In the first of our planned regular coverage of India’s parliamentary sessions, Mandira Kala provides a roundup of important commercial bills that were debated and passed during the recent session, and an assessment of their potential
In the past year, India’s parliament has witnessed the passage of key bills intended to spur economic reform. The constitution was amended and four bills were passed to enable the levy of a goods and services tax (GST) in the country. The GST subsumes several state and indirect central taxes into a uniform tax regime. It is expected to minimize cascading of taxes and create a common market for goods and services. Additionally, the Insolvency and Bankruptcy Code, which was passed in May 2016, enables a time-bound mechanism for banks to resolve the issue of bad loans.
The monsoon session of the parliament concluded on 11 August 2017 and saw 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 Banking (Regulation) Amendment Bill, 2017
Status: Passed
In the past few years, the banking industry has suffered from bad loans, with non-performing assets (NPAs, or loans on which repayment has been in arrears for at least 90 days) on the rise in the past decade. As of 2016, 7.5% of outstanding loans in India are categorized as NPAs. This is an increase from 2.5% in 2007. In addition, India has the second-highest amount of bad loans among BRICS countries (Brazil, Russia, India China and South Africa), after Russia.
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Banks have faced challenges recovering outstanding loans, including: (1) a lack of incentives for public sector bankers to recognize losses; (2) fear of investigation by anti-corruption agencies in case of low recoveries; and (3) insufficient capital to absorb losses due to unrecovered loans.
To drive the banks to initiate insolvency proceedings, the government introduced the Banking Regulation (Amendment) Bill, 2017, which was approved by parliament during this session. The bill amends the Banking Regulation Act, 1949, which currently regulates the functioning of banks through the Reserve Bank of India (RBI). Under the bill, the central government may authorize the RBI to issue directions to banks for initiating proceedings in case of a default in loan repayment. These proceedings will be under the Insolvency and Bankruptcy Code, 2016. The RBI may also issue directions to banks for resolution of stressed assets.
According to the RBI, loans extended by public sector banks account for 88% of NPAs in the country. This implies that a majority of NPAs are in banks where the government is the majority shareholder. Therefore, the government had the power to direct public sector banks to initiate recovery of NPAs under various RBI schemes and laws such as the Insolvency and Bankruptcy Code, 2016. In this context, it could be argued that the government had the authority to initiate recovery of 88% of NPAs without having to authorize the RBI under the bill.
On the other hand, the bill allows the RBI to issue directions to banks to initiate recovery proceedings against loan defaulters. It may be argued that a banking regulator is responsible to ensure stability of the banking system and thereby prevent risks to the financial system. Therefore, its role should be restricted to formulating broad guidelines that are followed by all banks, and not issuing directions related to specific loans. Banks should have the independence to take business decisions such as criteria for extending loans, risk profile of borrowers, lending rates, and recovery in case of loan default. Banks are best placed to assess the likelihood of recovery; for example, a bank may judge that a higher amount may be recovered if it waited for an improvement in the business cycle.
The Financial Resolution and Deposit Insurance Bill, 2017
Status: Introduced in the Lok Sabha; referred to a joint parliamentary committee
The resolution of failures of financial service providers is scattered across several laws. These laws are not comprehensive enough to ensure the stability of the financial industry. In addition, the authorities responsible to implement these laws do not have adequate power.
It is important to note that the impact of the failures of financial service providers is wide and can have a systemic effect on the economy. As a result, general insolvency resolution laws such as the Insolvency and Bankruptcy Code, 2016, do not apply to the resolution of failures of financial entities. The Financial Resolution and Deposit Insurance Bill, 2017 has been introduced in the parliament to address this issue.
Under the bill, the National Company Law Tribunal can order the Resolution Corporation (established under the bill) to resolve the failure of financial entities. The Resolution Corporation has powers such as: (1) transfer of assets of the failing financial entity to a healthy one; (2) merger or amalgamation with other entities; and (3) liquidation of the failing financial entity. The bill also envisions the establishment of the Corporation Insurance Fund, which acts as a deposit insurance to financial service providers.
The Companies (Amendment) Bill, 2017
Status: Passed by Lok Sabha; pending in Rajya Sabha
The Companies Act, 2013, regulates the functioning of companies in India, including their incorporation, management and winding up. After the implementation of the act, industry, professional institutes and legal experts pointed to compliance difficulties, and suggested necessary amendments to facilitate ease of doing business. The government then introduced the Companies (Amendment) Bill, 2016, which amended provisions related to financial accountability, corporate governance and compliance requirements of the Companies Act, 2013. These amendments were based on recommendations of the Companies Law Committee (CLC).
Financial accountability
The bill seeks to improve the financial accountability of companies by amending provisions with respect to: (1) disclosure requirements of large shareholders; and (2) the structure of companies and their investments.
- Disclosure of larger shareholders. If shareholders are eligible to vote or receive dividends on their shares, they are required to make a declaration to the company regarding shareholdings. The bill requires an additional disclosure if a shareholder, by acting alone, or in conjunction with others, has ownership of 25% of shares in the company. This requirement was introduced to identify shareholders who, directly or indirectly, have significant ownership and control of the company.
- Layers of subsidiaries and investments. On the other hand, the bill does not address a key recommendation of the CLC. The 2013 act prohibits companies from making investments in other companies through more than two layers of intermediary companies. In addition, the central government may specify a cap on the number of layers of subsidiaries that a holding company can have. These provisions seek to address issues such as siphoning of funds. The CLC recommended that such caps be deleted as they would affect the flexibility of the company’s structuring and ability to raise funds, despite providing accountability. The CLC noted that certain provisions would ensure transparency in the functioning of a company and its subsidiaries. However, the bill, as passed by Lok Sabha, does not seek to address the recommendations of the committee.
Compliance requirements
- Private placement. Companies can raise capital by selling securities such as shares to a small number of select investors. Under the 2013 act, companies need to submit a separate offer letter disclosing certain information about the company when a private placement offer is made to an individual investor. The bill simplifies the process by doing away with filing of the separate offer letter.
- Objects of company incorporation. The 2013 act requires that the memorandum of association of a company to state specific objects behind incorporating a company. However, the Standing Committee on Finance, which examined the bill, and the CLC have differing opinions on this provision. The CLC recommended that companies should have an option to provide a general objects clause, instead of specific objects to allow flexibility in their business activity, whereas, the standing committee recommended that companies should not be allowed to provide a general objects clause, as this might lead to the creation of bogus entities. The bill passed by the parliament adheres to the standing committee’s recommendation.
Corporate governance
- Independent directors. The 2013 act does not permit an independent director to have a pecuniary relationship with the company, other than their remuneration. The JJ Irani Committee in 2005 recommended that an independent director could have a monetary relationship of up to 10% of his/ her remuneration with the company. The CLC reasoned that minor transactions may not compromise the independence of directors. The bill permits an independent director to have a monetary relationship of up to 10% of his/ her total income with the company. This amount may be modified by the central government.
- Managerial remuneration. The 2013 act requires obtaining central government and shareholder approval for payment of managerial remuneration in excess of prescribed limits. The bill removes the requirement of obtaining approval from the government. It also specifies that in some cases approval of the shareholders will be required through a special resolution.
Reducing redundancy
- Forward dealing. Forward dealing is the act of purchasing securities of a company for a specific price at a future date. The 2013 act prohibits directors and key managerial personnel of a company from engaging in forward dealing. The bill removes this provision of the act. It also seeks to remove provisions of the act that prohibit insider trading in companies.
Labour reforms
Status: One bill introduced, three at draft stage
Reform of India’s labour laws have been pending for decades. The Parliamentary Standing Committee on Commerce recommended in 2015 that reforms need to be urgently carried out to bring labour laws in tune with existing times and create a business-friendly environment. The government seeks to consolidate 44 existing labour laws into the following four: (1) Code on Wages; (2) Labour Code on Industrial Relations; (3) Labour Code on Social Security and Welfare; and (4) Labour Code on Safety & Working Conditions. The government introduced the Code on Wages, 2017, during this parliamentary session, while three more bills are in the draft stage. These are in relation to industrial relations, social security and welfare.
The Code on Wages, 2017 repeals four central laws: (1) Minimum Wages Act, 1948; (2) Payment of Wages Act, 1936; (3) Payment of Bonus Act, 1965; and (4) Equal Remuneration Act, 1976. As per the code, central and state governments will fix the minimum wages applicable to different forms of employment, and review them periodically. The wages must be paid to all employees via bank account deposits. Wages below a limit fixed by central or state government may be payable in cash. The code also prohibits discrimination on grounds of gender in the matter of wages. It also extends current safeguards in relation to timely payment of wages to all kinds of employees.
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Mandira Kala is head of research 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.
