Iran is the new horizon for India

No other development in international law has been more significant for India’s corporate and business sectors than the Iran nuclear deal. India’s businesses typically take no interest in geo-political issues but this is once that they ought to sit up and move in to exploit an advantage they would have over businesses from the western world.

The agreement between the Islamic Republic of Iran and the “P5+1” group (the five permanent members of the United Nations Security Council plus Germany) can truly be a game-changer for Indian industry. The western powers have historically tried (and failed) to cripple Iran into a banana republic, and the latter has fought back valiantly (and successfully). Germany alone has maintained robust trade relations, despite deep inconvenience. To cut a long story short, the sanctions against Iran by the western powers has gone way beyond what the sanctions by the United Nations legitimately endorse.

Sanctions by the United Nations are only restricted to arms, ammunition and contraband, while the sanctions from the western nations went beyond that and attempted to cripple the nation’s financial systems and channels of funds. The idea was to be coercive with the republic and get them to wind down a nuclear programme, which was feared to be convertible into a weapons programme, that Iran kept insisting was never about making warheads.

The bargain to resolve the impasse and lift sanctions has been inevitable in more ways than one. Against the teeth of the sanctions, Iran has built a reasonable quality in its infrastructure, good public transport, decent public health indicia, and consequently bolstered Iran’s resilient national pride. Iran’s own internal politics is complicated and divisive – just the same type of divisiveness that one sees in other democracies such as India and the United States.

The Department of Financial Services in the State of New York extracted an expensive settlement of $340 million from Standard Chartered Bank for allegedly helping Iran’s trades – this was among the settlements that sparked international literature on the extortionate state of the United States’ law enforcement policy, since defending oneself is so expensive that one would rather settle fights with state agencies. This was a case of a local prosecutor enforcing federal law – somewhat like Kerala Police harming entire careers of India’s space scientists on charges of espionage against India. Even larger settlements ($9 billion against BNP Paribas for allegedly facilitating trade with Iran, Cuba and Sudan) have reflected even more poorly on the US. Indeed, Coca-Cola and Pepsi-Cola are widely available in Iran due to exceptions on “humanitarian” and “food supply” grounds.

In the United Kingdom, the Supreme Court came down heavily on the government for harassing and seriously harming the interests of Bank Mellat, an Irani bank’s operations in the United Kingdom.

The upholding of the rule of law by the UK legal system in fact is still in play – proceedings for payment of damages by the UK to the bank are under consideration by UK courts now.

Gradually, the lawless means of hurting Irani interests, all in the name of safeguarding the world from weapons of mass destruction – a hollow phrase one has heard of earlier in the context of Iraq – had to give way. What does this mean for India businesses? If Indians get out of their stereotypical thinking and realise that Iran is neither like Saudi Arabia in cultural conservatism nor like Egypt or Morocco in being a pushover for other world powers, they would see the opportunities that abound there.

First, Islamic capital markets entail sophisticated derivatives contracts (using put and call options to get around sharia limitations on payment of interest) and market players are highly sophisticated in appreciation of financial products. Second, the release of sanctions would pose immense opportunities for Indian players active in the banking and financial services back office industries, more particularly for the information technology industry.

Third, and most importantly, if the agreement is operationalised, the sheer inability of an Indian business to trade with Iran because just doing so would lead to others who trade with these Indian businesses violating US laws would go away. India could well be the regional headquarters for multinationals entering Iran if India strikes good bargains with good treaties on investment protection and tax avoidance.

Contrary to popular western and Indian middle-class perception, Farsi is far closer to Urdu than to Arabic. India is also physically closer to Iran than to China and the United States. And, for the record, in the Ease of Doing Business survey report of the World Bank, Iran ranks 130 out of 189 countries, while India ranks 142. In enforcing contracts, Iran ranks 66 while India ranks 186. This is an opportunity that Indian businesses can only ill-afford to lose.

(This piece was published in my Without Contempt column in Business Standard edition dated July 20, 2015)

DEFAMATION IS NOT CRIME

Self-litigating-non-lawyer-now-with-BJP politician Subramanian Swamy is on course to creating legal history again (after his litigation relating to 2G spectrum).

The Supreme Court is hearing his writ petition challenging the legality of defamation being considered a crime. A bunch of 18 other writ petitions filed this year by petitioners ranging from Rahul Gandhi to Arvind Kejriwal have been tagged with Swamy’s petition of last year.

Under Section 499 of the Indian Penal Code any “imputation” by words or signs that can harm the reputation of another person commits the crime of defamation. A nod or a wink in a manner that harms someone’s reputation is a crime. The punishment, apart from fine, can extend to two years in jail. In current-day Indian society, where everyone is quick to assume that everyone else is corrupt, this would mean that the “crime” is rampant in society. Equally, it would mean that a law that renders almost every human being’s conduct to be a crime is draconian and unconstitutional.

The Indian Constitution guarantees freedom of speech and expression as a fundamental right. It permits fetters only if they are “reasonable restrictions”. Defamation is explicitly mentioned as one of the grounds on which fundamental rights can be “reasonably restricted”. The key question, therefore, is whether sending someone to jail for expressing a view can be considered reasonable. Every crime is wrong but every wrong cannot be crime.

Remember Sharad Pawar’s famous suit in the 1990s for damages of Rs 100 crores against The Outlook for suggesting that the NN Vohra Committee appointed by the Home Ministry had suggested a nexus with hawala operators of Dawood Ibrahim. The dispute was settled out of court for an unconfirmed sum, estimated at Rs 5 crores. Likewise the only retribution so far against TV anchor Arnab Goswami has been the prohibitively expensive and chilling deposit of Rs 100 crores that has had to be paid in a defamation suit filed by a retired judge after he aired the photo of the retired judge as the photo of someone else who was that night’s subject of humiliation. While civil proceedings are an effective disincentive to defamation, criminalising defamation presents a bad economic policy incentive.

Civil proceedings involve paying fees for justice delivery linked to the amount claimed. Criminal proceedings involve setting up the might of the state at the expense of taxpayers to settle private battles. If one politician bad-mouths another, it is hardly a reason for the common man’s taxes to be used in resolving their battle. Although our politicians are far more thick-skinned than our businessmen, they routinely initiate criminal action for alleged defamation. Recently, the highly-reputed Maharashtra Chief Minister is reported to have threatened criminal defamation against anyone suggesting that he had some responsibility for delaying the take-off of his Air India flight.

The perverse incentive in use of criminal prosecution is pervasive. The rule of law in civil courts is sidestepped by the coercive exploitation of the human fear of losing personal liberty in jail. Private business defaults could routinely be termed as cheating or criminal breach of trust. The very prospect of criminal proceedings could coerce a settlement of disputes. Retired police officers with access to local policemen are reported to have set up business models founded on this fear.

The Union Home Ministry has opposed the petitions on the ground that civil suits take too long to be effective. This statement underlines a governmental endorsement of the fear of the police to curb free speech. The criminal justice system is as broken if not more broken than the civil justice system. Therefore, it is the sheer fear of having to answer summons in distant locations that the ministry seeks to endorse. Such an approach is an endorsement that a chilling effect on free speech is seen as being desirable by the government. It is the government’s job to clean up delays in justice delivery. Endorsing a perversity to deal with another perversity is bad governance. Whichever way the Supreme Court decides, this case will be an important event in India’s legal history of freedom of speech.

(This piece was published in the July 17, 2015 edition of the Ahmedabad Mirror, Bangalore Mirror, Mumbai Mirror and Pune Mirror)

A QUESTIONABLE ANTI-CORRUPTION SYSTEM

This edition of the column is going to talk about a particularly problematic area of law and regulatory policy governing doing business in India.Unless there is a drastic change in political will and capacity to handle this problem, no government, regardless of which political party is in office, and no judicial system, regardless of how judges are chosen and appointed, would be able to pull India out of a fast expanding morass.

The problem is around corruption.Not the existence of it – that, is not only a subject beaten to death. The problem is around our societal perception of how should be battled. And even more about the systems we build around battling corruption and the warped incentive system we have built in the process. We are on course to ensuring that the “honest and competent” find it totally unremunerative and uninteresting to join and man our governmental and regulatory systems. The market for human resources outside the is starved of this resource and will price this talent to a level that governments and regulators cannot afford.

As a consequence, the regulatory system would remain largely filled with people who may be either “honest and incompetent” or “dishonest and incompetent”. Since this would largely involve being incompetent, it is the folks who are “dishonest and competent” who will thrive. In short, a completely warped, scary and counterproductive incentive system is being guaranteed by a flawed approach to tackling corruption. Here’s how this plays out.

First, the assumption in Indian society is that every governmental or regulatory decision that is “questionable” on merits involves corruption.  Let’s define a “questionable” decision as one in which two or more potentially conflicting views are possible and that one or more of the views could potentially make life easy for doing business. A professional decision that casts a lesser burden on doing business is at the threshold assumed to have been motivated by corruption.  Therefore, the incentive is always to take the “safe” decision – one where no one is able to point a finger at the decision-maker for having “favoured” business.

Second, if the junior most officer who has to process a decision takes a “safe” view and his senior is competent to know that the long-term cost of the decision to the business ecosystem is heavy and changes it, he would be the one suspected of corruption – for he would be overruling a “safe” decision and would be taking a “questionable decision”, which is most prone to assumption of corruption.   The decision would therefore have to be referred to an outsider – say a “law officer” outside the government agency such as the Advocate General, the Solicitor General or the Attorney General. Now, the “questionable” nature of the decision is a cancer that has come to infect even the law officers’ offices. If the view were to support making life easier for a private party, corruption can be alleged there too. Even the senior most law officers of India have had to stand trial in recent times.

Third, the anti-corruption laws have become so warped that they expose honest and competent officers to the worst possible treatment.  Two features stand out – one: gratification need not even be proved and can just be assumed; and two: before throwing a public servant to the wolves prosecuting for corruption, no prior sanction of a sane voice in the system would be required. These features are contributions of the judiciary, with a disproportionate unfairness against corruption.

Fourth, even where a safe view on a questionable decision is set aside by a court, the decision on whether the court’s decision should be appealed is inherently another questionable one.  The safe view would be to prefer an appeal and let the judges decide – the incentive is in favour of not taking a bold professional decision but instead pushing the ball into the judges’ court to let them carry the burden. Thus, the executive arm of the State keeps finding ways to bring the unelected courts into decision-making and that lays the ground for judicial activism.

Finally, the net effect: every questionable decision is invariably determined in a bipolar manner. It is taken either by the junior most officer at the lowest end of the food chain on the executive side, or, by the senior most officer on the judicial side – mostly a bench of the Supreme Court. The entire decision-making apparatus in between the two is becoming irrelevant, and developing skill sets that idle minds are prone to develop. Create diabolical grounds and create complexities that necessitate referring the matter to outside lawyers and to judges, but pretty much lose the capacity to decide.

If the junior most officer who has to process the file has indeed had the courage to take a view that does not hurt the private party in question although he could have taken a view that would hurt the private party more, then of course, his seniors would only be endorsing someone else’s view. Therefore, such decisions do come through and the system survives. However, even that would fast become a rarity since the junior and the senior could be jointly picked up for conspiracy for not taking a safe view.

Who is the person that everyone is so afraid of? Easy: the junior most officer in the anti-corruption enforcement apparatus whose word on merits would matter the most in a probe into suspected corruption. That gentleman or lady, therefore, runs the country.

How do the corrupt handle this? Easy if you are dishonest and competent, you can game the system. Point a few cases of others to nasty anti-corruption proceedings, build a name, and if competent, package and present decisions in terms that show how harsh they are on private business.  That sets the tone of the discourse in any case and only those who can play the game with them can successfully do business.

Writing this takes moral courage.  A discussion questioning the quality of the incentive system to combat corruption is easily assailed with: “so, your stand is to promote corruption?”  In that ecosystem lies the story of why India can never improve her ranking in the “Ease of Doing Business” surveys of the World Bank.


(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

(This piece was published in the June 15, 2015 edition of Business Standard)

Twitter: @SomasekharS

THE ORIGINALIST DOGMA

The decision of the US Supreme Court rec ognising same-sex marriages across states has brought to the fore an impor tant concept in American constitutional law: the concept of “originalism” expounded by the dissenters on the bench. The ruling has sparked a debate across India, particularly since not too long ago the Indian Supreme Court had set aside a Delhi High Court ruling that consensual same-gender adult sex is not criminal. The debate over originalism is relevant for India.

Simply put, “originalism” refers to the principle of interpretation that views a constitution’s meaning as being fixed at the time its enactment. It does not necessarily mean an absolute dogma of never changing at all with the times. However, it does entail a dogma of considering libertarian reading of the constitution as “straying” from what was originally envisaged.

To be fair to originalists, they do not necessarily stick solely to the “letter of the law”. However, they may effectively end up doing so. Their interpretation of the “spirit of the law” is their reading of what the original authors could have intended as the spirit in those times.

For example, if a constitution were to ban the death penalty by hanging, an originalist may not restrict his reading of the ban solely to “hanging”. He may say the ban also extends to beheading. However, he could well hold that some other form of capital punishment not originally envisaged is not banned. He could argue that the new form of inflicting death could never have been envisaged when the constitution was originally written. Equally, he could uphold a new-age death penalty process by arguing that it was the pain of hanging that drove the spirit behind the ban, and the new form of death penalty does not inflict the same level of pain.

That is how originalist dissenting judges in the US Supreme Court’s same-sex marriage ruling get to make arguments like: “dignity is not a state-guaranteed fundamental right”. They find same-sex marriages as mind-bending as multipartner marriages, which despite having strong roots in “cultures around the world” (how about a peek at Mormons in the backyard) could never have been intended to be recognised in the US.

Conservative originalists frown upon reference to constitutional judgements of foreign societies – irrelevant to the original authors. Justice Antonin Scalia says he reads Israeli judgements when he wants to shock himself and does not have much to learn from British judges. Ironically, and thankfully, Indian judges allow for osmosis from foreign societies regardless of whether they are “liberal” and “conservative”.The judgement refusing to decriminalise consensual adult homosexuality, and the one recognising rights of the “third gender”, extensively borrow from judgements in foreign societies under foreign constitutions.

The dogma of originalism is just a shade away from dogmatic approach of religious fanatics – say, the Taliban’s interpretation of the Holy Quran. Both have the strong belief that every aspect of human life was originally envisaged and reduced to writing, to be interpreted in the spirit they alone understand. Only a shade different, because originalists always argue that if societies indeed want change, they should elect law-makers to amend the constitution. For the Taliban (or for that matter the orthodox segments of any religious faith), the thought of amending The Book would be a bigger heresy than interpreting it “liberally”.

Amending the constitution in any political system is something that, by design, should necessarily be very difficult. In the words of BR Ambedkar (defending critique that his draft made amending the Indian Constitution very difficult), authors of the constitution had no axe to grind beyond securing a good and workable constitution. On the other hand, parliament necessarily comprises partisans whose agenda would be obstructed and limited by the constitution.Their agenda would be to demolish these hurdles and so should not be allowed to amend the constitution easily.

Yet, he believed India’s constitution-amending limitations were the “simplest” compared with other constitutions such as those of the US and Australia. He was prescient, because we have one of the most-amended constitutions in the world. And our Supreme Court had to adopt a non-originalist interpretation of the law on amendment to outlaw amendments that alter the original basic features of the constitution.That’s something to chew on.

(This piece was published in the July 3, 2015 editions of Mumbai Mirror, Bangalore Mirror, Ahmedabad Mirror and Pune Mirror)

Tweets @SomasekharS

WHAT TO LEARN AND UNLEARN FROM THE UNITED STATES

Prior public consultations when making regulations should be a critical feature

When this column is printed, Barack Obama, as the Guest of Honour would be sitting through a long ceremonial parade to commemorate the completion of 65 years by the Republic of India, born after shaking off a long colonial rule by the UK. Obama would later speak on Mann ki baat,a radio show hosted by Prime Minister Narendra Modi, somewhat like Alo Presidente, hosted by the not-so-friendly Hugo Chavez in Venezuala. But, that bit is a digression.

The is an amazing republic, born of the will of a people, similarly shaking off her colonial masters. Her head of state is a perfect guest to have when celebrating the commencement of the 66th year of the Republic of India. The USA has always fascinated India – after all she has colonised the thinking and strategic objectives of India’s former coloniser so well that the UK is often referred to as the 51st State of the US. The UK is ill at ease with “foreign judges” (from neighbouring European constitutional courts) criticising her laws but is at peace with aligning her laws with collaborative objectives of the US.

New York City is the financial capital of the world, not just of the US. Some say the 51st state should in fact be New York City, and that the UK should only come in only as the 52nd. The City of London is after all over-shadowed by New York City. Therefore, there is always an extraordinary awe in which India and her policy-makers hold the US’ policy (of course this awe extends even to other aspects of public policy, but for this column, one should restrict analysis to the financial sector).

The US, on the other hand, being a sharp student, studies India well for her inner strengths and core capacities, regardless of whether India’s policymakers themselves recognise these strengths – not for nothing that even the consumer-fleecing Indian private sector healthcare is still cheaper than the highly-regulated and insurance-dependent expensive health care in the USA. In the context of Obama’s visit, it would be worthwhile to ruminate over the elements of the USA’s policy framework that we should embrace and those that we should shun copying.

Regulating how to make regulations is a key feature that needs serious learning from the US model. First, prior public consultations when making regulations should be a critical feature. Currently, this is being done more in the nature of lip service than out of any conviction that this process adds value. Public consultation is adopted when writing an entire body of regulations, but amendments to them are made without consultations. Even the process of consultation is not scientific. It is not unknown to find regulations with one scheme of the law being proposed, and after consultations, an entirely different scheme coming out, without any explanation or discussion on what led to the change – a good example would be the regulations governing alternate investment funds.

Second, assessing and discussing costs and benefits a proposed regulation as a pre-requisite of regulation-making is another feature that needs to be adapted. Surely, no regulator would propose any regulation without being motivated by a belief that it would provide benefits. However, not much thought is given to the costs and adverse impact that the regulation might inflict. Any attempt to highlight the adverse impact, depending on the level of anger, can be termed as anything ranging from being aligned with the ‘bad guys’ to being habitually contrarian and maverick. Often, regulations are written merely because a regulator has the power to write them – Reserve Bank of India Governor Raghuram Rajan is spot on when he says organisations create work for themselves once they are created.

Third, making appeals against regulatory orders prohibitively expensive, forcing parties to seek a better bargain in reaching settlements, is a bad model to emulate from the US. Truly, regulators in the US have had it too easy on this front. Once picked up for adverse regulatory attention, launching a defence is so prohibitively expensive that most succumb to settlements rather than fight for honour. There is no lack of honour in settling in that society. In India, the worst of both worlds apply. Adverse regulatory attention makes you a social pariah even while the process of settlement is highly discretionary (regulations governing settlements are inherently conflicting on what can be settled, leading to arbitrary and unreasonable discretion).

Fourth, Indian regulators are empowered a lot more than their US counterparts – the securities market regulator is a prime example. “Empower us unconditionally, and trust us to use it well,” is the Indian regulatory prayer to Parliament, which has often led to enormous powers being granted. In fact, when the power is extraordinary without an appropriate check and balance, regulators lose the incentive to build investigative and enforcement capacity – they can achieve “success” without turning too many stones. The result is an unpredictable regulatory system where the capacity to deal with surprises arising out of regulatory discretion is a skill that carries a precious premium over the capacity to plan one’s business with predictability without the need to “know the regulatory mind”.

Finally, blindly following the US micro-regulatory approach in some areas (for example, one can find regulations on the number and colour of crayons in a box) to the complete light-touch approach in other areas (approach in the financial sector before the last decade’s crises) would be most counter-productive. The US needs to loosen the former, and tighten up the latter. India needs to tighten the former and loosen the latter. After all Modi wants businesses to ‘Make in India’. For many businesses in the world, ‘Make in the US’ is not a welcome thought at all.


The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.

(This piece was published in the January 26, 2015 edition of Business Standard)

THREE APPROACHES TO BUDGET-MAKING

The law governing manufacturing is replete with obsolescence on multiple counts

It is that time of the year when everyone has a view on what the government should do with the Union Budget. As the Budget preparation team locks itself into the cellars of North Block, there are three choices before the (new) government.

The first is to get defensive and tentative in dread that the recent Delhi elections represent a rejection of brave policy. The second is to get bold and decisive, in line with the majority mandate won in last year’s national elections. The third is to lose the plot and deliver a Budget that is disconnected with ground reality.

The first approach would be most tempting and easy to achieve. Examples of this approach would be tweaking a tax rate here and there; moving an item from one classification to another for indirect taxes; and playing around with some tax deductions. There could even be some intuition-based social reform that is not linked to either empirical data or study of behavioural science.

An example would be exempting long term capital gains on transactions in constituents of a popular stock index for a year – essentially, a half-hearted and ham-handed attempt to boost transactions in the stock market.

If this was the only approach, it would spell disaster. Indeed, there would be elements of this approach in the budget speech, but the key is to not do just this. Hence the need to focus on what can be done with the second option. The second approach would be tougher to conceive than to achieve. The national electorate did not vote this government into office with expectations of doing what the UPA would have done anyway.

The expectations created to win the elections deserve incisive interventions. There are structural changes crying to be made. A classic example of skewed policy is that it is far tougher in India to acquire shares of minority shareholders to delist a listed company, than to acquire the land of a farmer whose family depends on subsistence farming, to build a shaving cream factory on it.

Essentially, the second approach would need hard and radical thinking with empirical support – for example, considering abolition of short term capital gains tax altogether on securities would represent such an approach. While predecessors have claimed credit for bringing in new laws, I have decided to remove laws, said Prime Minister at various forums. Focusing the approach of removing laws on obsolete laws that do not affect anyone’s life in any case would be a waste of time.

What is needed is a conscious effort to identify laws that do not serve any purpose and yet have to be complied with – just because the laws have always been there. Take the case of the law that enabled nationalisation of banks, or even the Banking Regulation Act, which deals with banks not owned by government.

The provisions were conceived in an era that bears no resemblance to current-day banking. Be it the structure of the board of directors of banks, or the provisions on what form of expertise should be represented on them, the provisions have no relevance for how banking is run today.

That is just one example. In an era where India is seeking to invite investors from around the globe to ‘Make in India’, the law governing is replete with obsolescence on multiple counts. The enormous clamour for “labour law reform” is obsessed with making it possible to sack workers at will.

The inability to sack employees is itself a product of badly designed law that focused on making it difficult to dismiss employees and lost sight of the need to spend on safety of employees who the employer does not desire to sack. The third approach is one of living in an ivory tower without any clue of what is necessary and what is being expected.

If expectations on the ground are not being heard, this approach gets adopted quite easily. This approach spells unmitigated disaster – where everything can go wrong. The retrospective tax amendments introduced to undo a loss in the Supreme Court on tax interpretation, just because the government was smarting from a loss of what it sincerely believed was a good case, would fall in this category. Given the expectations built in getting this mandate, if one more budget exercise goes by without a policy intervention to undo the messy retrospective amendments, the faith would be lost.

Finally, the government should disregard all the feedback it hears on the front pages of newspapers – no industrialist or commentator from the business sector would give a marking of anything less than 7/10. It, then, becomes a case of the Emperor’s clothes.


(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

(This piece was published in the February 16, 2015 edition of Business Standard)

Tweets @SomasekharS

HOW CONSTITUTIONAL ARE SEBI’S DIRECTIONS?

SC’s rationale on validity of IT Act holds immense significance for the financial sector

The Supreme Court’s decision on a challenge to the has made news for the section it outlawed — Section 66-A of that law. However, the court’s decision refusing to outlaw another provision of the law, and the rationale for that decision, carries immense significance and conveys serious lessons for the financial sector.

In the constitutional challenge to the law, Section 66-A was outlawed for being vague, over-reaching and arbitrary.  However, Section 69-A (which empowers the central government  to issue directions to block public access to electronic content) was saved as being constitutionally valid, on the ground that there were effective procedures and safeguards that could protect against abuse. Directions to block public access to electronic content under Section 69-A can be issued only on specific grounds, and Parliament also required the government to make rules to govern the procedures and safeguards for use of such power.

This is the section under which your access to viewing a documentary such as India’s Daughter can be blocked. Now before you jump to the conclusion that the decision to block that film has been upheld, remember that the court has only ruled that the power to block public access does not by itself violate the Indian Constitution. It does not mean that any and every use of that power is constitutionally valid.  In fact, the court found that the safeguards and procedures enable a mechanism to avoid arbitrariness, and even after those are followed, a challenge under a writ petition can be made. Section 69-A explicitly reproduces the very eight grounds on which reasonable restrictions may be imposed on the fundamental rights to various liberties enshrined in Article 19 of the Indian Constitution. Written rules notified by the government specify that a request for blocking any electronic content has to be made to a “nodal officer” who shall apply his mind to whether or not any of the eight grounds are available in the facts of the case. She then puts up the complaint to a “designated officer” who is authorised to issue such an order.  Meanwhile, a committee of government officers is required to examine the complaint, arrive at a view on whether the blocking of access may be considered to be reasonable (i.e. whether any of the eight grounds are available).

The committee is also required to give a hearing to any person who has generated or stored the electronic content sought to be blocked so that the arguments against a potential decision to block access can be heard. The case is then placed before the secretary, Ministry of Information and Broadcasting, who could then take a view, after which the designated officer may block access to the content complained of. Over and above this framework, a “Review Committee” is required to meet every two months and examine whether such decisions to block access to electronic content should be continued or not.

The took note of the elaborate framework of procedures and safeguards prescribed in law to protect against arbitrary usage of the power to issue directions, and therefore held 69-A to be constitutionally sound.  Now, juxtapose this with a similar “power to issue directions” granted to the Securities and Exchange Board of India under sections 11(4) and 11B of the Securities and Exchange Board of India, 1992.

First, the sections themselves (unlike 69-A) make no reference to the safeguards set out in the Indian Constitution.  They empower the regulator to issue directions “in the interests of” investors in the securities market – a term that can be understood in as wide a range as a painting of Mother India by M F Husain.

Using this power, any person associated with the securities market can be put out of the securities market until further notice without even a hearing. This measure can simply mean, in practical terms, that one cannot access one’s own savings invested in financial assets so long as such assets are “securities” — practically, almost everything other than what is in one’s bank account.

Second, unlike 69-A, there is no prescribed procedure at all for how the regulator should consider or  reconsider whether directions under Sections 11 and 11B are warranted or justifiable. The need for a post-decisional hearing is often presented as a safeguard. In reality, in the absence of any prescribed procedure or timelines, there can be absolutely no expectation of when such a post-decisional hearing would be afforded.

It can range from a few weeks to several months.  Instances of people being put out of the market on suspicion first, with investigations following later and dragging on for years, are par for the course.

In the 20-year history of this power, neither has a single rule been made by government nor has any regulation been made by on its own, to govern the usage of this all-important power similar to those in anti-terrorism laws.

Third, there is no review at all of whether a direction issued is required to be continued even when months and years go by. There is no review committee, no independent mind, or any other such safeguard to review whether or not a direction issued should be continued.  Over the years, the norm  has degenerated to the regulator almost never lifting a direction once issued.

Worse, the evidence shows that more and more strident tones are adopted regardless of content, in the delivery of the message continuing the directions.  These tones prejudice “collective conscience”, which in turn, influences judges.  So much so, that when directions are lifted by Sebi of its own accord, corruption is assumed. Provisions similar to sections 11(4) and 11B are contained in every legislation governing the financial sector — first found in the Banking Regulation Act and replicated in every legislation including recent ones such as those governing the insurance and pension regulators.

The Sebi is the regulator that has used it the most. None of these legislation has safeguards akin to those in 69-A. In the collective conscience of our society, the constitutional rights of those in business, have always been perceived as less worthy, perhaps due to the sub-conscious belief that these are the folks who otherwise subvert the law.

The European Court of Human Rights has recently seriously interdicted such powers of the Italian securities regulator. Until India brings order in this space, doing business in India will remain very difficult.


(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)  

(This piece was published in the March 30, 2015 edition of Business Standard)

Tweets @SomasekharS