Continuing our regular coverage of India’s parliamentary sessions, Mandira Kala and Gayatri Mann assess key commercial bills that were debated and passed during the recent session
Last year witnessed the introduction and passage of key bills in parliament aimed at strengthening the financial stability of the economy. The Financial Resolution and Deposit Insurance Bill, 2017, was introduced to create a time-bound and orderly mechanism for the resolution of failing financial companies, and the Banking Regulation (Amendment) Act, 2017, was passed in August 2017 to create a procedure for banks to deal with bad loans.
Carrying this momentum forward, the winter session of parliament, which concluded on 5 January, saw legislative developments in the financial sector, including the introduction and discussion of key legislation that affects the economy and ease of doing business in India. The status and main highlights of key bills are discussed below.
The Insolvency and Bankruptcy (Amendment) Bill, 2017
As of 2017, insolvency resolution took 4.3 years on average in India, with delays caused by a combination of time taken to resolve cases in courts, and confusion due to a lack of clarity about the bankruptcy framework. To create a time-bound mechanism for the resolution of insolvency of companies and individuals, the government introduced the Insolvency and
Bankruptcy Code, 2016.
The code is in its early stages of implementation, with the first case resolved in August 2017. In the past two years, 300 cases have been registered under the code, some of which have been challenged in courts. Initial provisions of the code did not restrict any person from submitting a resolution plan or participating in the acquisition process of the assets of a company at the time of liquidation. A committee was set up in November 2017 to review the code and identify issues in its implementation.
Following this, an ordinance was promulgated in November 2017 to prohibit certain persons from submitting resolution plans to resolve defaulting companies. The Insolvency and Bankruptcy (Amendment) Bill, 2017, was introduced to replace the ordinance and prohibit certain people from submitting resolution plans or participating in the liquidation process. This includes promoters and company management if the company’s debt has been a non-performing asset for more than one year.
The argument for excluding such people may be that these people have not complied with laws in the past, and therefore could be undesirable candidates to restructure a failing company. Further, promoters and management of a defaulting company may have been responsible for its failure, and it may be improper to allow them to regain control of the company. Various members of parliament have pointed out that excluding certain people may result in lower competition among applicants seeking to resolve a company, which may lead to lower recoveries for creditors.
In cases of liquidation, the bill restricts the liquidator from selling the assets of the company to any person ineligible to submit a resolution plan. Unlike a resolution, the company ceases to exist after liquidation, in which case the background of the person bidding for its assets may not be relevant. Excluding some prospective bidders from the liquidation process may lead to lower recovery from the sale of the assets. Nevertheless, it could be said that certain promoters may deliberately run down a company to buy its assets at a lower price, and that there may, therefore, be reason to exclude them from the liquidation process.
The Insolvency and Bankruptcy Code, 2016, set up a resolution infrastructure for companies and individuals. In the 2017 monsoon session, the government introduced the Financial Resolution and Deposit Insurance Bill, 2017, to look at the resolution of financial sector entities. The bill was referred to a joint parliamentary committee for examination.
The Financial Resolution and Deposit Insurance Bill, 2017
Status: Report of the joint parliamentary committee awaited
Financial sector entities such as banks and insurance companies are an integral part of the financial system, and their failure can have an adverse impact on financial stability and result in consumers losing their deposits. As witnessed in 2008, the failure of Lehman Brothers impacted the financial system across the world and triggered a global financial crisis.
In India, there is currently no specialized resolution law for financial sector entities. Monitoring and resolution of firms is managed by respective regulators, for example, the Reserve Bank of India for banks and the Insurance Regulatory and Development Authority of India for insurance companies. Such a system restricts specialized resolution capabilities being developed for the entire financial sector. In this context, the government introduced the Financial Regulation and Deposit Insurance Bill, 2017.
The bill puts in place a Resolution Corporation to monitor financial sector entities, pre-empt their failure, and resolve or liquidate them in case of failure. It also provides deposit insurance to banks up to a certain limit. However, there is no review or appeal mechanism for the decisions of the corporation. One reason for not allowing an appeal may be that decisions of the corporation may require urgent action to prevent the financial sector entity from failing. However, this may leave aggrieved persons without recourse to challenge the decision of the corporation if they are unsatisfied.
The Resolution Corporation can resolve failing financial sector entities using various methods, such as: (1) transfer of assets and liabilities to another entity; (2) bail-in (involving internal restructuring of liabilities including conversion of debt to equity); or (3) liquidation. The bill does not indicate the point at which the resolution process will be deemed complete. For some methods, such as transfer or merger, the completion of the process may be inferred from the point at which new management takes over the administration of the entity. However, for methods like bail-in, the point at which resolution is complete may be unclear.
The Specific Relief (Amendment) Bill, 2017
Status: Introduced in the Lok Sabha
There are certain remedies available to a party whose contract has not been performed: (1) the party may seek monetary compensation; or (2) it may ask the court to require performance of the contract, known as specific performance. Under the current legal framework, monetary compensation is considered the primary remedy, and specific performance is an exceptional remedy.
The Specific Relief Act, 1963, states that courts can grant specific performance only in certain cases, including where the value of compensation could not be obtained, or the compensation does not provide adequate relief. The act also provides discretion to courts in deciding when to award specific performance in cases of non-performance.
In 2016, the government constituted an expert committee to review the 1963 act and suggest amendments. The committee recommended that the framework for contract enforcement should be changed, and that specific performance should be made the primary remedy, while compensation should be the exception. This was suggested to ensure ease of doing business.
It was also felt that changes to the act were required in light of new developments, such as contract-based infrastructure projects and public-private partnerships. In this context, the Specific Relief (Amendment) Bill, 2017, was introduced in the Lok Sabha on 22 December 2017.
In December 2017, the government introduced the Goods and Services Tax (Compensation to States) Amendment Bill, 2017, to replace an ordinance and amend the Goods and Services Tax (Compensation to States) Act, 2017, which was passed in April 2017. The bill amends the 2017 act to increase the cap on the goods and services tax (GST) compensation cess (levy) on motor vehicles from 15% to 25%. The government has estimated it will raise ₹900 billion (US$13.8 billion) through the compensation cess in 2018-19.
Last year, GST was rolled out to replace the complex indirect tax system. Adjusting to the new system, the probability of states losing a part of their revenue from tax increased. The government passed the Goods and Services (Compensation to States) Act, 2017, to address this and provide for compensation to states for any loss in revenue due to the implementation of GST. The act allowed the government to notify the rate of GST compensation cess on items such as pan masala (a chewing mixture), coal, aerated drinks and tobacco subject to certain caps.
The Negotiable Instruments (Amendment) Bill, 2017
Status: Introduced in the Lok Sabha
The Negotiable Instruments Act, 1881, defines promissory notes, bills of exchange and cheques. It also specifies penalties for the bouncing of cheques, and other violations with respect to such negotiable instruments. To address the issue of undue delay in the resolution of cheque dishonour cases, the government introduced the Negotiable Instruments (Amendment) Bill, 2017.
The bill allows a court trying an offence related to cheque bouncing to direct the person who writes the cheque (the drawer) to pay interim compensation, not exceeding 20% of the cheque amount, to the complainant. If the drawer is acquitted, the court will direct the complainant to return the interim compensation, along with interest.
MANDIRA KALA is head of research and GAYATRI MANN is an associate analyst at PRS Legislative Research, a think-tank that tracks the functioning of the Indian parliament and works with members of parliament from the Lok Sabha and Rajya Sabha, across political parties, and members of the legislative assemblies of various states.