Model Code of Conduct and the 2014 General Elections

April 14th, 2014 No comments

Recently, the Election Commission has recommended postponing certain policy decisions of the government related to natural gas pricing, and notifying ecologically sensitive areas in the Western Ghats, by invoking the Model Code of Conduct (MCC).  It has also censured several candidates for violating the MCC.  In light of these recent events, we outline the key features of the MCC below.

What is the Model Code of Conduct and who does it apply to?

The MCC is a set of guidelines issued by the Election Commission to regulate political parties and candidates prior to elections, to ensure free and fair elections. This is in keeping with Article 324 of the Constitution, which gives the Election Commission the power to supervise elections to the Parliament and state legislatures.

The MCC is operational from the date that the election schedule is announced till the date that results are announced.  Thus, for the general elections this year, the MCC came into force on March 5, 2014, when the election schedule was announced, and will operate till May 16, 2014, when the final results will be announced.

How has the Model Code of Conduct evolved over time?

According to the Press Information Bureau, a form of the MCC was first introduced in the state assembly elections in Kerala in 1960.  It was a set of instructions to political parties regarding election meetings, speeches, slogans, etc.

In the 1962 general elections to the Lok Sabha, the MCC was circulated to recognised parties, and state governments sought feedback from the parties.  The MCC was largely followed by all parties in the 1962 elections and continued to be followed in subsequent general elections.

In 1979, the Election Commission added a section to regulate the ‘party in power’ and prevent it from gaining an unfair advantage at the time of elections.  In 2013, the Supreme Court directed the Election Commission to include guidelines regarding election manifestos, which it has included in the MCC for the 2014 general elections.

What are the key provisions of the Model Code of Conduct?

The MCC contains eight provisions dealing with general conduct, meetings, processions, polling day, polling booths, observers, party in power, and election manifestos.  Major provisions of the MCC are outlined below.

  • General Conduct:  Criticism of political parties must be limited to their policies and programmes, past record and work.  Activities such as:  (a) using caste and communal feelings to secure votes,  (b) criticising candidates on the basis of unverified reports,  (c) bribing or intimidation of voters, and (d) organising demonstrations or picketing outside houses of persons to protest against their opinions, are prohibited.
  • Meetings:  Parties must inform the local police authorities of the venue and time of any meeting in time to enable the police to make adequate security arrangements.
  • Processions:  If two or more candidates plan processions along the same route, organisers must establish contact in advance to ensure that the processions do not clash.  Carrying and burning effigies representing members of other political parties is not allowed.
  • Polling day:  All authorised party workers at polling booths should be given identity badges.  These should not contain the party name, symbol or name of the candidate.
  • Polling booths:  Only voters, and those with a valid pass from the Election Commission, will be allowed to enter polling booths.
  • Observers:  The Election Commission will appoint observers to whom any candidates may report problems regarding the conduct of the election.
  • Party in power:  The MCC incorporated certain restrictions in 1979, regulating the conduct of the party in power.  Ministers must not combine official visits with election work or use official machinery for the same.  The party must avoid advertising at the cost of the public exchequer or using official mass media for publicity on achievements to improve chances of victory in the elections.  Ministers and other authorities must not announce any financial grants, or promise any construction of roads, provision of drinking water, etc.   Other parties must be allowed to use public spaces and rest houses and these must not be monopolised by the party in power.
  • Election manifestos:  Added in 2013, these guidelines prohibit parties from making promises that exert an undue influence on voters, and suggest that manifestos also indicate the means to achieve promises.

Is the Model Code of Conduct legally binding?

The MCC is not enforceable by law.  However, certain provisions of the MCC may be enforced through invoking corresponding provisions in other statutes such as the Indian Penal Code, 1860, Code of Criminal Procedure, 1973, and Representation of the People Act, 1951.

The Election Commission has argued against making the MCC legally binding; stating that elections must be completed within a relatively short time (close to 45 days),  and judicial proceedings typically take longer, therefore it is not feasible to make it enforceable by law.

On the other hand, in 2013, the Standing Committee on Personnel, Public Grievances, Law and Justice, recommended making the MCC legally binding.  In a report on electoral reforms, the Standing Committee observed that most provisions of the MCC are already enforceable through corresponding provisions in other statutes, mentioned above.  It recommended that the MCC be made a part of the Representation of the People Act, 1951.

Empowering parliamentarians

March 24th, 2014 No comments

The 15th Lok Sabha recently concluded with the worst track record on a number of indicators. In the first of a four part series in Livemint, MR Madhavan of PRS Legislative Research discusses whether one can hope for an improvement in the performance of Parliament once the 16th Lok Sabha assembles in a couple of months.

The recently concluded 15th Lok Sabha performed poorly on many parameters: few sittings, low number of Bills passed and a significant proportion passed without deliberation, the higher proportion of time wasted on disruption etc. As the 16th Lok Sabha assembles in a couple of months, the big question is whether one can hope for an improvement in its performance.

The recently concluded 15th Lok Sabha performed poorly on many parameters: few sittings, low number of Bills passed and a significant proportion passed without deliberation, the higher proportion of time wasted on disruption etc. As the 16th Lok Sabha assembles in a couple of months, the big question is whether one can hope for an improvement in its performance.

Are there structural factors that led to the low effectiveness of Parliament in the last five years? If that is true, one can then look at ways to address these factors. Two aspects come to mind immediately: the anti-defection law and the lack of recorded voting. There are three other, key, functions of Parliament that merit attention: making laws, holding the government to account for its actions and policies, and the power of the purse.

The anti-defection law was made by inserting the Tenth Schedule to the Constitution in 1985 to combat “the evil of political defections”. The provisions require every member of Parliament (MP) and of state legislative assemblies or councils (MLA or MLC) to abide by the party’s command on voting or abstaining on every vote. If a legislator fails to do so, he may be disqualified from his membership to the legislature.

The provisions apply not only to votes that affect the stability of the government, i.e., no-confidence motions and money Bills. They are applicable to all votes. Also, they are applicable to members of Rajya Sabha and legislative councils, who have no say in the formation of the government.

The effect is that each member is converted into a mere number at the beck and call of the party leadership. This goes against the basis of a representative democracy in which the elected representative is expected to act in public interest (as understood by him) which would usually be a combination of his ideology, political party membership and constituency interests. Instead, the current system forces him to blindly obey the instructions of the party leadership.

This system weakens the checks and balances inherent in parliamentary democracy. The government can get any of its policies and Bills approved by issuing a whip to its party members and through backroom deals with the leadership of other political parties. It does not need to convince individual MPs of the merits of the proposals. Thus, our system strips the incentive for an MP to understand and think through any issue, as he has to finally just obey the party. For example, in December 2012, the government had to face a vote on permitting foreign direct investment in the retail sector. The members of all political parties voted (or abstained) on party lines. Contrast this with a system without the anti-defection law such as the British Parliament, in which, the prime minister was unable to win the vote in the House of Commons on going to war in Syria, despite the government having a comfortable majority.

The irony is that the anti-defection law does not appear to be very effective in preventing defections that lead to the fall of the government. During the confidence motion in 2008, about 20 MPs defied the party whip. Also, this provision does not apply when the party leadership decides to change its affiliation—as the Dravida Munnettra Kazhagam (DMK) and Trinamool Congress did in the last two years—for a mass-defection from the coalition. Furthermore, the anti-defection law breaks the link between the elected representative and his electors. Citizens vote for their candidates on a combination of the person and the party—this is evident from the discussions on “winnability” of various candidates and the care with which parties allocate the tickets for elections.

The elected representative is accountable to his voters for his actions, and this accountability is enforced when he contests for re-election from the constituency. However, the anti-defection law provides him with an excuse for his stand on any issue—that he had to obey the party’s diktat. Compare this to the system in other democracies, such as that seen in the electoral debates in the US, where candidates have to justify their past actions on various legislative votes, often those taken decades earlier.

This brings us to a related issue—we do not have records of how MPs voted on most issues. Most motions are decided by a voice vote, with the Speaker determining whether the majority supported or rejected the motion. Though any member can challenge this decision and demand a division (recorded vote), it is rarely done. Of the 175 Bills passed in the 15th Lok Sabha (not counting Constitutional Amendment Bills), only 11 had a recorded vote. This implies that citizens do not know whether their MPs were even present in the House during the vote. This is an easy fix as every seat is provided with a voting machine. Indeed, in the British Parliament, where MPs have to physically walk out into the lobbies for their votes to be recorded, most Bills see such action.

To sum up, we need two reforms urgently: repeal the anti-defection law, and require that all Bills be passed only through recorded voting.

M.R. Madhavan is president of PRS Legislative Research.

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Ordinance making powers of the Executive in India

September 27th, 2013 No comments

In light of the decision of the union cabinet to promulgate an Ordinance to uphold provisions of the Representation of People Act, 1951, this blog examines the Ordinance making power of the Executive in India.  The Ordinance allows legislators (Members of Parliament and Members of Legislative Assemblies) to retain membership of the legislature even after conviction, if

(a)     an appeal against the conviction is filed before a court within 90 days and

(b)     the appeal is stayed by the court.

However, the Ordinance will only be promulgated after it receives the assent of the President.

I. Separation of powers between the Legislature, Executive and Judiciary

In India, the central and state legislatures are responsible for law making, the central and state governments are responsible for the implementation of laws and the judiciary (Supreme Court, High Courts and lower courts) interprets these laws.

However, there are several overlaps in the functions and powers of the three institutions.  For example, the President has certain legislative and judicial functions and the legislature can delegate some of its functions to the executive in the form of subordinate legislation.

II. Ordinance making powers of the President

Article 123 of the Constitution grants the President certain law making powers to promulgate Ordinances when either of the two Houses of Parliament is not in session and hence it is not possible to enact laws in the Parliament.[i]

An Ordinance may relate to any subject that the Parliament has the power to legislate on. Conversely, it has the same limitations as the Parliament to legislate, given the distribution of powers between the Union, State and Concurrent Lists. Thus, the following limitations exist with regard to the Ordinance making power of the executive:

i.   Legislature is not in session: The President can only promulgate an Ordinance when either of the two Houses of Parliament is not in session.

ii.   Immediate action is required: The President cannot promulgate an Ordinance unless he is satisfied that there are circumstances that require taking ‘immediate action’[ii].

iii.   Parliamentary approval during session: Ordinances must be approved by Parliament within six weeks of reassembling or they shall cease to operate.  They will also cease to operate in case resolutions disapproving the Ordinance are passed by both the Houses.  

Figure 1 shows the number of Ordinances that have been promulgated in India since 1990.  The largest number of Ordinances was promulgated in 1993, and there has been a decline in the number of Ordinance promulgated since then.  However, the past year has seen a rise in the number of Ordinances promulgated.

           Figure 1: Number of national Ordinances promulgated in India since 1990

Ordinances PromulgatedSource: Ministry of Law and Justice; Agnihotri, VK (2009) ‘The Ordinance: Legislation by the Executive in India when the Parliament is not in Session’; PRS Legislative Research

III. Ordinance making powers of the Governor

Just as the President of India is constitutionally mandated to issue Ordinances under Article 123, the Governor of a state can issue Ordinances under Article 213, when the state legislative assembly (or either of the two Houses in states with bicameral legislatures) is not in session.  The powers of the President and the Governor are broadly comparable with respect to Ordinance making.  However, the Governor cannot issue an Ordinance without instructions from the President in three cases where the assent of the President would have been required to pass a similar Bill.[iii]

IV. Key debates relating to the Ordinance making powers of the Executive

There has been significant debate surrounding the Ordinance making power of the President (and Governor).  Constitutionally, important issues that have been raised include judicial review of the Ordinance making powers of the executive; the necessity for ‘immediate action’ while promulgating an Ordinance; and the granting of Ordinance making powers to the executive, given the principle of separation of powers.

Table 1 provides a brief historical overview of the manner in which the debate on the Ordinance making powers of the executive has evolved in India post independence.

Table 1: Key debates on the President’s Ordinance making power

Year

Legislative development

Key arguments

1970 RC Cooper vs. Union of India In RC Cooper vs. Union of India (1970) the Supreme Court, while examining the constitutionality of the Banking Companies (Acquisition of Undertakings) Ordinance, 1969 which sought to nationalise 14 of India’s largest commercial banks, held that the President’s decision could be challenged on the grounds that ‘immediate action’ was not required; and the Ordinance had been passed primarily to by-pass debate and discussion in the legislature.
1975 38th Constitutional Amendment Act Inserted a new clause (4) in Article 123 stating that the President’s satisfaction while promulgating an Ordinance was final and could not be questioned in any court on any ground.
1978 44th Constitutional Amendment Act Deleted clause (4) inserted by the 38th CAA and therefore reopened the possibility for the judicial review of the President’s decision to promulgate an Ordinance.
1980 AK Roy vs. Union of India In AK Roy vs. Union of India (1982) while examining the constitutionality of the National Security Ordinance, 1980, which sought to provide for preventive detention in certain cases, the Court argued that the President’s Ordinance making power is not beyond the scope of judicial review. However, it did not explore the issue further as there was insufficient evidence before it and the Ordinance was replaced by an Act. It also pointed out the need to exercise judicial review over the President’s decision only when there were substantial grounds to challenge the decision, and not at “every casual and passing challenge”.
1985 T Venkata Reddy vs. State of Andhra Pradesh In T Venkata Reddy vs. State of Andhra Pradesh (1985), while deliberating on the promulgation of the Andhra Pradesh Abolition of Posts of Part-time Village Officers Ordinance, 1984 which abolished certain village level posts, the Court reiterated that the Ordinance making power of the President and the Governor was a legislative power, comparable to the legislative power of the Parliament and state legislatures respectively. This implies that the motives behind the exercise of this power cannot be questioned, just as is the case with legislation by the Parliament and state legislatures.
1987 DC Wadhwa vs. State of Bihar It was argued in DC Wadhwa vs. State of Bihar (1987) the legislative power of the executive to promulgate Ordinances is to be used in exceptional circumstances and not as a substitute for the law making power of the legislature.  Here, the court was examining a case where a state government (under the authority of the Governor) continued to re-promulgate ordinances, that is, it repeatedly issued new Ordinances to replace the old ones, instead of laying them before the state legislature.  A total of 259 Ordinances were re-promulgated, some of them for as long as 14 years.  The Supreme Court argued that if Ordinance making was made a usual practice, creating an ‘Ordinance raj’ the courts could strike down re-promulgated Ordinances.
Source: Basu, DD (2010) Introduction to the Constitution of India; Singh, Mahendra P. (2008) VN Shukla’s Constitution of India; PRS Legislative Research

 

This year, the following 9 Ordinances have been promulgated:

  1. The Securities Laws (Amendment) Ordinance, 2013
  2. The Readjustment of Representation of Scheduled Castes and Scheduled Tribes in Parliamentary and Assembly Constituencies Second Ordinance, 2013
  3. The Securities and Exchange Board of India (Amendment) Second Ordinance, 2013
  4. The National Food Security Ordinance, 2013
  5. The Indian Medical Council (Amendment) Ordinance, 2013
  6. The Securities and Exchange Board of India (Amendment) Ordinance, 2013
  7. The Readjustment of Representation of Scheduled Castes and Scheduled Tribes in Parliamentary and Assembly Constituencies Ordinance, 2013
  8. The Criminal Law (Amendment) Ordinance, 2013
  9. The Securities Laws (Amendment) Second Ordinance, 2013

Three of these Ordinances have been re-promulgated, i.e., a second Ordinance has been promulgated to replace an existing one.  This seems to be in violation of the Supreme Court’s decision in DC Wadhwa vs. State of Bihar.

 


Notes:

[i] With regard to issuing Ordinances as with other matters, the President acts on the advice of the Council of Ministers. While the Ordinance is promulgated in the name of the President and constitutionally to his satisfaction, in fact, it is promulgated on the advice of the Council of Ministers.

[ii] Article 123, Clause (1)

[iii]  (a) if a Bill containing the same provisions would have required the previous sanction of the President for introduction into the legislature;

(b) if the Governor would have deemed it necessary to reserve a Bill containing the same provisions for the consideration of the President; and

(c) if an Act of the legislature containing the same provisions would have been invalid unless it received the assent of the President.

Mahatma Gandhi National Rural Employment Guarantee Act: Review of implementation

September 23rd, 2013 No comments

In the recently concluded Monsoon Session of Parliament , the Parliamentary Standing Committee on Rural Development released a report on the implementation of the Mahatma Gandhi National Rural Development Act, 2005 (MGNREGA).  This blog provides a brief introduction to the key provisions of MGNREGA , followed by an overview of the major findings and recommendations of the Standing Committee.

I. MGNREGA: A brief introduction

A. Objectives: MGNREGA, which is the largest work guarantee programme in the world, was enacted in 2005 with the primary objective of guaranteeing 100 days of wage employment per year to rural households.  Secondly, it aims at addressing causes of chronic poverty through the ‘works’ (projects) that are undertaken, and thus ensuring sustainable development.  Finally, there is an emphasis on strengthening the process of decentralisation through giving a significant role to Panchayati Raj Institutions (PRIs) in planning and implementing these works.

B. Key features:

  • Legal right to work: Unlike earlier employment guarantee schemes, the Act provides a legal right to employment for adult members of rural households.  At least one third beneficiaries have to be women.  Wages must be paid according to the wages specified for agricultural labourers in the state under the  Minimum Wages Act, 1948, unless the central government notifies a wage rate (this should not be less than Rs 60 per day).  At present, wage rates are determined by the central government but vary across states, ranging from Rs 135 per day to Rs 214 per day.
  • Time bound guarantee of work and unemployment allowance: Employment must be provided with 15 days of being demanded failing which an ‘unemployment allowance’ must be given.
  • Decentralised planning: Gram sabhas must recommend the works that are to be undertaken and at least 50% of the works must be executed by them.  PRIs are primarily responsible for planning, implementation and monitoring of the works that are undertaken.
  • Work site facilities: All work sites should have facilities such as crèches, drinking water and first aid.
  • Transparency and accountability: There are provisions for proactive disclosure through wall writings, citizen information boards, Management Information Systems and social audits.  Social audits are conducted by gram sabhas to enable the community to monitor the implementation of the scheme.
  • Funding:  Funding is shared between the centre and the states.  There are three major items of expenditure – wages (for unskilled, semi-skilled and skilled labour), material and administrative costs.  The central government bears 100% of the cost of unskilled labour, 75% of the cost of semi-skilled and skilled labour, 75% of the cost of materials and 6% of the administrative costs.

MGNREGA was implemented in phases, starting from February 2006, and at present it covers all districts of the country with the exception of those that have a 100% urban population.  The Act provides a list of works that can be undertaken to generate employment related to water conservation, drought proofing, land development, and flood control and protection works.  Table 1 provides information regarding employment generation and expenditure under MGNREGA.

Table 1: MGNREGA: Key indicators

Year

Number of households provided employment (in crore)

Average number of person days of work per household

Total Expenditure (in lakh)

2006-07

2.10

43

8823.35

2007-08

3.39

42

15856.88

2008-09

4.51

48

27250.10

2009-10

5.25

54

37905.23

2010-11

5.49

47

39377.27

2011-12*

4.99

43

 38034.69

2012-13**

4.25

36

 28073.51

Source: Standing Committee on Rural Development; PRS. Note: *Provisional ** As on 31.01.2013

II. Findings and Recommendations of the Standing Committee on Rural Development

A. Achievements: The Standing Committee highlighted several achievements of MGNREGA in the seven years of its implementation, especially:

  • Ensuring livelihood for people in rural areas.
  • Large scale participation of women, Scheduled Castes and Scheduled Tribes (SCs/STs) and other traditionally marginalised sections of society.  SCs/STs account for 51% of the total person-days generated and women account for 47% of the total person-days generated.
  • Increasing the wage rate in rural areas and strengthening the rural economy through the creation of infrastructure assets.
  • Facilitating sustainable development, and
  • Strengthening PRIs by involving them in the planning and monitoring of the scheme.

B. Challenges: However, the Committee found several issues with the implementation of the scheme. As Table 1 (above) shows, the average number of days of employment provided to households has been lower than the mandated 100 days, and has been decreasing since 2010-11.

Key issues that the Committee raised include

  • Fabrication of job cards: While as many as 12.5 crore households have been issued job cards out of an estimated 13.8 crore rural households ( as per the 2001 census), there are several issues related to existence of fake job cards, inclusion of fictitious names, missing entries and delays in making entries in job cards.
  • Delay in payment of wages: Most states have failed to disburse wages within 15 days as mandated by MGNREGA.  In addition, workers are not compensated for a delay in payment of wages.
  • Non payment of unemployment allowances: Most states do not pay an unemployment allowance when work is not given on demand.  The non-issuance of dated receipts of demanded work prevents workers from claiming an unemployment allowance.
  • Large number of incomplete works: There has been a delay in the completion of works under MGNREGA and inspection of projects has been irregular.  Implementing agencies were able to complete only 98 lakh works out of 296 lakh works.  As Table 2 shows, a large percentage of works remain incomplete under MGNREGA and the work completion rate appears to be decreasing in recent years.

Table 2: Work completion rate

Year

Work completion rate (%)

2006-07

46.34

2007-08

45.99

2008-09

43.76

2009-10

48.94

2010-11

50.86

2011-12*

20.25

2012-13*

15.02

Total                  33.22

Source: Standing Committee on Rural Development. Note: * As on 30.01.2013

  • Other key challenges include poor quality of assets created, several instances of corruption in the implementation of MGNREGA, and insufficient involvement of PRIs.

C. Recommendations: The Committee made the following recommendations, based on its findings:

  • Regulation of job cards: Offences such as not recording employment related information in job cards and unlawful possession of job cards with elected PRI representatives and MGNREGA functionaries should be made punishable under the Act.
  • Participation of women: Since the income of female workers typically raises the standard of living of their households to a greater extent than their male counterparts, the participation of women must be increased through raising awareness about MGNREGA.
  • Participation of people with disabilities: Special works (projects) must be identified for people with disabilities; and  special job cards must be issued and personnel must be employed to ensure their participation.
  • Utilisation of funds:  The Committee found that a large amount of funds allocated for MGNREGA have remained unutilised.  For example, in 2010-11, 27.31% of the funds remained unutilised.  The Committee recommends that the Department of Rural Development should analyse reasons for poor utilisation of funds and take steps to improve the same.  In addition, it should initiate action against officers found guilty of misappropriating funds under MGNREGA.
  • Context specific projects and convergence: Since states are at various stages of socio-economic development, they have varied requirements for development.  Therefore, state governments should be allowed to undertake works that are pertinent to their context.  There should be more emphasis on skilled and semi-skilled work under MGNREGA.  In addition, the Committee recommends a greater emphasis on convergence with other schemes such as the National Rural Livelihoods Mission, National Rural Health Mission, etc.
  • Payment of unemployment allowance: Dated receipts for demanded work should be issued so that workers can claim unemployment allowance.  Funds for unemployment allowance should be met by the central government.
  • Regular monitoring: National Level Monitors (NLMs) are deployed by the Ministry of Rural Development for regular and special monitoring of MGNREGA and to enquire into complaints regarding mis-utilisation of funds, etc.  The Committee recommends that the frequency of monitoring by NLMs should increase and appropriate measures should be taken by states based on their recommendations.  Additionally, social audits must mandatorily be held every six months.  The Committee observes that the performance of MGNREGA is better in states with effective social audit mechanisms.
  • Training of functionaries: Training and capacity building of elected representatives and other functionaries of PRIs must be done regularly as it will facilitate their involvement in the implementation of MGNREGA.

 

Government and RBI response to contain a depreciating rupee

September 9th, 2013 No comments

The depreciating Indian rupee was a recurring topic of discussion and debate in the Monsoon Session of the Parliament.  The USD/INR exchange rate depreciated 9% during this Monsoon Session, hitting a record low of INR68 to a dollar on August 28.  The Indian Rupee also depreciated 11% against the British Pound and 8% against the Euro during this session.  The rupee depreciation may feed into inflation by affecting the price of imported goods, especially of oil.  However, a cheaper rupee may boost exports, improving the Current Account Deficit (CAD).  This post discusses the reasons for the decline in the value of the rupee, and the steps taken to contain it.

The Prime Minister and the Finance Minister made statements in Parliament regarding the economic situation of the country and the currency.  The key reasons cited by the government for the decline in the value of the rupee are:

  • Large Current Account deficit: The current account (net exports of goods and services, remittances, and net dividend payments) has been in a deficit continuously for the last eight years.  Falling growth rate of Indian exports, coupled with a sharp rise in imports, especially of crude oil and gold, have increased this deficit.
  • Weakening capital inflows: The capital account (the net flow of funds through equity investments and borrowings) surplus has been used to finance the current account deficit for many years.  Capital inflows have reduced due to the improving economic situation in the US and other developed countries.  Investors are exiting developing markets in expectation of the US Federal Reserve increasing the interest rates, impacting the currencies of emerging markets, like India, Brazil, Russia, Indonesia, Turkey and South Africa.
  • Inflation: The PM said that part of the depreciation is attributable to the adjustment of the rupee exchange rate to the inflation differential, i.e. India’s relatively high rate of inflation versus other economies.

Figure 1: Excess of Capital Account surplus over Current Account deficit has been shrinking (in USD million)

Picture2

Source: Reserve Bank of India; PRS. Note: FY refers to financial year; for example, FY06 is financial year 2005-2006.

Table 1: Steps taken by the RBI and the government of India to stabilise the currency markets

Issue Details
Capital Outflow The RBI reduced the limit for outbound investment and remittances from India.
Encouraging Capital Inflows RBI has removed administrative restrictions on investment schemes offered by banks to non-resident Indians, and removed ceiling on interest rates on deposit accounts held by NRIs.

The government liberalised the FDI limits for 12 sectors, including oil and gas.  A Bill is pending in the Parliament to revise the FDI limit to 49% in the insurance sector.

RBI increased the current overseas borrowing limit for banks from 50% to 100%, and allowed it to be converted into rupees and hedged with the RBI at concessional rate.

RBI also allowed banks to swap fresh NRI dollar deposits with a minimum duration of 3 years with the RBI.

Limiting Imports and encouraging exports The Finance Ministry increased the customs duty on importing precious metals including gold and platinum.

20% of every lot of import of gold must be exclusively made available for the purpose of export.

Oil Import Needs

 

RBI decided to provide dollar liquidity to three public sector oil marketing companies (IOC, HPCL and BPCL) to help them meet their entire daily dollar requirements.

Government is also considering increasing its import of crude oil from Iran, and pay for it directly in Indian rupees.

Trade Deficit Ministry of Commerce is exploring the possibility of using local currency for trade with major trading partners.

RBI allowed exporters and importers more flexibility in management of their forward currency contracts.

Curbing Speculative  in currency RBI increased the short-term emergency borrowing rates for banks.

The daily holding requirements under the Cash Reserve Ratio for banks have been modified.

International Cooperation Government increased its currency swap limit with Japan from USD15 billion to USD50 billion.

The BRICS nations also agreed on a USD100 billion foreign currency reserve pool as part of their plan to create a BRICS New Development Bank.  India will contribute $18 billion to this fund from its reserves.

Source: Reserve Bank of India; PRS.

In response to questions raised about the economic situation in the country, the Finance Minister and the Prime Minister in Parliament emphasised that there were sufficient foreign exchange reserves to meet the external financing needs.  The government targets to limit the fiscal deficit to 4.8% of GDP, and the CAD to under USD70 billion in 2013-14.  More recently, the new RBI Governor, upon taking office on September 4, 2013, re-affirmed the central bank’s commitment to sustain confidence in the currency and to gradually liberalise the financial market.At the G-20 summit in St. Petersburg, the G-20 agreed to be mindful of the repercussions of the withdrawal of monetary stimulus by developed countries on emerging markets.  The G-20 central banks agreed to “properly calibrate and communicate” their monetary policy to minimise volatility of capital inflows and exchange rates to avoid adverse implications for economic and financial stability in emerging markets.

 

Land acquisition process can take 50 months

September 6th, 2013 1 comment

The new Land Acquisition Bill has detailed a process for acquiring land.  The process could take up to 50 months.  This will increase the gestation period of projects.  The new time line and the attendant uncertainty at each step will have to be factored in by promoters of projects while computing the costs and feasibility.

The details of the process are given in the Table below.  Some of the processes can be conducted concurrently with others. The processes which need to be done sequentially are shown in bold.  These add up to 50 months (not counting extensions).

Time limits for various steps for Land Acquisition under the new Act

Process Section Time limit
Social Impact Assessment 4(1) last proviso 6 months
Appraisal of SIA by review committee 7(4) and 7(5) 2 months
Examination of land acquisition proposal and SIA by appropriate government 8 No time limit specified
SIA expert group appraisal to Preliminary notification 14 12 months but extendable by appropriate government
Preliminary notification to updating of land records 11(5) 2 months
Preliminary notification to objections 16(1) 60 days
Preliminary notification to R&R survey 17(1) Time limit to be prescribed in Rules
Preliminary notification under section 11 to Declaration under section 20 15 and 20(7) (inconsistency) 12 months (S15)12 months but extendable by appropriate government; also court stay period excluded (S20(7))
Time for compensation claims to be made 22(2) 30 days to 6 months
Declaration to Award 26 12 months but extendable by appropriate government
Correction of Award by Collector 34(1) 6 months
Award to Possession of land by collector  39(1) After ensuring compensation is paid (3 months) and monetary component of R&R paid (6 months).
Time for infrastructure entitlements under R&R 39(1) proviso 18 months after award

Source: PRS

Total Time Limit (assuming no extensions): SIA (6 months) + Expert group appraisal (2 months) + Preliminary notification (12 months) + Declaration (12 months) + Award (12 months) + Possession (6 months) = 50 months.

 

Case not closed – Appointment of judges

September 5th, 2013 No comments

Parliament is considering a proposal to change the process of appointment of judges to the Supreme Court and High Courts.  A Constitutional Amendment Bill has been introduced in Rajya Sabha that enables the formation of a Judicial Appointments Committee (JAC), and states that the composition and functions of the JAC will be detailed in a law enacted by Parliament.  The appointments will be made according to the recommendations of the JAC.  This body replaces the current process of “consultation” with the Chief Justice of India (CJI) and other senior judges.

An ordinary Bill has also been introduced in Rajya Sabha which seeks to establish the JAC.  The composition of the JAC will be the CJI, the next two judges of the Supreme Court in terms of seniority, the law minister and two eminent persons.  These two eminent persons will be selected by a collegium consisting of the CJI, the prime minister and the leader of opposition in the Lok Sabha.  In case of High Court Judges, the JAC will consult with the chief minister, the governor of the state and the Chief Justice of the High Court.

The new system is widening the selection committee.  It includes representatives of the executive and senior judiciary, as well as two persons who are jointly selected by the executive (PM), judiciary (CJI), and the legislature (leader of opposition).

However, it may be diluting some of the safeguards in the Constitution.  At a later date, the composition of the JAC can be amended by ordinary majority in Parliament.  [For example, they can drop the judicial members.]  This is a significantly lower bar than the current system which requires a change to the Constitution, i.e., have the support of two thirds of members of each House of Parliament, and half the state assemblies.

The 120th Constitution Amendment Bill and the JAC Bill are listed for consideration and passing in Rajya Sabha today.  Given that these Bills propose fundamental changes to the process of appointments to key constitutional bodies, it is important that there be a wide debate.  The Rajya Sabha must refer these Bills to the Standing Committee for careful examination of various issues.

I have written a piece on this issue in the Indian Express today.

 

 

 

 

Enhancing SEBI’s Powers

September 4th, 2013 No comments

Recently, there have been instances of certain collective investment schemes (CISs) attempting to circumvent regulatory oversight.  In addition, some market participants have not complied with Securities and Exchange Board of India’s (SEBI) orders of payment of penalty and refund to investors.

In August, the Securities Laws (Amendment) Bill, 2013 was introduced in the Lok Sabha to amend the Securities and Exchange Board of India Act, 1992 (the SEBI Act, 1992), the Securities Contract (Regulation) Act, 1956 (SCRA, 1956) and the Depositories Act, 1996. The Bill replaced the Securities Laws (Amendments) Ordinance, 2013.

The Bill makes the following key amendments:

a) Definition of Collective Investment Schemes

The SEBI Act, 1992 defines CISs as schemes in which the funds of investors are pooled, yield profits or income and are managed on behalf of investors.  It also exempts certain types of investments which are regulated by other authorities.

The Bill introduces a proviso to the definition of CIS.  This proviso deems any scheme or arrangement to be a CIS if it meets all three of the following conditions: (a) funds are pooled, (b) it is not registered with SEBI, or it is not exempted by SEBI Act, 1992, and (c) it has a corpus of Rs 100 crore or more.  These provisions could potentially lead to some schemes not conventionally defined as CIS to fall under the definition. For instance, partnership firms operating in the investment business or real estate developers accepting customer advances could be termed as CISs.

SEBI has been given the power to specify conditions under which any scheme or arrangement can be defined as a CIS. This raises the question of whether this is excessive delegation of legislative powers – usually the parent act defines the entities to be regulated and the details are entrusted to the regulator.

b) Disgorgement (repayment) of unfair gains/ averted losses

SEBI has in the past issued orders directing market participants to refund i) profits made or ii) losses averted, through unfair actions.  The Bill deems SEBI to have always had the power to direct a market participant to disgorge unfair gains made/losses averted, without approaching a court.  This power to order disgorgement without approaching a court is in contrast with the provisions of the recently passed Companies Bill, 2011 and the draft Indian Financial Code (IFC) which require an order from a court/tribunal for disgorgement of unfair gains.

Further, the Bill specifies that the disgorged amount shall be credited to the Investor Education and Protection Fund (IEPF), and shall be used in accordance with SEBI regulations.  The Bill does not explicitly provide the first right on the disgorged funds to those who suffered wrongful losses due to the unfair actions, unlike the draft IFC.

c) Investigation and prosecution

The Bill empowers the SEBI chairman to authorise search and seizure operations on a suspect’s premises.  This does away with the current requirement of permission from a Judicial Magistrate.  This provision removes the usual safeguards regarding search and seizure as seen in the Code of Criminal Procedure, 1973, the recently passed Companies Bill, 2011 and the draft Indian Financial Code.

The Bill also empowers an authorised SEBI officer to, without approaching a court, attach a person’s bank accounts and property and even arrest and detain the person in prison for non-compliance of a disgorgement order or penalty order.  Most regulators and authorities, with the exception of the Department of Income Tax, do not have powers to such an extent.

d) Other Provisions of the Bill

The Bill retrospectively validates consent guidelines issued by SEBI in 2007 under which SEBI can settle non-criminal cases through consent orders, i.e., parties can make out-of-court settlements through payment of fine/compensation.  The United States Securities and Exchange Commission settles over 90% of non-criminal cases by consent orders.

The Bill retrospectively validates the exchange of information between SEBI and foreign securities regulators through MoUs.

The Bill sets up special courts to try cases relating to offences under the SEBI Act, 1992.

For a PRS summary of the Bill, here.

A balancing Act- The Land Acquisition Bill

August 29th, 2013 No comments

The Land Acquisition Bill is slated to be taken up for consideration and passing in the Lok Sabha today. The government had circulated an amendment list in the last session of Parliament. In a column in the Financial Express, MR Madhavan discusses the major features of the Land Acquisition Bill and the associated issues that Parliament may need to consider while deliberating on the Bill.

Economic growth and job creation require efficient usage of land resources. It is important that a fair and transparent process for purchase and for acquisition of land is followed. For the purchase of land, a key concern is the authenticity of land titles, and the government has drafted a Land Titling Bill for this purpose. In the case of land acquisition, the following questions need to be addressed. What are the end-uses for which public interests will trump private property rights, and justify acquisition of land from a person who is not willing to part with it? What should be the process followed? Since there is no market mechanism of discovery of prices in these cases, how should compensation be computed? Is there a need to address non-land owners who may be displaced by the acquisition process? Does the acquisition process get completed in a reasonable amount of time, and is there finality to the acquisition? In sum, do both sides—the acquirer and the land owner—perceive the process to be fair?

The current Bill addresses these questions in the following manner. It defines public purpose to include infrastructure projects (as defined by the finance ministry, with some exclusions); projects related to agriculture, agro-processing and cold storage; industrial corridors, mining activities, national investment and manufacturing zones; government administered or aided educational and research institutions; sports, healthcare, transport and space programmes. It also enables the government to include other infrastructural facilities to this list after tabling a notification in Parliament. The significant difference from the current Land Acquisition Act, 1894, is that land cannot be acquired for use by companies unless they satisfy any of the above end-uses.

The Bill includes a requirement for consent of the land owners in some cases. If the land is acquired for use by a private company, 80% of land owners need to give consent. If it is for use by a public private partnership (PPP), 70% of the land owners have to agree to the acquisition. The rationale of having differential consent requirements based on ownership—including the lack of any such requirement if the land is for the use of the government or a public sector undertaking—is not clear. Why should a land owner, who is losing his land care, whether the intended project is to be executed by the government or a private company?

The Bill specifies that the compensation will be computed in the following manner. Three factors are taken into account: the circle rate according to the Stamp Act; the average of the top 50% of sale deeds registered in the vicinity in the previous three years; the amount agreed upon, if any, in case of purchase by a private company or PPP. The higher of these three amounts is multiplied by a factor, which varies from 1 in urban areas to a number between 1 and 2 in rural areas, depending upon the distance from the urban centre. To this amount, the value of any fixed assets such as buildings, trees, irrigation channels etc is added. Finally, this figure is doubled (as solatium, i.e. compensation for the fact that the transaction was made with an unwilling seller). The justification given for the multiplier ranging from 1 to 2 is that many transactions are registered at a price significantly lower than the actual value in order to evade taxes—the moot question is whether such under-reporting is uniform across the country?

The Bill states that all persons who are affected by the project should be rehabilitated and resettled (R&R). The R&R entitlements for each family includes a house, a one-time allowance, and choice of (a) employment for one person in the project, (b) one-time payment of R5 lakh, or (c) inflation adjusted annuity of R2,000 per month for 20 years. In addition, the resettlement areas should have infrastructure such as a school, post office, roads, drainage, drinking water, etc.

The process has several steps. Every acquisition, regardless of size, needs a social impact assessment, which will be reviewed by an expert committee, and evaluated by the state government. Then a preliminary notification will be issued, land records will be updated, objections will be heard, rehabilitation and resettlement survey carried out, and a final declaration of acquisition issued. The owners can then claim compensation, the final award will be announced, and the possession of the land taken. The total time for this process can last up to 50 months. The big question is whether this time frame would hinder economic development and the viability of projects?

The Bill provides for an Authority to adjudicate disputes related to measurement of land, compensation payable, R&R etc, with appeals to be heard by the High Court. There are several restrictions on the land acquired. The purpose for which land is acquired cannot be changed. If land is not used for five years, it would be transferred to a land bank or the original owners. Transfer of ownership needs prior permission, and in case of transfer in the first five years, 40% of capital gains have to be shared with the original owners.

Recent cases of land acquisition have been followed by public protests, and the stalling of the acquisition. Whereas some of these may be driven by political agendas, the old Act was perceived to be unfair to land owners in several ways. The challenge for Parliament is to examine the new Bill and craft the law in such a way that it is fair (and perceived as such) to land owners, while making acquisition feasible and practical for projects that are required for economic development and other areas of public interest.

Does the financing of “Rights” laws impinge on the rights of states

August 20th, 2013 No comments

In the last decade, some schemes have been recast as statutory entitlements – right to employment, right to education and right to food.  Whereas schemes were dependent on annual budgetary allocations, there rights are now justiciable, and it would be obligatory for Parliament to allocate sufficient resources in the budget.  Some of these rights also entail expenditure by state governments, with the implication that state legislatures will have to provide sufficient funds in their budgets.  Importantly, the amounts required are a significant proportion of the total budget.

There has been little debate on the core constitutional issue of whether any Parliament can pre-empt the role of resource allocation by future Parliaments.  Whereas a future Parliament can address this issue by amending the Act, such power is not available to state legislatures.  Through these Acts, Parliament is effectively constraining the spending preferences of states as expressed through their budgets passed by their respective legislative assemblies.  I have discussed these issues in my column in Pragati published on August 16, 2013.