One man’s meat, they say, is another man’s poison. This statement appears to accurately capture the implications of many Covid-related relief measures announced on Indian savers and investors. As a hyperactive industry lobbies flood the government with suggestions on dues that can be waived, compliances that can be done away with and laws that can be diluted to facilitate ease of doing business in these terrible times, a key casualty has been the interest of folks who aren’t savvy or organised enough to represent their interests to the government.

Given that several tranches of relief measures have already been announced for industry, before acceding to further demands, it is important for the Centre and sector regulators to pause and take stock of how extant measures have affected the country’s investor protection framework.

Depositors in the dark

To help businesses tide over interrupted incomes and cash flows, the RBI had in March allowed banks, NBFCs and financial institutions to grant their borrowers a loan moratorium from March 1 to May 31, 2020. This was later extended until August 31. As a corollary to this,the RBI also said that if a borrower was provided a moratorium on certain loans, they would be exempt from its asset classification norms.

As a result, while banks and other lenders normally recognise loans that are 90 days past their due date as NPAs, such NPA recognition would now remain suspended during the moratorium period. Effectively, should any of these loans go bad, banks would begin to recognise them as defaults only after the expiry of three months from end-August.

While granting moratorium to borrowers is understandable given the extraordinary circumstances, deferment of NPA recognition may deprive depositors and investors in banks of the critical information they need in these tough times to identify safe parking grounds for their money. Management commentary from financial firms suggests that mainstream banks now have 20-30 per cent of their loan books under moratorium, while for some NBFCs and small finance banks, the proportion is as high as 70-90 per cent. This will certainly have significant implications for their NPAs and provisioning which will in turn reflect on profitability, liquidity, and even business continuity in some cases, as normal accounting norms kick in a few months down the line.

But depositors or investors presently making decisions to invest in bank deposits or shares are forced to put up with an information vacuum on the true picture of their financial health. While the RBI has required banks to provide details of loans under moratorium in their notes to accounts and make additional provisions, inferring a bank’s complete financial position from these details would be a tall ask for retail folk.

Nor do challenges for investors stop with NPA recognition. Credit rating agencies, already known to be late in downgrading stressed firms, have been given leeway by SEBI to not treat missed repayments after March 1 as defaults, if they are due to the lockdown/moratorium. A proposal in the Atmanirbhar Bharat package calls for private companies that list their bonds on the stock exchanges to not be treated as listed companies, diluting the useful disclosure regime for bonds put in place by SEBI after the IL&FS debacle.

Temporary moratoriums apart, recent amendments to the Insolvency and Bankruptcy Code threaten to undermine bank recovery proceedings for good by striking at the country’s credit culture. Apart from asking creditors to hold off all insolvency references against loan defaulters for the next six months-one year, the amendment contains an inexplicable clause that permanently bars lenders from filing cases for recovering this debt even after the crisis abates!

India’s financial system was already resting on shaky foundations prior to the Covid outbreak, with legacy NPAs, defaults by NBFCs and governance issues at private and co-operative banks undermining depositor confidence. Should Covid ‘relief’ measures push banks and NBFCs further into the abyss, public confidence in the financial system could be dented for good.

Harried homebuyers

Homebuyers in India have always got the short end of the stick, with developers demanding payments in advance, reneging on contract terms and allowing buyers to foot the bill for everything from outright fraud to project delays. The Centre’s promulgation of the Real Estate Regulation Act (RERA) brought some order to this chaos by seeking to more stringently enforce buyer-builder contracts through compulsory project registration, segregation of project funds and penalties for delayed completion. State governments, after much dragging of their feet, had only begun to seriously implement RERA in the past couple of years when Covid struck.

Now, recent relief measures announced for the real estate sector threaten to push back this long-delayed reform. As a part of the relief, the Centre has advised State governments to extend all timelines for registration and completion of RERA-registered projects falling due after March 25 by six months, with leeway for a further three-month extension. Deadlines for other RERA-related compliances are also to be stretched with builders, allowed to treat Covid as a force majeure event while fulfilling their contracts with buyers.

These measures may have the net effect of sending homebuyers back to square one, as RERA-related safeguards will remain in abeyance over the next 6-9 months. Repairing the damage to homebuyer confidence and bringing back builder discipline after Covid recedes may not be an easy task.

Minor infractions?

In a bid to make India’s labyrinthine laws more business-friendly, the Finance Ministry has this week put up a discussion paper that seeks to do away with criminal penalties such as imprisonment for what it considers minor violations of economic laws, without mala fide intent. While such a clean-up is very necessary, many of the offences that have been listed out in the paper appear far from minor, or even bona fide, from an investor protection point of view.

Among the provisions that the government has proposed to decriminalise are those that bar unqualified persons from acting as insurance actuaries (Section 37 of Actuaries Act), unregistered entities from running chit funds (section 76 of Chit Funds Act) and provisions from the recent Banning of Unregulated Deposit Schemes Act 2019, that bar unauthorised entities from attracting and defaulting on public deposits.

Sections of the RBI Act that figure in the list are also in place to ensure that the public at large is not defrauded by unregulated entities. For instance, Section 58B (4A) bars non-banks from commencing operations without RBI registration, Section 58B(5) penalises persons receiving unauthorised deposits, and Section 58B(1) talks of persons wilfully making false statements in returns furnished to the RBI or in advertisements for public deposits. Without criminal provisions, it is a moot point if these sections will prove a deterrent to Ponzi scheme operators masquerading as regulated entities.

There’s also a proposal to decriminalise the bouncing of cheques due to insufficient funds under the Negotiable Instruments Act. Both bankers and small businesses point out that this can deal a big blow to contract enforcement in commercial transactions and clog up the courts.

The above instances suggest two things. One, if the Centre is single-mindedly focussing on relief measures that can smooth the way for businesses to get back to their feet post-Covid, financial market regulators such as SEBI, RBI, IRDA and others tasked with consumer protection need to offer their counsel to the Centre and actively push back on relief measures that undermine their constituents. Two, rather than pushing through relief measures in haste, the Centre needs too needs to actively seek out the feedback of smaller economic constituents such as investor associations, so that lobby groups don’t ride roughshod over smaller economic participants who are unable to make their voices heard.

Let’s not forget that minority investor protection is one of the key metrics on which the World Bank evaluates a country for awarding its Ease of Doing Business rankings, and that India has been a high scorer, thus far, on this metric.

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