Last month, the Pension Fund Regulatory and Development Authority (PFRDA) issued revised guidelines for the registration of the Pension Fund Managers (PFMs). These guidelines are for the PFMs to manage the National Pension System (NPS) in the non-governmental and private sector. See here. The NPS was implemented in 2004 for all government employees and later extended to the private sector in 2009. The guidelines bring about the following changes in the NPS:
Although NPS was made accessible on a voluntary basis to non-government employees and those working in the private sector since 2009, the subscription to the schemes under NPS was lower than expected. In August 2010, a committee was set up under the chairmanship of Mr. G.N. Bajpai to review the implementation of NPS in the informal sector. The Committee noted that since NPS was opened to the general public there were only 50,000 private sector subscribers until May 2011. According to the Committee, the low subscription was due to the low-to-negligible distribution incentive to the PFMs to distribute the different schemes to the subscribers to invest their funds. The Committee thus recommended that PFRDA should consider revising the structure of the NPS so as to increase subscription. It suggested making the fee structure dynamic for PFMs. The Committee had also suggested that there should be some revision in the bidding as well as the selection process for the PFMs to increase competition and thereby incentivise them to distribute the schemes. These changes, as suggested by the Bajpai Committee and now notified by the PFRDA, are different from the original design of the NPS. The Old Age Social and Income Security (OASIS) Report of 2000, which had initially suggested the establishment of pension system for the unorganised sector in the country, had recommended a low-cost structure for the pension system. The Report had stated that the choice of PFMs should be based on a bidding process where the lowest bidder should be made a PFM under the NPS. The rationale for the auction base for the PFMs was that it would provide a system to the subscribers whereby they could make investments for their old age by paying a minimal fee. A set uniform fee was meant to eliminate the large marketing expenses which would ultimately get passed on to the subscibers. In addition, the intent behind keeping the fund managers from the distribution and marketing of the schemes was to prevent any mis-selling (misleading an investor about the characteristics of a product) that may happen. Recent newspaper reports have raised doubt if these new rules would help in increasing the penetration of the NPS in the markets. However, the chairman of PFRDA, Mr. Yogesh Agarwal, in a recent interview explained that it was important to bring about changes in the structure of the NPS. According to him a scheme which was mandatory for the government sector could not be expected to perform as well in the private sector (where it is voluntary) without any changes made to its structure. He also stated that the NPS should be able to compete with other financial products such as insurance and mutual funds in the market. See here for the PRS Legislative Brief on the PFRDA Bill, 2011. Notes: The seven PFMs are LIC Pension Fund Ltd., UTI Retirement Solutions Ltd., SBI Pension Funds Pvt. Ltd., IDFC Pension Fund Management Co. Ltd., ICICI Prudential Pension Funds Management Co. Ltd., Kotak Mahindra Pension funds Ltd., and Reliance Capital Pension Fund Ltd..
The Specified Bank Notes (Cessation of Liabilities) Bill, 2017 is being discussed in Parliament today.[1] The Bill replaces an Ordinance promulgated on December 30, 2016 to remove the Reserve Bank of India’s (RBI) liability and central government’s guarantee to honour the old Rs 500 and Rs 1,000 notes which were demonetised on November 8, 2016 through a notification.[2] These notes were allowed to be deposited in banks by December 30, 2016. In light of this, we explain the provisions of the Bill and possible implications.
What does the Bill say?
Under the RBI Act, 1934, RBI is responsible for issuing currency notes, and is liable to repay the holder of a note upon demand. The Bill provides that, from December 31, 2016, RBI would no longer be liable to repay holders of old notes of Rs 500 and Rs 1,000, the value of these notes.[3] Further, the old notes will no longer be guaranteed by the central government.
Can a person keep old notes?
A person will be prohibited from holding, transferring or receiving the old notes from December 31, 2016 onwards. It exempts some people from this prohibition including: (i) a person holding up to 10 old notes (irrespective of denomination), and (ii) a person holding up to 25 notes for the purposes of study, research or numismatics (collection or study of coins or notes).
What happens if a person continues to hold old notes after December 30, 2016?
Any person holding the old notes, except in the circumstances mentioned above, will be punishable with a fine: (i) which may extend to Rs 10,000, or (ii) five times the value of notes possessed, whichever is higher.
Are there any issues with this provision?
There may be two issues.
No window to deposit old notes before imposing penalty: The notification of November 8th allowed old currency notes to be deposited till December 30, 2016 and specified that people unable to deposit them till this date would be given an opportunity later.2 However, the Ordinance which came into force on December 31, 2016 made it an offence to hold old currency notes from that day onwards and imposed a penalty. This overnight change did not provide a window for a person holding the notes on that day to exchange or deposit them. Therefore, not only did the holder lose the monetary value of the notes but he was also deemed to have committed an offence. This implies that a person who had the notes did not have an opportunity to avoid committing an offence and attracting a penalty.
Unclear purpose behind penalty on possessing old notes: The purpose and the objective behind imposing a penalty for the possession of old currency notes is unclear. One may draw a comparison between holding an invalid currency note, and an expired cheque since both these instruments are meant to complete transactions. Currently, a cheque becomes invalid three months after being issued. However, holding multiple expired cheques does not attract a penalty.
Is it still possible to deposit old notes?
The government has specified a grace period under the Bill to allow: (i) Indian residents who were outside India between November 9, 2016 to December 30, 2016 to deposit these notes till March 31, 2017, and (ii) non-residents who were outside India during this period to deposit notes till June 30, 2017. The government may exempt any other class of people by issuing a notification. In addition, RBI has permitted foreign tourists to exchange Rs 5,000 per week. No other person can exchange or deposit old notes after December 30, 2016.
Would this satisfy Constitutional norms?
While the notification issued on November 8 specified that after December 30, 2016, any person unable to exchange or deposit old notes would be allowed to do so at specified RBI offices, the Bill does not provide such a facility except in the circumstances discussed above.
On may question whether this violates Article 300A of the Constitution, which states that no person will be deprived of his property except by law. Though this Bill will be a “law”, one may want to think about whether its provisions meet the standards of due process and are not arbitrary. Given that earlier notifications had indicated that a facility for exchanging or depositing old notes would be provided after December 30, 2016, would the action of not providing such facility under the Bill qualify as an arbitrary action which violates due process? [4] A few examples will be useful in examining this question.
Case 1: A person unable to deposit notes due to poor health
A person may have been unable to deposit old currency notes owing to various reasons such as poor health, old age or disability till the deadline of December 30, 2016. The Bill does not provide any facility for such persons to deposit old notes, except if they were not in India during the period between November 8 and December 30, 2016.
Case 2: A person without a bank account
A person without a bank account may have held over Rs 4,500 in old currency notes. The notification (and future modifications) allowed a person to exchange up to Rs 4,500 over the counter once till November 24, 2016.[5] Such a person would have to incur a monetary loss if he possessed old notes above this value, given his inability to deposit them in a bank account.
Case 3: Indian citizens living abroad
There may be Indians working or studying abroad holding old currency notes. The government has notified the last date for depositing old notes for these non-resident Indians as June 30, 2017.[6] However, these people may not visit India between November 8, 2016 and June 30, 2017. In such a scenario, these people may have to incur a monetary loss.
Case 4: Foreign nationals entering India before demonetisation
Foreign tourists in the country may have held old currency notes before demonetisation on November 8, 2016. Such tourists can only exchange old currency notes of up to Rs 5,000 per week till January 31, 2017.[7] Given that such foreigners may not have bank accounts in India, they may also suffer a monetary loss for whatever amount could not be exchanged within the period they were in India. For example, a person who had Rs 10,000 and left India on November 13, 2016 would not have been able to get the value of notes they had, over Rs 5,000.
In addition, Indian currency notes are used legally in neighbouring countries such as Nepal and Bhutan. The Bill allows only Indian citizens to deposit old notes for an extended period under certain conditions. However, it does not make any provisions for foreigners to deposit or exchange old notes held by them. Such foreign nationals who are not Indian residents would not have bank accounts in India.
[1] The Specified Bank Notes (Cessation of Liabilities) Bill, 2017,http://www.prsindia.org/uploads/media/Specified%20Bank%20notes/specified%20bank%20notes%20bill%202017-compress.pdf.
[2] S. O. 3407 (E), Gazette of India, Ministry of Finance, November 8, 2016, http://finmin.nic.in/172521.pdf.
[3] The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016,http://www.prsindia.org/uploads/media/Ordinances/Specified%20Bank%20Notes%20%28Cessation%20of%20Liabilities%29%20Ordinance,%202016.pdf.
[4] Section 2 (ix) of the notification issued on November 8, 2016 (No. S. O. 3407 (E)) states that any person who is unable to exchange or deposit the specified bank notes in their bank accounts on or before the 30th December, 2016, shall be given an opportunity to do so at specified offices of the Reserve Bank or such other facility until a later date as may be specified by it.
[5] S. O. 3543 (E), Gazette of India, Ministry of Finance, November 24, 2016, http://finmin.nic.in/172740.pdf.
[6] S. O. 4251 (E), Gazette of India, Ministry of Finance, December 30, 2016,http://dea.gov.in/sites/default/files/24Notification%2030.12.2016.pdf.
[7] Exchange facility to foreign citizens, January 3, 2017, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10815&Mode=0.
