Tag Archives: Financial Sector Legislative Reforms Commission

India’s BigLaw: Metamorphosis from deal making to policy activism

24 Sep

This post was first published on http://blogs.law.harvard.edu/legalprofession/, on September 23, 2013. 

As skepticism mounts over India’s economic resilience and economists rush to blame India’s policy framework for the woes of her economy, the role that India’s BigLaw plays in her law and policy making processes assumes greater significance now more than ever before. In the backdrop of an unpredictable, evolving and complex regulatory and legal regime, the quintessential Indian law firm is expected to not only play the flawless draftsman or the aggressive negotiator but also an organization capable of dealing with the regime, its regulators and policymakers. Indian corporate law firms have responded to this demand by claiming policy affairs as a niche area of their legal practice. In this backdrop, this post explores how and why the Indian corporate lawyer has transitioned from a boardroom negotiator and a draftsman to an active participant in India’s law and policy making processes, and highlights potential conflicts associated with this transition.

Today, India’s law and policymaking processes do not only involve the political class, bureaucrats, civil society actors or jurisprudential developments. A proposed policy or law (in particular, one that affects commerce in India) is regularly preceded by well-publicized detailed analyses proactively offered by leading corporate lawyers in the country. As members of expert committees constituted by the government and regulators, providers of feedback on government-released discussion papers, columnists or interviewees in the media, members of business associations interfacing with the government, Indian corporate law firms strive to make conspicuous contribution to proposed laws and policies. The fact that several prominent Indian corporate law firms now project themselves as having an established regulatory and policy practice (which typically includes reform initiatives, legislative drafting work and holding policy-oriented consultations with government actors), underscores their desire to be seen as being active in the policymaking space. A couple of large corporate Indian law firms are now reported to have dedicated, though limited, resources with profiles involving government affairs and policy formulation. These trends are indicative of a progressive tendency to pro-actively contribute towards law and policy making in India.

The growing participation of the corporate legal community in policy and legislative work is directly attributable to an inclusive approach being increasingly adopted by Indian legislators, policy makers and regulators in recent times. Take, for instance, the FDI policymaking space, a most coveted and crowded practice area dominated by India’s BigLaw. In sharp contrast to the pre-2010 era when FDI policymaking processes had no space for involvement of legal professionals, in 2010, the Department of Industrial Policy and Promotion (being the FDI policymaker in India) initiated a discussion paper series inviting comments on proposed FDI policies from all stakeholders [i]. In addition to responses from industry associations, these discussion papers have, in fact, garnered policy-oriented responses from law firms having an established practice in this space [ii]. Similarly, drafts of proposed rules and regulations released by the Ministry of Corporate Affairs and the Securities and Exchange Board of India (the Indian securities regulator) regularly elicits detailed analyses by corporate law firms known for their capital markets practice [iii].

In addition to the policy and regulatory framework, the contribution that Indian corporate law firms have been making to substantive lawmaking cannot be understated. Several substantive corporate laws (such as the Competition Act, 2002, the Companies Act, 2013, etc.) brought into effect in the last decade have been preceded by consultations with law firms known for their expertise in areas governed by such legislations. So much so, the drafting of certain provisions and filings under these legislations was reportedly entrusted to leading legal professionals in the corporate field. Similarly, leading corporate lawyers were engaged as consultants by the government-appointed commission entrusted with the responsibility of overhauling the legal framework applicable to the Indian financial services sector [iv].

Participation of the Indian corporate legal community extends to the implementation and enforcement stages of policies and regulations as well. Owing to the lack of institutional mechanisms that facilitate formal stakeholder participation at the implementation stages, most often, such participation occurs where a law firm identifies an ambiguity or an unaddressed situation in an implemented law or regulation in the course of assisting a client in a transaction, and approaches the regulator or policymaker for clarifications. In the past, queries seeking transaction-specific clarifications have resulted in the regulator or policymaker addressing the problem for the benefit of the general class of stakeholders. A perfect example of this situation are clarifications obtained through the Informal Guidance Scheme implemented by the Indian securities regulator, which is akin to the Interpretive Guidance initiative of the SEC.

In addition to direct contributions of the kind described above, corporate lawyers have made remarkable contributions to the Indian policy framework indirectly through participation in business associations such as the Confederation of Indian Industries, chambers of commerce, etc. Previous evaluations of government-stakeholder consultations in India have indicated that the interests of members of such associations are not always aligned [v]. Conflicting interests amongst members often restrict the ability of business associations to convey their views on proposed and implemented policies to policymakers. Corporate law firms, through their participation in such associations, are able to impart objectivity and clarity to the associations’ collective views on laws and policies that affect the industry. Through presentations made to such associations, participation in specialized committees and consultation processes initiated by the government and regulators with such business associations, corporate lawyers often end up contributing to the policy framework by participating in actual stakeholder and industry-level discussions. For instance, the post-budget announcement days regularly witness tax law firms explaining the implications of the budget on various industries. These views often supply the foundation for opinion-formation by industry-specific business associations on the budget.

Participation by BigLaw in policymaking is mutually beneficial to policymakers, regulators and the participating law firms. While the former are benefitted with the expertise and real-world experience that law firms bring to the table, a capacity to deal with and establish smooth interface with regulators and policymakers can potentially earn a premium for law firms from a client’s perspective. However, the increasing role of corporate law firms in policy formulation and implementation often raises several questions regarding the objectivity underlying their contribution. To what extent are a law firm’s views insulated from client requirements? Do law firms contribute toward policymaking only when warranted by specific transactions? How does one address the inherent conflict of interest while analyzing policy-oriented feedback offered by legal professionals in the corporate field? These questions often reduce the receptivity of lawyers’ views at policy-level discussions. As unregulated as this space currently is, these questions are open-ended and it remains to be seen whether the benefits of professional expertise and legal skills outweigh concerns of objectivity.

Be that as it may, with increasing inclusiveness in the Indian law and policy making space, credit for contributing towards law and policy making in India can no longer be restricted to socially activist lawyers, legal jurists and civil society actors. By volunteering in his own way towards improvisation of proposed and implemented policies, laws and regulations, India’s contemporary corporate lawyer is now making a leap from being a plain dealmaker to a contributor to the law, policy and rule making processes of the country.

Bhargavi Zaveri is a Mumbai-based solicitor with experience in M&A, private equity and corporate practice in India. She is presently an affiliated fellow with the HLS Program on the Legal Profession where she is researching FDI law and policymaking, and the interface between legal professionals and policymakers in India.

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Let the public participate

5 Aug

This post was first published in Takshashila’s Pragati – The Indian National Interest Review on May 3, 2013.  The article can be accessed here.

Given the failure of many government legislations in achieving the objectives for which they were formulated, a case for institutionalising deeper public consultations in the legislative process has been made in the recent past. Currently, there are four entry points where citizens can participate in the legislative process: first, the identifying stage; second, the drafting stage; third, the legislative stage; and fourth, the post-legislative stage.

Civil society organisations can alert the government to the need for a particular legislation or changes in an existing law. The Mazdoor Kisan Shakti Sangathan, a farmers and workers group, ran a successful campaign for a Right to Information law, which was finally enacted in 2005. The recent anti-corruption agitation led to the introduction of a Lokpal Bill currently pending in the Rajya Sabha. The long-running Right to Food campaign by a network of NGOs has been instrumental in raising awareness about chronic hunger and the eventual introduction of the National Food Security Bill in 2011.

The government can also suo moto decide that a law is required in a particular sector. It may get inputs from specialised bodies such as the National Human Rights Commission and the Law Commission or appoint a group to study a sector and draft a law. These groups or bodies may hold consultations with independent experts and stakeholders. Furthermore, an individual Member of Parliament (MP) can also introduce a Bill in either House. This is known as a Private Member’s Bill (for example, Lok Sabha MP, Kalikesh Singh Deo introduced the Disclosure of Lobbying Activities Bill in 2013 to regulate lobbying activities). Although these are generally never passed, they act as signalling devices to the government, which may introduce its own legislation on the subject. It is possible for the public to approach their constituency representatives to advocate for a particular law.

Government Bills are drafted by the concerned ministry, which is then vetted by other ministries. There are also times when the government approaches an independent expert to draft a law. Recently, it appointed the Financial Sector Legislative Reforms Commission, under the chairmanship of Justice BN Srikrishna to reform the financial sector laws.

The government may publish the draft legislation in the public domain for feedback. Drafts of the Electronic Service Delivery Bill, the National Sports Bill and the Land Acquisition and Resettlement Bill were published for a specified time period (generally 20-30 days). It may also circulate the draft among a select set of stakeholders for comments.  An individual MP may solicit public feedback on his Private Member Legislation. For example, Biju Janata Dal, MP Baijayant Panda uses his personal website and social media tools such as Facebook to publicise the draft of his private member bills.

There are few avenues of public engagement once the Bill is introduced in the Parliament. Since 1993, 24 Department-related Standing Committees (DRSCs) were formed to scrutinise Bills and other policies of the Government (before 1993 Bills were sometimes referred to ad-hoc committees for scrutiny). Generally most Bills are referred to these DRSCs, however, the presiding officer of the House has the discretion not to do so. For instance, key Bills such as the Special Economic Zones Bill, 2005 and the National Investigation Agency Bill, 2008 were not referred to a DRSC. In contrast, the Lokpal Bill passed by the Lok Sabha was sent to a Select Committee by the Rajya Sabha although it had been examined by the DRSC.

These DRSCs may solicit feedback from the public by issuing notices in key newspapers and the Gazette of India. The public comments are also tabled in the form of a report. However, the level of public engagement varies with different Bills. For instance, the DRSC scrutinising the Companies Bill, 2009 received 101 comments while only 10 submissions were received for the Armed Forces Tribunal (Amendment) Bill, 2012.

The government is not bound to accept the recommendations of the DRSC but individual MPs may introduce amendments to the Bill when it is being considered by the House. The MP may suggest amendments based on the DRSC’s suggestions or any public feedback.

Once Bills are enacted, ministries draft and notify Rules (also known as subordinate legislation) to enable their implementation. These Rules may be scrutinised by the Subordinate Legislation Committee, which is empowered to seek public feedback.

Post legislative scrutiny of laws is not mandatory in India. It may however be undertaken by bodies such as the Law Commission of India, the DRSCs or a specific commission appointed for the purpose who may hold public consultations. Recently, rape laws were reviewed by the Justice Verma Committee before an Ordinance was promulgated on the matter.

Many other democracies have devised meaningful ways to encourage public participation in the legislative process. In countries such as the UK, Australia and South Africa, it is mandatory to hold public consultations or publish draft Bills for comments. In fact, in South Africa it is a constitutionally mandated provision. In the UK, the Government publishes Green Paper and White Paper, which sets out its central ideas on the Bill. After introduction, it is compulsory to refer a Bill to a committee in the UK and the US. However, there is no such requirement in Australia, Canada and South Africa. Unlike in India and South Africa, it is mandatory for the Government in countries such as the UK, Australia and Canada to respond to the recommendations of the committee. While post legislative scrutiny in India is largely a matter of discretion of the Government, in the UK it is compulsory to do so within three to five years. In the US, legislative oversight committees review laws on a continuous basis. In Australia, most laws have to be reviewed within three years.  Public comments are also solicited during the post-legislative scrutiny.

India can learn from the experience of these countries and tailor them to suit our requirements. There are many ways in which the government can deepen public engagement in the legislative process.

First, ministries can be mandatorily required to publish the draft Bill for a reasonable time and publicise it through different media. Along with the draft Bill, the ministry may be required to include available background information on the subject and facilitate access to legal and legislative record on the matter.

Second, it should be compulsory to refer a Bill to a DRSC or select committee for scrutiny. This could be at both the pre-legislative stage and the legislative stage.  These committees should be required to hold wide consultations with a variety of stakeholders (NGOs, state and local governments, special interest groups, academics and legal experts). Public participation may be facilitated by increasing access to constituency offices, using a variety of media outlets to publicise the Bill and creating public participation offices that can interface with the public.

Third, in order to increase transparency in the feedback process, the government could be required to publish a report demonstrating how the inputs from stakeholders have been considered while formulating the law.

Fourth, most Acts should be subject to a post legislative scrutiny through public engagement every three to five years.  This could be carried out if each Bill includes an Explanatory Note giving the criteria or outcomes by which the Bill could be judged for effectiveness.  This responsibility could be given to a specialised committee.

Such measures will result in robust legislations, which shall need lesser amendments and will be successful in achieving the objective with which that legislation was enacted.

Can’t bank on it

4 Jun

This article was co-authored by me, and appeared in the Indian Express on June 4, 2013. The original may be found here.

According to a recent press release by the Reserve Bank of India, its board met in early May. This was the first board meeting after the Cobrapost exposé, revealing widespread failure by banks in adhering to the RBI’s Know Your Customer (KYC) regulations. What did the RBI board discuss and what decisions did it take?

The first set of Cobrapost exposés happened on March 14, implicating three banks. On April 6, a second set of news stories exposed more banks. The exposés revealed widespread failure by banks in enforcing KYC regulations.

When the RBI central board met in Srinagar on May 9, one would have expected the board to take some decisions to look into the issue of KYC regulations. At the very least, the board might have asked for a report on the enforcement of KYC regulations, or a review of the audits carried out on banks by the regulator. Alternatively, the management of RBI would have informed the board of the steps to be taken to review the working of the KYC regulations. The board might have highlighted the need for better regulatory oversight.

The press release says that the board, however, took “four major decisions”: one, banks are to enhance the Credit Deposit Ratio (CDR) in the state from 36 per cent to 40 per cent by March 31, 2014. Two, the state government should legislate the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities) Act in the state. Three, the state government and banks are to take up electronic benefit transfer on a pilot basis. Four, banks are to have an active role in skill development for horticulture and other social activities in the state.

There are two important things to note. First, the RBI board did not express a view on the KYC regulations. Second, none of its decisions were about banking regulations or what the regulator may do. All its decisions were about about what the state government and banks will do.

The first decision related to commercial banks is not about risk, safety, or regulatory compliance. Giving more credit to increase the CDR is a commercial decision of a bank. The second decision is an instruction/ suggestion to elected legislatures of the state. While the RBI may assist the legislature on making the laws, it is not within the powers of the RBI board to decide that “The state government [has] to legislate the SARFAESI Act in the state”. Similarly, the decision of the RBI board that the J&K government take up a pilot project or that banks engage in skill development in horticulture are not decisions that the board of a financial regulatory authority should be taking.

None of the four major decisions of the RBI board had anything to do with its regulatory failure. There was no attempt at reviewing why the failure took place. There was no attempt to say what the RBI would do to prevent such failure.

The key function of the board of a regulator is to make regulations, to review the effects of the regulations, enforcement, performance review and cost benefit analysis. The board of any corporate body is created to maintain oversight of the functioning of the corporate body. For example, a company’s board reviews the functioning of the company, orders investigation into serious issues and gives direction to the company. The decisions of the board are actionable orders to the management of the company. For regulators, the main functioning is making regulations. The board of the regulator must exercise control, oversight and review the functioning of the regulator. Many regulatory boards develop modern corporate governance systems like risk committees and audit committees to discharge their duties.

In addition, boards of regulators have a responsibility to the public at large. Companies use funds of shareholders, and therefore, the board’s responsibility is limited to shareholders. For regulators, the entire public is the shareholder of the regulator. The board must also publicly demonstrate that it is discharging its statutory duties. Only issues that are decided to be sensitive may be closed to the public. To complete the cycle of accountability, it is important for the public to be aware of the outcomes of the decision of the board. A review of whether a regulation the board approved was enforced properly, and whether it achieved the purpose for which it was written, must be made public.

The Indian Financial Code, drafted by the Financial Sector Legislative Reforms Commission, addresses some of these issues. It incorporates modern-day developments in governance and oversight mechanisms for public institutions. The code requires every regulation to be approved by the board of the regulator through a resolution. Unlike the present system, the only regulatory instruments the regulator is allowed to issue are regulations. Today, the RBI issues regulations, circulars and master circulars that are not required to be approved by the board.

In contrast, at the RBI board meeting in Srinagar, the issue of the Cobrapost exposé and KYC was not even discussed. No review of the KYC regulations was done. No decision was taken about KYC. The board’s major decisions were ones that the RBI cannot implement. It is not even clear that the RBI board has the constitutional authority to decide what the J&K legislature will legislate, or even whether it can decide if banks should have a role in social activities in the state.

Though the IFC lays down in detail the role and functioning of the board of regulators, it is not necessary for the RBI to wait for adopting these good practices. The current RBI Act, Section 7 (2), says: “Subject to any such directions, the general superintendence and direction of the affairs and business of the bank shall be entrusted to a central board of directors which may exercise all powers and do all acts and things which may be exercised or done by the bank.” Under these powers, the RBI can transform its board from taking decisions advising banks to develop horticulture skills to writing better regulations that prevent money-laundering in India.

The writer, professor at the National Institute of Public Finance and Policy, Delhi, is a consulting editor for ‘The Indian Express’. This article has been co-authored by Shubho Roy.

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