A few minutes ago, the Supreme Court delivered a judgement striking down Section 66 A of the Information Technology Act, 2000. This was in response to a PIL that challenged the constitutionality of this provision. In light of this, we present a background to Section 66 A and the recent developments leading up to its challenge before the Court. What does the Information Technology Act, 2000 provide for? The Information Technology (IT) Act, 2000 provides for legal recognition for transactions through electronic communication, also known as e-commerce. The Act also penalizes various forms of cyber crime. The Act was amended in 2009 to insert a new section, Section 66A which was said to address cases of cyber crime with the advent of technology and the internet. What does Section 66(A) of the IT Act say? Section 66(A) of the Act criminalises the sending of offensive messages through a computer or other communication devices. Under this provision, any person who by means of a computer or communication device sends any information that is:
Over the past few years, incidents related to comments, sharing of information, or thoughts expressed by an individual to a wider audience on the internet have attracted criminal penalties under Section 66(A). This has led to discussion and debate on the ambit of the Section and its applicability to such actions. What have been the major developments in context of this Section? In the recent past, a few arrests were made under Section 66(A) on the basis of social media posts directed at notable personalities, including politicians. These were alleged to be offensive in nature. In November 2012, there were various reports of alleged misuse of the law, and the penalties imposed were said to be disproportionate to the offence. Thereafter, a Public Interest Litigation (PIL) was filed in the Supreme Court, challenging this provision on grounds of unconstitutionality. It was said to impinge upon the freedom of speech and expression guaranteed by Article 19(1)(a) of the Constitution. How has the government responded so far? Subsequently, the central government issued guidelines for the purposes of Section 66(A). These guidelines clarified that prior approval of the Deputy Commissioner or Inspector General of Police was required before a police officer or police station could register a complaint under Section 66(A). In May 2013, the Supreme Court (in relation to the above PIL) also passed an order saying that such approval was necessary before any arrest is to be made. Since matters related to police and public order are dealt with by respective state governments, a Supreme Court order was required for these guidelines to be applicable across the country. However, no changes have been made to Section 66 A itself. Has there been any legislative movement with regard to Section 66(A)? A Private Member Bill was introduced in Lok Sabha in 2013 to amend Section 66(A) of the IT Act. The Statement of Objects and Reasons of the Bill stated that most of the offences that Section 66(A) dealt with were already covered by the Indian Penal Code (IPC), 1860. This had resulted in dual penalties for the same offence. According to the Bill, there were also inconsistencies between the two laws in relation to the duration of imprisonment for the same offence. The offence of threatening someone with injury through email attracts imprisonment of two years under the IPC and three years under the IT Act. The Bill was eventually withdrawn. In the same year, a Private Members resolution was also moved in Parliament. The resolution proposed to make four changes: (i) bring Section 66(A) in line with the Fundamental Rights of the Constitution; (ii) restrict the application of the provision to communication between two persons; (iii) precisely define the offence covered; and (iv) reduce the penalty and make the offence a non-cognizable one (which means no arrest could be made without a court order). However, the resolution was also withdrawn. Meanwhile, how has the PIL proceeded? According to news reports, the Supreme Court in February, 2015 had stated that the constitutional validity of the provision would be tested, in relation to the PIL before it. The government argued that they were open to amend/change the provision as the intention was not to suppress freedom of speech and expression, but only deal with cyber crime. The issues being examined by the Court relate to the powers of the police to decide what is abusive, causes annoyance, etc,. instead of the examination of the offence by the judiciary . This is pertinent because this offence is a cognizable one, attracting a penalty of at least three years imprisonment. The law is also said to be ambiguous on the issue of what would constitute information that is “grossly offensive,” as no guidelines have been provided for the same. This lack of clarity could lead to increased litigation. The judgement is not available in the public domain yet. It remains to be seen on what the reasoning of the Supreme Court was, in its decision to strike down Section 66A, today.
The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking sector in India, where it observed that banks’ capacity to lend has been severely affected because of mounting NPAs. The Estimates Committee of Lok Sabha is also currently examining the performance of public sector banks with respect to their burgeoning problem of NPAs, and loan recovery mechanisms available.
Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018 regarding timely resolution of stressed assets have come under scrutiny, with multiple cases being filed in courts against the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying causes, and steps taken so far to address the issue.
What is the extent and effect of the NPA problem in India?
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorized as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.
As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (Figure 1). This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.
Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside more funds to pay for anticipated future losses; and this, along with several structural issues, leads to low profitability. Profitability of a bank is measured by its Return on Assets (RoA), which is the ratio of the bank’s net profits to its net assets. Banks have witnessed a decline in their profitability in the last few years (Figure 2), making them vulnerable to adverse economic shocks and consequently putting consumer deposits at risk.
What led to the rise in NPAs?
Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was booming and business outlook was very positive. Large corporations were granted loans for projects based on extrapolation of their recent growth and performance. With loans being available more easily than before, corporations grew highly leveraged, implying that most financing was through external borrowings rather than internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased. This contributed to what is now known as India’s Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of paying back the bank. The banks at this time took to the practice of ‘evergreening’, where fresh loans were given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters being penalised.
What is being done to address the problem of growing NPAs?
The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets.
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts (where the borrowers are unable to pay their dues). Under the IBC, the creditors of these insolvent accounts, presided over by an insolvency professional, decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is not arrived at, the defaulter’s assets are liquidated. Proceedings under the IBC are adjudicated by the Debt Recovery Tribunal for personal insolvencies, and the National Company Law Tribunal (NCLT) for corporate insolvencies. 701 cases have been registered and 176 cases have been resolved as of March 2018 under the IBC.
What changed recently in the RBI’s guidelines to banks?
Over the years, the RBI has issued various guidelines aimed at the resolution of stressed assets of banks. These included introduction of certain schemes such as: (i) Strategic Debt Restructuring (which allowed banks to change the management of the defaulting company), and (ii) Joint Lenders’ Forum (where lenders evolved a resolution plan and voted on its implementation). In line with the enactment of the IBC, the RBI, through a circular in February 2018, substituted all the specific pre-existing guidelines with a simplified, generic, time-bound framework for the resolution of stressed assets.
In the revised framework which replaced the earlier schemes, the RBI put in place a strict deadline of 180 days during which a resolution plan must be implemented, failing which stressed assets must be referred to the NCLT under IBC within 15 days. The framework also introduced a provision for monitoring of one-day defaults, where incipient stress is identified and flagged immediately when repayments are overdue by a day.
Borrowers whose loans were tagged as NPAs before the release of the circular recently crossed the 180-day deadline for internal resolution by banks. Some of these borrowers, including various power producers and sugar mills, had appealed against the RBI guidelines in various High Courts. A two-judge bench of the Allahabad High Court had recently ruled in favour of the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. All lawsuits against the circular have currently been transferred to the Supreme Court, which has now issued an order to maintain status quo on the same. This means that these cases cannot be referred to the NCLT until the Supreme Court’s decision on the circular, although the RBI’s 180-day deadline has passed. This effectively provides interim relief to the errant borrowers who had moved to court till the next hearing of the apex court on this matter, which is scheduled for November 2018.
