Rites of Passage
The Economic Times, March 08, 2011

In his budget speech, the finance minister took the first tentative step to revive eight economic legislations that have forever been in the works. He said the government will “move” the legislations, though he specified for only one when that will be. John Samuel Raja D outlines the contents of the eight bills and their position in Parliament .

They have been tossed around. They have been conveniently forgotten. They have aged. They have lived and died with the Lok Sabha. And now, these seven financial-sector legislations are set to get a new lease of life. Or at least, that’s what Finance Minister declared as a statement of intent in his Budget speech. But it’s a long journey from intent to passage, from a bill to an act. It begins when the ministry concerned sends a draft to the law ministry for approval and legal compliance. It comes back to the ministry concerned, which makes the changes sought and places it before the Union Cabinet. After the Cabinet approves the bill, it has to be cleared by both houses of the Parliament. For this, it is placed in either the Lok Sabha or the Rajya Sabha. If the bill is tabled in the Lok Sabha and sits there, it runs the risk of dying with the term of the house. In the Rajya Sabha, it can be carried forward. Once introduced in either house, a bill is usually referred to a Parliamentary committee for examination. The committee can take anywhere between three months and two years, even more. At this stage, the government can decide to incorporate changes in the bill based on the recommendations of the parliamentary committee. It is then put to vote in the two houses. Will these seven bills reach that stage? What about the eighth bill that all of corporate India is waiting for — the Companies Bill, 2009? Here’s what is at stake.

INSURANCE

The Insurance Laws (Amendment) Bill 2008

Objective: To deregulate the insurance sector through greater foreign presence and more operational freedom for insurers

Proposals

• Raise foreign-equity ceiling in insurance companies from 26% to 49%

• Indian promoters need not reduce their stake to 26% over a period of time, as currently mandated

• Let insurers set premiums, making the Tariff Advisory Committee redundant

• General insurers have to offer third-party cover in motor insurance. Since this is a loss-making proposition, many insurers currently don't offer it to customers

• Allow entry of Lloyd's, the London-based insurance specialist

Impact

The greater leeway on stake holdings will allow

promoters to adopt business strategies that suit them. So, Indian promoters can opt for a high stake or sell to foreign partners, who can hold more.

Legislation

Was introduced in the Rajya Sabha in

September 2009. A Parliamentary committee is currently examining the bill.

LIC

The Life Insurance Corporation (Amendment) Bill 2009 Objective: Make LIC conform to the same regulatory requirements as other life insurers

Proposals

• Raise LIC's paid-up capital to 100 cr, from 5 cr

• Distribute 90% of LIC's annual surplus to policyholders, against 95% currently

• An actuary to investigate LIC each year on operational and solvency parameters, as against the current norm of once in two years

• Create a general reserve from surplus, which will help it offer social-security schemes and improve its solvency margin—how much buffer it has to meet exigencies. As of January 2010, LIC needed 50,000 cr, but had only 40,000 cr

• Government to offer sovereign guarantee, but review it periodically

Impact

Brings uniformity among life insurers in capital norms.

Strengthens LIC by building it a greater buffer, but this comes at the cost of policyholders, who are likely to receive lower bonuses because of lower surplus distribution.

Legislation

Its earlier avatar died with the last Lok

Sabha. Re-introduced in 2009 and a house panel presented its report to Parliament in March 2010.

PENSIONS

The Pension Fund Regulatory And Development Authority (PFRDA) Bill

Objective: Make the New Pension System (NPS) the first and last word in pension planning

Proposals

The PFRDA has been the pensions regulator for about seven years, but through an executive order. So, it has to keep going back to the government for approval. Its aim is to provide old-age security to all workers, but its NPS hasn’t taken off. Instituting PFRDA as an act of Parliament will give it the sanctity, visibility and universality it needs.

Impact

Government finances should improve as the NPS shifts the

onus from the employer to the employee. The NPS is a ‘defined contribution’ scheme—a person’s pension is based on her contribution and the returns earned. The old system was based on ‘defined benefit’, where the government paid a person a pre-decided sum for life. Government employees will not get a pension handout. But they can invest their pension savings in equities. And nongovernment workers can access an investment plan.

Legislation

Introduced in March 2005, panel report

in July 2005, but the bill died with the Lok Sabha in 2009. Needs to be reintroduced.

PRIVATE BANKS

Banking Laws Amendment Bill 2011

Objective: Give shareholders in private banks voting rights in proportion to their holding

Proposals

Although details of the bill haven't been released officially, statements from the government and finance ministry officials indicate the following:

• Shareholders in private banks will have voting rights in proportion to their equity shareholding. At present, voting rights are capped at 10%, irrespective of shareholding. In state-run banks, it is capped at 1%

• Reserve Bank of India (RBI) may get the power to inspect the books of financial conglomerates that might be given bank licences

• Will answer if the Competition Commission of India would have the powers to approve bank mergers

Impact

Gainers would be private banks such as

Kotak Mahindra Bank and IndusInd Bank, whose promoters hold more than 10%. If the RBI removes the 10% cap, private banks can attract more investment, especially foreign.

Legislation

Likely to be introduced for the first time in the current session

SBI

The SBI (Subsidiary Banks) Amendment Bill, 2009

Objective: Speed up decision-making in subsidiary banks of SBI

Impact

The Centre having the final say will make for

faster decision-making at the SBI arms

Proposals

The bill pertaining to the merger of the five remaining SBI associates with its parent is a separate one. This one pertains to decisionmaking at the subsidiaries. This bill shifts some powers from the RBI to the Centre, notably on capital, bonus shares, preferential allotment or private placement, appointment of chairmen, and supersession of the board of directors in public or depositers' interest. Legislation: Introduced in Lok Sabha in 2009. A Parliamentary panel is considering the bill and the government aims to pass this in the current session.

WORKING CAPITAL

The Factoring And Assignment Of Receivables Bill, 2011

Objective: Enable companies to encash receivables and reduce working capital

Impact

No stamp duty for factoring companies and

companies manage their working capital better

Proposals

In factoring, a company due to receive 100 from a customer collects 95 from a factoring company. The factoring company collects 100 from the customer. Factoring companies have to pay stamp duty on sale/purchase of accounts receivables, which is a major disincentive for them. The bill does away with this requirement. It also proposes a central registry where any assignment of a receivable will be recorded. The legislation : Likely to be introduced for the first time in the current session

DEBT RECOVERY

Bills to amend RDBFI Act 1993 and SARFAESI Act 2002

Objective: Who has the first right to recovering dues from a defaulter of loans ?

Proposals

Details are not available, but sources say a proposal looks to create ‘first charge holder’ on a borrower’s assets. Recovery of excise duty, customs duty and service charges will take precedence over secured creditors. The Recovery of Debts due to Banks and Financial Institutions (RDBFI) Act fast-tracked loan recovery. The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest (SARFESI) Act lets lenders sell distressed assets to recovery specialists. Legislation : Government looking to introduce it in the current session

CORPORATE SECTOR

The Companies Bill, 2009

Objective:

Overhaul the legislation that governs companies by increasing focus on corporate governance, self-regulation, disclosures and enforcement

Proposals

• Stakeholders can initiate 'classaction suits'. Satyam Computer, for example, paid $125 million to its US shareholders for fraud, but nothing to Indian ones because this clause doesn't exist in India

• One-person company: Sole proprietors will be able to run businesses with limited-liability concept. A business loss will not mean unlimited personal liability

• Statutory auditors will be rotated and cannot do non-audit work for a client company

• CEO, CFO and the company secretary are designated as ‘key managerial personnel’, and can be named in lawsuits. So far, it's the chairman and MD

• Consolidated financial statements to be mandatory

• A dedicated law tribunal to bypass lower courts and handle offences under the bill, as well as liquidation and winding-up petitions

• Investigations under company law ssto be carried out by Central government, not by sector regulators. Statutory status to the Serious Fraud Investigations Office proposed

Impact

Companies will face fewer

bureaucratic hassles while forming and running business. At the same time, stronger enforcement creates space for harassment. Shareholder and creditors benefit from greater transparency.

PRESENT COMPANIES ACT, 1956

13 parts 750 sections 15 schedules

THE COMPANIES BILL, 2009

28 chapters 426 clauses

No schedule

Legislation

The Companies Bill 2008,

its predecessor, was introduced in October 2008, but it lapsed. Its 2009 version was introduced in August 2009. A Parliamentary committee has cleared it and it is waiting for a vote.

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