critical for such provisions to be reviewed in the context of every legislation in which they reside. A good rule of law system would mean that this is done without asking the courts to consider each case and when they get presented. But that is truly wishful thinking in the political economy. However, some low-hanging fruit like company law could be a good starting point.

A substantial part of this piece was published as the Without Contempt column in the Business Standard editions dated December 14, 2017

Shun rhetoric, appreciate IBC problem

The IBC ordinance is another example of attempting to write a law to solve a problem that is not properly defined at the threshold

The debate over the presidential ordinance amending the Insolvency and Bankruptcy Code, 2016, (IBC) to insert disqualifications of potential participants in the resolution process of an insolvent has become bipolar and divisive. Television channels are going breathless airing alternative views on alternate days. Columns (including in this paper) have attributed motives and sought to call out “canards” — a classic “Hinduho-ke-Musalmaan” type of zeal seen only in “holy wars” claiming righteousness.


The very nature of this fight makes it evident that the ordinance is good politics. However, in the process, the sweep of the real problem posed by the ordinance, runs the risk of remaining unaddressed, thereby risking the very effectiveness of the IBC.


The disqualifications introduced should first be noticed. The ordinance lists various categories of persons who would stand disqualified from participating in any resolution plan for any insolvent under the IBC.  Any promoter of such disqualified person, and indeed any “connected person” with such disqualified person also stands disqualified. The term “connected person” includes all “related parties” and “associates” of the disqualified person. In other words, once any person is disqualified, the scope and sweep of the disqualification is wide and expansive.


Now, three categories of disqualifications in the list, clearly are amenable to the charge of not having been thought through, and will truly have mindless and unintended consequences.


First: the disqualification of any borrower that has been classified as a “non-performing asset” and has stayed in that status for over a year. At first blush, this would appear logical — obviously an entity that is unable pay its own debts cannot be involved in resolving the problems for any other insolvent. However, every “connected person” i.e. every “related party” of such entity and every associate too would automatically stand disqualified.


The term “related party” under the IBC is wide — for example, any company with common shareholding of just 2 per cent would be a related party. The term “associate” would be even more problematic — but the minute detail is not necessary to make this point in this column. Therefore, if a business goes bust for any reason whatsoever, every promoter of that business, and every related party and associate can never participate in any resolution plan for any other insolvent under the IBC. It is not even the case that only the participation of such related persons in the resolution of that disqualified person would be barred. Every resolution of every other insolvent under the IBC would also be barred.  This is extreme, an unreasonable restriction, and can substantially wipe out the supply of authors of resolution plans.


Second: the disqualification of any guarantor of any debt owed by any insolvent under the IBC. This is an inexplicable disqualification. A guarantor of a company’s debt is someone who believed in that debtor and agreed to guarantee that debtor’s promise. When a resolution plan is sought to be made, the guarantor would have skin in the game because it is his neck on the line.  While keeping out such a person from the resolution of the debtor is itself questionable, keeping out such a person and every person connected with him from every other resolution plan for every other insolvent under the IBC is not even intelligible.


Third: the disqualification of any person (and indeed, of every connected person, related party and associate of such person) to whom the capital market regulator may have issued directions not to deal in securities or access the securities market. No time frame of the period of prohibition on dealing in securities is set out. The capital market regulator is known to have been trigger-happy in the past, issuing such directions even on an “ex parte” basis (without a hearing). There is no settled science or rationale for the choice of the length of the directions in the law.  Courts disturb or uphold such directions on the basis of the human judgement of nature of the facts in the cases before them. This disqualification would remove from the resolution market for all insolvents, a wide range of persons for no plausible, objective or intelligible rationale.
Worse, the same principles of exclusion from the market, would apply to any affiliate outside India.  This would wipe out from the resolution market almost every single multinational company that has an interest in India.  If any person anywhere in the world has ever become insolvent, or has become a non-performing asset or has been issued any direction not to deal in securities. all affiliates of that person all over the world would be ineligible to participate in a resolution plan in India under the IBC.


One can go on to other disqualifications too — for example: the disqualification upon conviction with an imprisonment term for a period of two years, without regard to what the conviction was for. So, if one family member has had an unfortunate tragic criminal conviction, every relative and every “connected person” would be banned from participating in any resolution plan for any insolvent. However, the three examples above would suffice to show how the public debate is wrongly focussed on “good vs. evil” terms — without nuance, and with deployment of blunt weapons rather than sharp instruments.


The IBC ordinance is another example of attempting to write a law to solve a problem that is not properly defined at the threshold. If the problem sought to be solved was to keep out those responsible for the cause of an insolvency from the resolution of that insolvent, the ordinance as promulgated is not the solution.
The very concept of identifying persons responsible for causing insolvency is very difficult to define in a one-size-fits-all manner.  The ordinance has demonized the occurrence of insolvency instead of recognizing that business failure is a part of life.  Every star investor and global business would have insolvents among their related parties.
This is why the IBC clearly envisages a role for professional resolution professionals and bankruptcy professionals.  It is for these professionals to oversee a resolution plan for insolvent companies. A committee of financial creditors has to approve the resolution plan. It is open to the resolution professional and the financial creditors to weed out misfits from participation. If a resolution professional does not perform well, she is subject to regulatory intervention from the Insolvency and Bankruptcy Board of India, the regulator of these professionals. Instead of studying if this profession performs properly, the ordinance has put the very efficacy of IBC at risk, with an air of misplaced righteousness. It is time to cut out the noise and focus on the gravity of the problem.


A substantial part of this piece was published as the Without Contempt column in the Business Standard editions dated November 29, 2017