Tag Archives: RBI

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

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