Mohit Gupta
The Fugitive Economic Offenders Bill, 2018 (hereafter referred to as
FEO Bill, 2018) was introduced in the Lok Sabha on 12th March 2018. It was
passed by the Lok Sabha on 19th July 2018 and by the Rajya Sabha on 25th July
2018 (PRS Legislative Brief, 2018). It
has also received assent from the President on 5th August 2018 and is now a law
in force in the territory of India (Press Trust of India, 2018). The law
replaces the Fugitive Economic Offenders ordinance that was promulgated on 21st
April 2018. The objective of the FEO Bill, 2018 is to deal with offenders that
have fled the Indian jurisdiction and became fugitive after committing fraud,
money laundering, tax evasion etc. In this regard a list of around 30 people
was identified that were involved in financial irregularities that have either
fled the jurisdiction, living abroad or are expected to have turned fugitive
(Lok Sabha, 2018). The said ordinance and the FEO Bill, 2018 that replaces the
ordinance were put in place to deal with these people. The media reports that
followed, after the FEO Bill, 2018 receiving a nod from both the houses of
parliament, portrayed it as some sort of a panacea to deal with fugitives or a
credible threat, to say the least, for all fugitive economic offenders
(Unnikrishnan, 2018; Nair, 2018 etc.). However, before accepting such
propositions, there is a need to closely assess the provisions of this bill to
find out whether it is effective in dealing with the problem of fugitives.
First of all, there are already a plethora of laws that exist in the
statute books to deal with economic offenders and have provisions related to
legal proceedings and confiscation of property of an accused offender. Some of the provisions for confiscation of
property under existing laws include Section 4 and Section 7 of the Smugglers
and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 which
prohibits holding of illegal property and forfeiture of such property by the
central government. In a similar vein, Section 25 (a) of the Recovery of Debts
due to Banks and Financial Institutions Act, 1993 empowers a recovery officer
to attach and sale the properties of a debtor for recovery of the debt.
statute books to deal with economic offenders and have provisions related to
legal proceedings and confiscation of property of an accused offender. Some of the provisions for confiscation of
property under existing laws include Section 4 and Section 7 of the Smugglers
and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 which
prohibits holding of illegal property and forfeiture of such property by the
central government. In a similar vein, Section 25 (a) of the Recovery of Debts
due to Banks and Financial Institutions Act, 1993 empowers a recovery officer
to attach and sale the properties of a debtor for recovery of the debt.
Similarly, Section 8 (5) and 60 (2A) of the Prevention of Money
Laundering Act (PMLA), 2002 allows for confiscation of property of an economic
offender by the central government. Further, Section 13(4) of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act (SRFAESI), 2002 provides for take-over of the assets of
a borrower by a creditor which is akin to confiscation or forfeiture of
properties. So with provisions for confiscation, forfeiture or take-over of
properties in existing laws to deal with problems of willful non-payment, it is
important to look at marked distinction, if any, between the FEO Bill, 2018 and
the existing statutes. Further, how distinct this bill is regarding
confiscation of properties which are already subjected to confiscation under
other statutes. At the first blush, there appears to be broadly two
distinctions between this legislation and the existing ones.
Laundering Act (PMLA), 2002 allows for confiscation of property of an economic
offender by the central government. Further, Section 13(4) of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act (SRFAESI), 2002 provides for take-over of the assets of
a borrower by a creditor which is akin to confiscation or forfeiture of
properties. So with provisions for confiscation, forfeiture or take-over of
properties in existing laws to deal with problems of willful non-payment, it is
important to look at marked distinction, if any, between the FEO Bill, 2018 and
the existing statutes. Further, how distinct this bill is regarding
confiscation of properties which are already subjected to confiscation under
other statutes. At the first blush, there appears to be broadly two
distinctions between this legislation and the existing ones.
First of all the critical difference that appears from the existing
laws is the provision in the FEO Bill, 2018 for confiscation of property of an
accused offender before conviction. This provision seems to be picked and
copied from the United Nations Convention Against Corruption (UNCAC), 2005
which India ratified in 2011. According to Article 54(1) (c) of this convention
“each state party shall consider taking such measure as may be necessary to allow confiscation of such property without
a criminal conviction in cases in which the offender cannot be prosecuted
by reason of death, flight or absence or in other appropriate cases” (Emphasis
Added) (United Nations, 2004, p.44). However, there is little reason to believe
that this will provide a credible threat to the fugitive offender to return
because there is no incentive for the fugitive to face conviction knowing that
the properties are already confiscated.
laws is the provision in the FEO Bill, 2018 for confiscation of property of an
accused offender before conviction. This provision seems to be picked and
copied from the United Nations Convention Against Corruption (UNCAC), 2005
which India ratified in 2011. According to Article 54(1) (c) of this convention
“each state party shall consider taking such measure as may be necessary to allow confiscation of such property without
a criminal conviction in cases in which the offender cannot be prosecuted
by reason of death, flight or absence or in other appropriate cases” (Emphasis
Added) (United Nations, 2004, p.44). However, there is little reason to believe
that this will provide a credible threat to the fugitive offender to return
because there is no incentive for the fugitive to face conviction knowing that
the properties are already confiscated.
Let us now examine the properties which stand at the risk of being
confiscated by the provisions of the FEO Bill, 2018 and how far can they deter
an accused offender. There are two set of properties that stand at risk of
confiscation under the FEO Bill, 2018. These are outlined in Section 12 of the
bill. Section 12(2) (a) allows for confiscation of properties from proceeds of
crime in India or abroad while Section 12 (2) (b) provides for the conviction
of benami properties of an accused offender. It is important to throw some
light on how effective these provisions are in confiscating the property under
the respective heads mentioned in them.
confiscated by the provisions of the FEO Bill, 2018 and how far can they deter
an accused offender. There are two set of properties that stand at risk of
confiscation under the FEO Bill, 2018. These are outlined in Section 12 of the
bill. Section 12(2) (a) allows for confiscation of properties from proceeds of
crime in India or abroad while Section 12 (2) (b) provides for the conviction
of benami properties of an accused offender. It is important to throw some
light on how effective these provisions are in confiscating the property under
the respective heads mentioned in them.
Firstly, it is essential to discuss the issue of confiscation of the
benami properties of an accused offender. Section 2(1) of the FEO Bill, 2018
defines that “benami property” and “benami transaction” shall have the same
meanings as assigned to them under clauses (8) and (9) respectively of section
2 of the Prohibition of Benami Property Transactions Act, 1988 (BPTA, 1988).
Now if that is the case then only those benami properties of an accused
fugitive offender can be confiscated under FEO Bill, 2018 which are defined
benami under BPTA, 1988). The 2016 amendment to this BPTA Act, 1988 which was
claimed to be a step forward to curb benami transaction carves out certain
exemptions to the category of what qualifies as benami property in Section 2
itself of the BPTA Act, 1988 which also defines the scope of benami properties.
The two key exemptions out of four which are relevant for the present
discussion are:
benami properties of an accused offender. Section 2(1) of the FEO Bill, 2018
defines that “benami property” and “benami transaction” shall have the same
meanings as assigned to them under clauses (8) and (9) respectively of section
2 of the Prohibition of Benami Property Transactions Act, 1988 (BPTA, 1988).
Now if that is the case then only those benami properties of an accused
fugitive offender can be confiscated under FEO Bill, 2018 which are defined
benami under BPTA, 1988). The 2016 amendment to this BPTA Act, 1988 which was
claimed to be a step forward to curb benami transaction carves out certain
exemptions to the category of what qualifies as benami property in Section 2
itself of the BPTA Act, 1988 which also defines the scope of benami properties.
The two key exemptions out of four which are relevant for the present
discussion are:
i) a Karta, or a member of
a Hindu undivided family (HUF), as the case may be, and the property is held
for his benefit or benefit of other members in the family and the consideration
for such property has been provided or paid out of the known sources of the
Hindu undivided family;
a Hindu undivided family (HUF), as the case may be, and the property is held
for his benefit or benefit of other members in the family and the consideration
for such property has been provided or paid out of the known sources of the
Hindu undivided family;
ii) a person standing in a
fiduciary capacity for the benefit of another person towards whom he stands in
such capacity and includes a trustee, executor, partner, director of a company,
a depository or a participant as an agent of a depository under the
Depositories Act, 1996 and any other person as may be notified by the Central
Government for this purpose;
fiduciary capacity for the benefit of another person towards whom he stands in
such capacity and includes a trustee, executor, partner, director of a company,
a depository or a participant as an agent of a depository under the
Depositories Act, 1996 and any other person as may be notified by the Central
Government for this purpose;
In leaving out these exemptions the entire efficacy of the BPTA Act,
1988 has been watered down in defining the scope of what qualifies as benami
Property. This is because HUF and persons acting in fiduciary capacity serve as
a loophole to the effectiveness of benami law. For the case of HUF, it is a
black box which implicates the institutions of gender and property rights,
providing the familial basis of ownership and control. Business groups in India
have used this orthodox institution for tax avoidance, and capital accumulation
primarily because what is thrown in the family corpus is exempted from tax and
Karta of HUF can enter into transactions on behalf of HUF (Das Gupta, 2013).
Further, the sources of income of HUF are often obscured, and there is ample
room for subjectivity in defining the ‘known source of income’ for HUF by
throwing it in the family pot, making a lot of property held by Karta outside
the ambit of benami transactions. In addition to this, what is less emphasised
is that the HUF is stapled with existing corporate governance structures of
business groups in India by providing it a place in promoter group holding of
flagship companies of business groups to ensure maximum control with little
ownership (Das Gupta, 2016). This facilitates related party transactions and
helps to keep anonymity/benami nature of property held by creating a convoluted
structure using HUF as a nucleus. A
study of 25 landmark cases on HUF reveal that how HUF have been used to
organise complex group structure by business groups in India and how HUF is
used for realising the interest in the property by making related party
transactions most of which tend to be benami. This is because among the related
party consideration is paid by one while the title is given to someone else. It
also ensures that the property remains with the male line of descendant because
they are the natural successors as per the dominant school in the Hindu law
(Das Gupta & Gupta, 2017). The Law Commission of India also underscored the
use of benami route by HUF in its 57th report in 1973. The report pointed out
that the probable reasons for benami transactions are; the intention to defraud
the creditors, to evade taxes, the desire of the joint Hindu family to make
secret provisions and finally to avoid certain political and social risks (Law
Commission of India, 1973; Emphasis Added). Thus by leaving out property held
by Karta of a HUF from the scope of benami transaction essentially the efficacy
of the BPTA, 1988 and FEO Bill, 2018 have been curtailed significantly.
1988 has been watered down in defining the scope of what qualifies as benami
Property. This is because HUF and persons acting in fiduciary capacity serve as
a loophole to the effectiveness of benami law. For the case of HUF, it is a
black box which implicates the institutions of gender and property rights,
providing the familial basis of ownership and control. Business groups in India
have used this orthodox institution for tax avoidance, and capital accumulation
primarily because what is thrown in the family corpus is exempted from tax and
Karta of HUF can enter into transactions on behalf of HUF (Das Gupta, 2013).
Further, the sources of income of HUF are often obscured, and there is ample
room for subjectivity in defining the ‘known source of income’ for HUF by
throwing it in the family pot, making a lot of property held by Karta outside
the ambit of benami transactions. In addition to this, what is less emphasised
is that the HUF is stapled with existing corporate governance structures of
business groups in India by providing it a place in promoter group holding of
flagship companies of business groups to ensure maximum control with little
ownership (Das Gupta, 2016). This facilitates related party transactions and
helps to keep anonymity/benami nature of property held by creating a convoluted
structure using HUF as a nucleus. A
study of 25 landmark cases on HUF reveal that how HUF have been used to
organise complex group structure by business groups in India and how HUF is
used for realising the interest in the property by making related party
transactions most of which tend to be benami. This is because among the related
party consideration is paid by one while the title is given to someone else. It
also ensures that the property remains with the male line of descendant because
they are the natural successors as per the dominant school in the Hindu law
(Das Gupta & Gupta, 2017). The Law Commission of India also underscored the
use of benami route by HUF in its 57th report in 1973. The report pointed out
that the probable reasons for benami transactions are; the intention to defraud
the creditors, to evade taxes, the desire of the joint Hindu family to make
secret provisions and finally to avoid certain political and social risks (Law
Commission of India, 1973; Emphasis Added). Thus by leaving out property held
by Karta of a HUF from the scope of benami transaction essentially the efficacy
of the BPTA, 1988 and FEO Bill, 2018 have been curtailed significantly.
The Second important exemption that has been carved out in the BPTA
Act, 1988 as per the latest amendment in 2016 is the property held by a person
in a fiduciary capacity which includes that by a trustee, executor, partner or
director in a company. The most significant exception here is that of the
property held by a trustee. This is because trust has been in itself a grey
zone and often used for carrying opaque transactions like acquiring of land
because of lacunae around financial disclosures of trusts. The Report of the Law Commission in 1988
provides the evidence of fictitious trusts in Tamil Nadu which were created to
transfer the property at that time in the name of servants, close relatives and
family members to bye pass the land ceiling legislation. It also provides the
evidence of the more well-known route to carry out Benami transactions that is
the ‘pseudo-religious trust’ – a list of 21 such trusts existent at that time
in Tamil Nadu was provided which were controlled by family members and were
holdings several hundred acres of land. These pseudo-religious trusts were
created in the name of temples, dharamshalas etc. A similar indicative account
is also available with respect to the charitable trusts in Maharashtra set up
under the Maharashtra Public Charitable Trusts Act 1950 where the bourgeois
capital has been used to grab land at concessional rates for all leading
hospitals in Bombay rendering them uncharitable in fact (Duggal, 2012). A more
emphatic observation regarding the exclusion of person acting in a fiduciary
capacity under BPTA Act, 1988 was pointed out by National Institute of Public
Finance and Policy (NPFP) in their recommendation for the 58th report of the
Standing Committee on Finance where it opined the following: “… An exception
has been carved out where a property is held by a person standing in a
fiduciary capacity. Most of the lawyers will act in a fiduciary capacity. In
fact, a legal adviser has been specifically included in the exception. Thus, properties held and managed in tax
heavens by lawyers will be out of the ambit of the Act. Most of the Benami
properties will be held either in the name of near relatives or by lawyers….
acting in a fiduciary capacity. Leaving all these categories out will
severely restrict the operation of the Act to only those cases where properties
are held in the name of trusted employees, servants, etc. It is therefore
doubtful if the Act in its present form will achieve the avowed objective of
prohibiting the holding of property in Benami (Lok Sabha, 2011; Emphasis
Added).
Act, 1988 as per the latest amendment in 2016 is the property held by a person
in a fiduciary capacity which includes that by a trustee, executor, partner or
director in a company. The most significant exception here is that of the
property held by a trustee. This is because trust has been in itself a grey
zone and often used for carrying opaque transactions like acquiring of land
because of lacunae around financial disclosures of trusts. The Report of the Law Commission in 1988
provides the evidence of fictitious trusts in Tamil Nadu which were created to
transfer the property at that time in the name of servants, close relatives and
family members to bye pass the land ceiling legislation. It also provides the
evidence of the more well-known route to carry out Benami transactions that is
the ‘pseudo-religious trust’ – a list of 21 such trusts existent at that time
in Tamil Nadu was provided which were controlled by family members and were
holdings several hundred acres of land. These pseudo-religious trusts were
created in the name of temples, dharamshalas etc. A similar indicative account
is also available with respect to the charitable trusts in Maharashtra set up
under the Maharashtra Public Charitable Trusts Act 1950 where the bourgeois
capital has been used to grab land at concessional rates for all leading
hospitals in Bombay rendering them uncharitable in fact (Duggal, 2012). A more
emphatic observation regarding the exclusion of person acting in a fiduciary
capacity under BPTA Act, 1988 was pointed out by National Institute of Public
Finance and Policy (NPFP) in their recommendation for the 58th report of the
Standing Committee on Finance where it opined the following: “… An exception
has been carved out where a property is held by a person standing in a
fiduciary capacity. Most of the lawyers will act in a fiduciary capacity. In
fact, a legal adviser has been specifically included in the exception. Thus, properties held and managed in tax
heavens by lawyers will be out of the ambit of the Act. Most of the Benami
properties will be held either in the name of near relatives or by lawyers….
acting in a fiduciary capacity. Leaving all these categories out will
severely restrict the operation of the Act to only those cases where properties
are held in the name of trusted employees, servants, etc. It is therefore
doubtful if the Act in its present form will achieve the avowed objective of
prohibiting the holding of property in Benami (Lok Sabha, 2011; Emphasis
Added).
Further, a partner in a partnership firm is exempted from the
category of benami transaction and allowed to hold property in fiduciary capacity.
The ramifications of this exemption become evident if one reads the scope of
partnership firms in the 2016 amendment to the BPTA Act, 1998. This included a
Limited Liability Partnership (LLP) as well in the ambit of a partnership. Now
as defined by the Limited Liability Partnership Act 2008 – A LLP is a body
corporate which can have among others even other body corporate as its
partners. Thus, effectively this exemption allows the property to be held in
the name of a body corporate apart from an individual not being benami. Thus
the family-owned business groups which have a large number of body corporate in
their promoter group holding are given ample opportunity to engage in the
benami transactions. More importantly, a body corporate in LLP Act 2008 also
includes an LLP outside India. On the
one hand such foreign entities have been used by the family-owned business
groups for vertical and horizontal integration to transform themselves into
multinationals but and on the other hand, this has been possible without
increasing their corporate liability (Das Gupta, 2010). Thus this allows
foreign body corporate to be ultimate beneficiaries of benmai transactions.
category of benami transaction and allowed to hold property in fiduciary capacity.
The ramifications of this exemption become evident if one reads the scope of
partnership firms in the 2016 amendment to the BPTA Act, 1998. This included a
Limited Liability Partnership (LLP) as well in the ambit of a partnership. Now
as defined by the Limited Liability Partnership Act 2008 – A LLP is a body
corporate which can have among others even other body corporate as its
partners. Thus, effectively this exemption allows the property to be held in
the name of a body corporate apart from an individual not being benami. Thus
the family-owned business groups which have a large number of body corporate in
their promoter group holding are given ample opportunity to engage in the
benami transactions. More importantly, a body corporate in LLP Act 2008 also
includes an LLP outside India. On the
one hand such foreign entities have been used by the family-owned business
groups for vertical and horizontal integration to transform themselves into
multinationals but and on the other hand, this has been possible without
increasing their corporate liability (Das Gupta, 2010). Thus this allows
foreign body corporate to be ultimate beneficiaries of benmai transactions.
Thus, skepticism that the Benami transactions would not be curbed in
the light of the above exemptions is a valid one. This is because the
consideration for a transaction will be paid by one party while the property
rights are defined in the name of other. This most often the case with the
family-owned business groups where these persons acting in a fiduciary capacity
like the partner or a director are related party and often the family members.
This also raises serious doubts on benami properties that can be confiscated
under the FEO Bill, 2018.
the light of the above exemptions is a valid one. This is because the
consideration for a transaction will be paid by one party while the property
rights are defined in the name of other. This most often the case with the
family-owned business groups where these persons acting in a fiduciary capacity
like the partner or a director are related party and often the family members.
This also raises serious doubts on benami properties that can be confiscated
under the FEO Bill, 2018.
Coming back to the case of confiscation of other properties as
defined by section 12(2) (a) of the FEO Bill, 2018, it is unlikely that a
person who has become fugitive and knows that the property is confiscated will
return for facing criminal conviction, because of being deterred by this
provision of the FEO Bill, 2018. This is more so because usually, the amount
involved in economic offence is highly disproportionate to the value of total
property of an accused in the jurisdiction from which he has turned fugitive.
For instance, recently, a diamond baron from India has been declared as a
fugitive offender. It is estimated that the value of his properties seized by
the authorities was grossly overvalued in books and the real value of the
properties are minuscule compared to the actual value of the scam with Punjab
National Bank, which is estimated to be over 100 billion (Ghunawat, 2018).
Further, these properties are attached under the various sections of the PMLA,
2002 and charge sheet against various accused has been filed under Section 45
of the PMLA, 2002. This shows that there are provisions in the existing
statutes to deal with the problem at hand then there seems to be no reason to
stuff the statute books with new laws.
defined by section 12(2) (a) of the FEO Bill, 2018, it is unlikely that a
person who has become fugitive and knows that the property is confiscated will
return for facing criminal conviction, because of being deterred by this
provision of the FEO Bill, 2018. This is more so because usually, the amount
involved in economic offence is highly disproportionate to the value of total
property of an accused in the jurisdiction from which he has turned fugitive.
For instance, recently, a diamond baron from India has been declared as a
fugitive offender. It is estimated that the value of his properties seized by
the authorities was grossly overvalued in books and the real value of the
properties are minuscule compared to the actual value of the scam with Punjab
National Bank, which is estimated to be over 100 billion (Ghunawat, 2018).
Further, these properties are attached under the various sections of the PMLA,
2002 and charge sheet against various accused has been filed under Section 45
of the PMLA, 2002. This shows that there are provisions in the existing
statutes to deal with the problem at hand then there seems to be no reason to
stuff the statute books with new laws.
The ‘Schedule’ appended to the FEO Bill, 2018 contains a list of
offences which are known as ‘Scheduled Offence’ under which proceedings can be
initiated against an offender. This includes offence compiled from 15 existing
statutes including PMLA, 2002, BTPA, 2016, Companies Act, 2013 etc. If the
proceedings against a person are already/can be carried under these statutes
then to create overlapping provisions for the same offence under a new bill
seems to be an attempt in futility. With no explicit clarity provided in the
present bill, this may end up with bizarre situations where for instance the
same set of properties be attached and confiscated under multiple legislations
or under the FEO Bill, 2018 but as per the provisions of existing statutes
dealing with such offences. It is just like adding another layer of law to the
existing laws if it is done without consolidating the provisions of all
statutes in one place.
offences which are known as ‘Scheduled Offence’ under which proceedings can be
initiated against an offender. This includes offence compiled from 15 existing
statutes including PMLA, 2002, BTPA, 2016, Companies Act, 2013 etc. If the
proceedings against a person are already/can be carried under these statutes
then to create overlapping provisions for the same offence under a new bill
seems to be an attempt in futility. With no explicit clarity provided in the
present bill, this may end up with bizarre situations where for instance the
same set of properties be attached and confiscated under multiple legislations
or under the FEO Bill, 2018 but as per the provisions of existing statutes
dealing with such offences. It is just like adding another layer of law to the
existing laws if it is done without consolidating the provisions of all
statutes in one place.
The duplication of efforts by creating provisions in this bill is
further evident from the fact that for the cases involving amounts lower than
Rs. 100 crores there are other laws available under which the proceedings will
be carried against a fugitive offender. This has been argued by the Finance
Minister himself during the discussion on the FEO Bill, 2018 (Rajya Sabha, 2018
a). Thus one can see no logic in the fact that why the existing statutes which
are effective in dealing with the fugitive offenders until the amount involved
is less than Rs. 100 crores suddenly turn out to be ineffective, so that there
is a need for them to be replaced by a new law arises, as soon as this
threshold is crossed. Furthermore, the futility of keeping this Rs.100 crores
threshold as an entry point in this legislation is discussed in greater detail
below.
further evident from the fact that for the cases involving amounts lower than
Rs. 100 crores there are other laws available under which the proceedings will
be carried against a fugitive offender. This has been argued by the Finance
Minister himself during the discussion on the FEO Bill, 2018 (Rajya Sabha, 2018
a). Thus one can see no logic in the fact that why the existing statutes which
are effective in dealing with the fugitive offenders until the amount involved
is less than Rs. 100 crores suddenly turn out to be ineffective, so that there
is a need for them to be replaced by a new law arises, as soon as this
threshold is crossed. Furthermore, the futility of keeping this Rs.100 crores
threshold as an entry point in this legislation is discussed in greater detail
below.
Thus this law has nothing new to offer as far as confiscation of
properties of an offender is concerned except for confiscation without
conviction which is not a credible threat to an offender as argued above.
However coming back to the point on duplication of efforts, there is further
evidence for it, Section 2(n) of the FEO Bill, 2018 defines a Special Court
under which the proceedings against an accused fugitive offender will take
place as ‘a special court as designated under Section 43(1) of the PMLA, 2002’.
Thus there is a recurring inter dependence on other statues for carrying on the
trail for an accused offender under this law. This further questions the need
for this separate legislation if there are existing institutions to deal with
the issue and it creates no new and all-encompassing institutional measures to
curb the problem. This law will serve as no credible threat for the offender
whose properties are already confiscated under multiple legislations dealing
with this issue and proceedings are to be carried in special courts earmarked
for other Acts. It only will increase the litigation cost of proceedings under
a new Act while the offender continues to abscond and has no incentive or
threat to come back.
properties of an offender is concerned except for confiscation without
conviction which is not a credible threat to an offender as argued above.
However coming back to the point on duplication of efforts, there is further
evidence for it, Section 2(n) of the FEO Bill, 2018 defines a Special Court
under which the proceedings against an accused fugitive offender will take
place as ‘a special court as designated under Section 43(1) of the PMLA, 2002’.
Thus there is a recurring inter dependence on other statues for carrying on the
trail for an accused offender under this law. This further questions the need
for this separate legislation if there are existing institutions to deal with
the issue and it creates no new and all-encompassing institutional measures to
curb the problem. This law will serve as no credible threat for the offender
whose properties are already confiscated under multiple legislations dealing
with this issue and proceedings are to be carried in special courts earmarked
for other Acts. It only will increase the litigation cost of proceedings under
a new Act while the offender continues to abscond and has no incentive or
threat to come back.
There is no reason to believe that adding another layer of law in
the form of the FEO Bill, 2018 will prove to be a credible threat in not only
deterring the Individuals from becoming fugitive economic offenders (as we have
argued above) but also to bring back the existing offenders. This is because
the efficacy of this legislation is further constrained by the fact that the
criminal law in India cannot be applied with retrospective effect as per
Article 20(1) of the Indian Constitution which provides that “No person shall
be convicted of any offence except for the violation of law in force at the
time of the commission of the Act charged as an offence..”. This means that the
fugitive offenders who had committed an offence before this bill became
operational as an Act are not covered within the scope of this bill. A likely
argument in response to this can be that “It is never too late” to bring such
legislation that can deter the wilful fugitive offenders. However, such an
argument also do not hold water and is akin to a futile attempt of trying to
‘bolt the stable after horses have fled’ because the FEO Bill, 2018 in the
first place was initiated especially to poach a series of economic offenders
who have fled the Indian Territory recently and were involved in frauds to the
tune of several thousand crores. If it is ineffective in bringing them back,
then this raises serious doubts about its efficacy.
the form of the FEO Bill, 2018 will prove to be a credible threat in not only
deterring the Individuals from becoming fugitive economic offenders (as we have
argued above) but also to bring back the existing offenders. This is because
the efficacy of this legislation is further constrained by the fact that the
criminal law in India cannot be applied with retrospective effect as per
Article 20(1) of the Indian Constitution which provides that “No person shall
be convicted of any offence except for the violation of law in force at the
time of the commission of the Act charged as an offence..”. This means that the
fugitive offenders who had committed an offence before this bill became
operational as an Act are not covered within the scope of this bill. A likely
argument in response to this can be that “It is never too late” to bring such
legislation that can deter the wilful fugitive offenders. However, such an
argument also do not hold water and is akin to a futile attempt of trying to
‘bolt the stable after horses have fled’ because the FEO Bill, 2018 in the
first place was initiated especially to poach a series of economic offenders
who have fled the Indian Territory recently and were involved in frauds to the
tune of several thousand crores. If it is ineffective in bringing them back,
then this raises serious doubts about its efficacy.
Further Article 20(2) of the constitution lays down the protection
from ‘double jeopardy’, and it states that no person shall be prosecuted and
punished for the same offence more than once.” Now if a person is already
facing a prosecution for an offence under any of the above-mentioned Acts like
CrPC 1973, SRFAESI 2002, PMLA 2002, BTPA 2016 etc. then this safeguard provided
by the constitution limits the applicability of the FEO bill, 2018 on any
offender for the same offence and there is an overlapping of same offence being
covered under various Acts. Further, in such a case there seems no reason to
believe that FEO Bill, 2018 will stand out to ensure conviction or prosecution
of an offender solely by its provisions.
from ‘double jeopardy’, and it states that no person shall be prosecuted and
punished for the same offence more than once.” Now if a person is already
facing a prosecution for an offence under any of the above-mentioned Acts like
CrPC 1973, SRFAESI 2002, PMLA 2002, BTPA 2016 etc. then this safeguard provided
by the constitution limits the applicability of the FEO bill, 2018 on any
offender for the same offence and there is an overlapping of same offence being
covered under various Acts. Further, in such a case there seems no reason to
believe that FEO Bill, 2018 will stand out to ensure conviction or prosecution
of an offender solely by its provisions.
The efficacy of the FEO Bill, 2018 is a matter of further scrutiny
because it applies to the territory of India only and it cannot define the
terms of bringing back an offender from other jurisdiction. The process to
bring back any fugitive economic offender from other jurisdiction is contingent
upon the existence of a multilateral or bilateral extradition arrangement with
that jurisdiction. In India, the extradition process is governed by the
Extradition Act, 1962 under which there needs to be an extradition treaty or
agreement that defines the terms of extradition of an offender. India currently
has extradition treaties with 48 countries and extradition agreements with 3
European countries (Rajya Sabha, 2018b). Further, the information available in
public domain from Ministry of External Affairs provides a list of 9 countries
with which India has extradition agreements (including the three mentioned by
the minister in response pointed above)[1].
Thus in total India has extradition arrangements (by way of treaties and
agreements) with 57 countries.
because it applies to the territory of India only and it cannot define the
terms of bringing back an offender from other jurisdiction. The process to
bring back any fugitive economic offender from other jurisdiction is contingent
upon the existence of a multilateral or bilateral extradition arrangement with
that jurisdiction. In India, the extradition process is governed by the
Extradition Act, 1962 under which there needs to be an extradition treaty or
agreement that defines the terms of extradition of an offender. India currently
has extradition treaties with 48 countries and extradition agreements with 3
European countries (Rajya Sabha, 2018b). Further, the information available in
public domain from Ministry of External Affairs provides a list of 9 countries
with which India has extradition agreements (including the three mentioned by
the minister in response pointed above)[1].
Thus in total India has extradition arrangements (by way of treaties and
agreements) with 57 countries.
In the absence of an extradition treaty, Section 3(4) of the
Extradition Act, 1962 provides that any convention to which India and the other
country is signatory may be treated as an extradition treaty. For instance, the
UNCAC 2005 which India ratified in 2011 has 140 countries as signatories. In
the absence of a treaty, this convention can be used for extradition. However,
such convention has its limitations for laying down precise rules for
extradition. This is because the convention cannot alter the domestic laws of a
state, therefore, it only provides an indicative guideline and standards for
various countries to fight against corruption. Thus, the entire tone of the
convention is normative as opposed to assertive and the provisions are very
broadly defined rather than listing specificities for instance it states that
each state party shall take measures to prevent corruption in the private
sector, providing mutual legal assistance to each other etc. (UNCAC, 2005;
pp.14, 33 etc.) . Thus the rules are not spelt out in clearly in case of
absence of a treaty. Hence the efficacy of the FEO Bill, 2018 in bringing back
the fugitive economic offenders is also constrained by the fact that India has
bilateral extradition arrangements with only a limited set of countries.
Extradition Act, 1962 provides that any convention to which India and the other
country is signatory may be treated as an extradition treaty. For instance, the
UNCAC 2005 which India ratified in 2011 has 140 countries as signatories. In
the absence of a treaty, this convention can be used for extradition. However,
such convention has its limitations for laying down precise rules for
extradition. This is because the convention cannot alter the domestic laws of a
state, therefore, it only provides an indicative guideline and standards for
various countries to fight against corruption. Thus, the entire tone of the
convention is normative as opposed to assertive and the provisions are very
broadly defined rather than listing specificities for instance it states that
each state party shall take measures to prevent corruption in the private
sector, providing mutual legal assistance to each other etc. (UNCAC, 2005;
pp.14, 33 etc.) . Thus the rules are not spelt out in clearly in case of
absence of a treaty. Hence the efficacy of the FEO Bill, 2018 in bringing back
the fugitive economic offenders is also constrained by the fact that India has
bilateral extradition arrangements with only a limited set of countries.
More importantly, this list excludes the various tax heaven islands
like Antigua, Barbuda etc. which are a frequent resort of such offenders, once
they abscond from jurisdiction in which offence has been committed (Ghosh, 2018).
These small jurisdictions offer Citizenship by Investment (CIP’s) or run
‘golden visas’ scheme which rewards investors and eventually grant them
citizenship. These schemes are used for generating revenue by the smaller
jurisdictions which are usually exploited the by the affluent corporate to hide
out after turning fugitive (Henley, 2018). Further, even if there is an
extradition arrangement with any country, the actual extradition is based in
principle on the reciprocity of exchange of offenders by both countries. To add
to this even if there is an extradition arrangement with a country, the actual
extradition process is quite cumbersome which requires providing substantial
evidence, serving a Red Corner Notice and other complex enquiries. So, given the
absence of an extradition arrangement with various countries and the fact that
the actual process of extradition is quite tedious, it seems impossible that
the FEO Bill, 2018 will work as an effective tool to bring back the offenders
who have fled the Indian jurisdiction. In this case, the government can only
request to ‘contracting state’ like under section 12(5) of the FEO Bill, 2018
for confiscating properties of an alleged offender outside India. The
promptness of the contracting state to act on the request made by another state
remains to be seen.
like Antigua, Barbuda etc. which are a frequent resort of such offenders, once
they abscond from jurisdiction in which offence has been committed (Ghosh, 2018).
These small jurisdictions offer Citizenship by Investment (CIP’s) or run
‘golden visas’ scheme which rewards investors and eventually grant them
citizenship. These schemes are used for generating revenue by the smaller
jurisdictions which are usually exploited the by the affluent corporate to hide
out after turning fugitive (Henley, 2018). Further, even if there is an
extradition arrangement with any country, the actual extradition is based in
principle on the reciprocity of exchange of offenders by both countries. To add
to this even if there is an extradition arrangement with a country, the actual
extradition process is quite cumbersome which requires providing substantial
evidence, serving a Red Corner Notice and other complex enquiries. So, given the
absence of an extradition arrangement with various countries and the fact that
the actual process of extradition is quite tedious, it seems impossible that
the FEO Bill, 2018 will work as an effective tool to bring back the offenders
who have fled the Indian jurisdiction. In this case, the government can only
request to ‘contracting state’ like under section 12(5) of the FEO Bill, 2018
for confiscating properties of an alleged offender outside India. The
promptness of the contracting state to act on the request made by another state
remains to be seen.
The FEO Bill, 2018 outlines that the designated special courts can
initiate proceedings under this law if the amount involved is higher than
Rs.100 crores. The rationale for putting this arbitrary threshold emanates from
the fact that only those offenders that are involved in grave offences are
targeted using this bill, and any lower threshold amount will clog the courts
with too many cases, as argued by the finance minister during the discussion on
the FEO Bill, 2018 (Rajya Sabha, 2018a). This arbitrary threshold is not
justified firstly because any offence continues to be an offence and the degree
of that cannot be justified by placing the absolute amount involved as a
benchmark.
initiate proceedings under this law if the amount involved is higher than
Rs.100 crores. The rationale for putting this arbitrary threshold emanates from
the fact that only those offenders that are involved in grave offences are
targeted using this bill, and any lower threshold amount will clog the courts
with too many cases, as argued by the finance minister during the discussion on
the FEO Bill, 2018 (Rajya Sabha, 2018a). This arbitrary threshold is not
justified firstly because any offence continues to be an offence and the degree
of that cannot be justified by placing the absolute amount involved as a
benchmark.
Secondly this arbitrary limit of Rs. 100 crore swiftly ignores the
fact that the economic offenders who turn out to be fugitive usually do not
operate as an individual rather they operate through an optimum mix of a
plethora of entities under common control in the form of a business group. Thus
an Individual ‘M’ might be a director in Company ‘G Limited’ and a partner in a
Limited Liability Partnership (LLP) ‘AB LLP’. Since a company and LLP are
distinct body corporate, therefore they can take loans in their name. Let us
assume Company G took a loan of Rs 95 crores, and AB LLP took a Letter of
Credit of Rs. 90 Crore, by pledging the same guarantee against which Company G
took a loan. In addition to this Individual M also availed a Bank Overdraft of
Rs. 90 Crores. Now if Individual M turns out to be fugitive, he and the other
two entities cannot be qualified as a fugitive economic offender under the FEO
Bill, 2018 because while the total amount involved is Rs 275 crores but
individually all of the three entities had an obligation of less than Rs. 100
crores. In this case, the proceedings against them will be initiated under the
various other legislations like PMLA, 2002 etc. This again takes us back to the
issue of this legislation, in particular, being ineffective in dealing with the
issue of fugitives on its own.
fact that the economic offenders who turn out to be fugitive usually do not
operate as an individual rather they operate through an optimum mix of a
plethora of entities under common control in the form of a business group. Thus
an Individual ‘M’ might be a director in Company ‘G Limited’ and a partner in a
Limited Liability Partnership (LLP) ‘AB LLP’. Since a company and LLP are
distinct body corporate, therefore they can take loans in their name. Let us
assume Company G took a loan of Rs 95 crores, and AB LLP took a Letter of
Credit of Rs. 90 Crore, by pledging the same guarantee against which Company G
took a loan. In addition to this Individual M also availed a Bank Overdraft of
Rs. 90 Crores. Now if Individual M turns out to be fugitive, he and the other
two entities cannot be qualified as a fugitive economic offender under the FEO
Bill, 2018 because while the total amount involved is Rs 275 crores but
individually all of the three entities had an obligation of less than Rs. 100
crores. In this case, the proceedings against them will be initiated under the
various other legislations like PMLA, 2002 etc. This again takes us back to the
issue of this legislation, in particular, being ineffective in dealing with the
issue of fugitives on its own.
Let us discuss several other loopholes in this legislation. Section
14(a) of the FEO Bill, 2018 gives power to a court or tribunal to not hear any
civil claim of an individual who has turned fugitive. The subsequent Section
14(b) reads that a court or a tribunal may disallow a company and an LLP or an
individual related to these entities (as a promoter, majority shareholder or
key managerial person) to file any civil claims if the person has been declared
as a fugitive economic offender. This means that there is some understanding
within the FEO Bill, 2018 of how the corporate sector works in India through an
interface of companies, individuals and firms. Thus an attempt was made in the
provisions of the FEO Bill, 2018 to curb the legal recourse available to the
fugitive offenders through related entities but it is a half-hearted attempt in
filling this lacuna. Firstly, while it bars a company and an LLP to file any
civil claims, it does not bar other entities like a HUF from making a civil
claim for themselves or for economic offender who are more often than not a
promoter entity in the business group and comprises of the family members of a
family-owned business group. Secondly, Section 3 of the FEO Bill, 2018 limits the
applicability of the provisions only to an individual. This implies that only a
natural person can be declared a fugitive economic offender as per the
provisions and action can be taken against him. However, this excludes the
entire group involving companies and other entities which should also be booked
under the law as they enjoy the status of a separate legal person. These other
entities may be booked under other legislations like getting barred from
trading securities on a stock exchange etc. but then this again brings the
point that this legislation is not comprehensive enough to deal with issues
arising out of fugitive economic offender. Thus the FEO Bill, 2018 only adds to
the litigation cost while adding nothing new to the criminal law against economic
offences. The denial of filing civil claims, once declared as fugitive economic
offenders also violate Article 21 of the Indian constitution which provides the
right to life and justice. To avoid striking down of this provision by
judiciary an ambiguous text/weak provision has been inserted and thus Section
14(b) reads that “….the court ‘may disallow’ any company or LLP for defending
any civil claim…”. The word ‘may disallow’ instead of more assertive words
like ‘will disallow’ or ‘not allow’, not only leaves enough room for
subjectivity of the judiciary to decide upon entertaining the claims on a case
to case basis but can also increase the cost of litigation because people can
challenge the denial of justice as per the fundamental rights given by the
constitution. This also has an impact on the interest of the other stakeholders
related to an entity whose key personnel have become fugitive because of the
likely restriction on filing any civil claim by such an entity.
14(a) of the FEO Bill, 2018 gives power to a court or tribunal to not hear any
civil claim of an individual who has turned fugitive. The subsequent Section
14(b) reads that a court or a tribunal may disallow a company and an LLP or an
individual related to these entities (as a promoter, majority shareholder or
key managerial person) to file any civil claims if the person has been declared
as a fugitive economic offender. This means that there is some understanding
within the FEO Bill, 2018 of how the corporate sector works in India through an
interface of companies, individuals and firms. Thus an attempt was made in the
provisions of the FEO Bill, 2018 to curb the legal recourse available to the
fugitive offenders through related entities but it is a half-hearted attempt in
filling this lacuna. Firstly, while it bars a company and an LLP to file any
civil claims, it does not bar other entities like a HUF from making a civil
claim for themselves or for economic offender who are more often than not a
promoter entity in the business group and comprises of the family members of a
family-owned business group. Secondly, Section 3 of the FEO Bill, 2018 limits the
applicability of the provisions only to an individual. This implies that only a
natural person can be declared a fugitive economic offender as per the
provisions and action can be taken against him. However, this excludes the
entire group involving companies and other entities which should also be booked
under the law as they enjoy the status of a separate legal person. These other
entities may be booked under other legislations like getting barred from
trading securities on a stock exchange etc. but then this again brings the
point that this legislation is not comprehensive enough to deal with issues
arising out of fugitive economic offender. Thus the FEO Bill, 2018 only adds to
the litigation cost while adding nothing new to the criminal law against economic
offences. The denial of filing civil claims, once declared as fugitive economic
offenders also violate Article 21 of the Indian constitution which provides the
right to life and justice. To avoid striking down of this provision by
judiciary an ambiguous text/weak provision has been inserted and thus Section
14(b) reads that “….the court ‘may disallow’ any company or LLP for defending
any civil claim…”. The word ‘may disallow’ instead of more assertive words
like ‘will disallow’ or ‘not allow’, not only leaves enough room for
subjectivity of the judiciary to decide upon entertaining the claims on a case
to case basis but can also increase the cost of litigation because people can
challenge the denial of justice as per the fundamental rights given by the
constitution. This also has an impact on the interest of the other stakeholders
related to an entity whose key personnel have become fugitive because of the
likely restriction on filing any civil claim by such an entity.
The other important issue regarding the interest of the various
stakeholders that are attached directly or indirectly to the entity that has
turned out to be fugitive relates to the title and rights of the property of
the offender. Section 12(8) provides that such rights and title shall solely
vest with the central government. However the FEO Bill, 2018 is silent on what
will be the actual treatment of the sale proceeds from these entitlements and
in what order shall it be distributed to the creditors. The likely consequence
will be that this will have a significant brunt on the small and operational
creditors like workers and employees of the entity. One of the accused
fugitives from India which was involved in aviation sector did not pay the
salaries of staff for a long duration before turning fugitive, and the
employees are still not able to find ways to recover their dues[2].
It is difficult for them to incur the cost of entering into legal arrangements
to claim their share of wages, salaries and other dues from the proceeds that
are available with the government. This is because transaction cost of entering
into such arrangements individually is very significant and collectively it may
not be possible for the small creditors like workers to enter into such
arrangements because they are not usually the organised creditors. Further, it
is likely that the entity against which proceedings are initiated under the FEO
Bill, 2018 may initially become insolvent and then eventually bankrupt because
of the failure to honour its obligations. The insolvency may trigger because
timely payment of dues is restricted on one hand because the offender continues
to abscond and on the other, the property from which the commitments can be
honoured are confiscated, and the title of these properties rests with the
central government.
stakeholders that are attached directly or indirectly to the entity that has
turned out to be fugitive relates to the title and rights of the property of
the offender. Section 12(8) provides that such rights and title shall solely
vest with the central government. However the FEO Bill, 2018 is silent on what
will be the actual treatment of the sale proceeds from these entitlements and
in what order shall it be distributed to the creditors. The likely consequence
will be that this will have a significant brunt on the small and operational
creditors like workers and employees of the entity. One of the accused
fugitives from India which was involved in aviation sector did not pay the
salaries of staff for a long duration before turning fugitive, and the
employees are still not able to find ways to recover their dues[2].
It is difficult for them to incur the cost of entering into legal arrangements
to claim their share of wages, salaries and other dues from the proceeds that
are available with the government. This is because transaction cost of entering
into such arrangements individually is very significant and collectively it may
not be possible for the small creditors like workers to enter into such
arrangements because they are not usually the organised creditors. Further, it
is likely that the entity against which proceedings are initiated under the FEO
Bill, 2018 may initially become insolvent and then eventually bankrupt because
of the failure to honour its obligations. The insolvency may trigger because
timely payment of dues is restricted on one hand because the offender continues
to abscond and on the other, the property from which the commitments can be
honoured are confiscated, and the title of these properties rests with the
central government.
This then leads to a situation under which the process eventually
has to be initiated as per the Insolvency and Bankruptcy Code (IBC), 2016.
Section 53 of the IBC, 2016 spells out the order in which the proceeds of
liquidation have to be disbursed to the creditors by the type of creditors. The
FEO Bill, 2018 do not spell out this order making the marginal and small
creditors vulnerable. It also does not mention that the order will be the same
as that followed in the IBC, 2016. This leaves a cushion for the secured
creditors while the interest of the unsecured and small creditors is put at
stake. It is also important to remember that the IBC, 2016 can only provide an
indicative order of disbursing the claims and cannot be sought to be an
effective solution right now given the extent of haircut (bad debts that cannot
be recovered) the creditors have to face is over 90% in one of the first cases
resolved[3].
has to be initiated as per the Insolvency and Bankruptcy Code (IBC), 2016.
Section 53 of the IBC, 2016 spells out the order in which the proceeds of
liquidation have to be disbursed to the creditors by the type of creditors. The
FEO Bill, 2018 do not spell out this order making the marginal and small
creditors vulnerable. It also does not mention that the order will be the same
as that followed in the IBC, 2016. This leaves a cushion for the secured
creditors while the interest of the unsecured and small creditors is put at
stake. It is also important to remember that the IBC, 2016 can only provide an
indicative order of disbursing the claims and cannot be sought to be an
effective solution right now given the extent of haircut (bad debts that cannot
be recovered) the creditors have to face is over 90% in one of the first cases
resolved[3].
The interest of the creditors like minority shareholders or the
shareholders other than those belonging to the promoter group holding of a
company is also affected by an individual becoming a fugitive economic
offender. This is because they have an indirect interest in the acquisitions of
an individual offender by their shareholding. This implies that they become
‘person having interest’ as per the provisions of the FEO Bill, 2018 which is
defined in the bill as an individual or entity which have a direct or indirect
interest in the property of the offender. Section 8 and 9 of the FEO Bill, 2018
make them subjected to a search and seizure without any notice. They also stand
exposed to facing detention for 24 hours till the time they are not produced in
front of a magistrate. The FEO Bill, 2018 does not clearly state the means to
protect the interest of such innocent stakeholders.
shareholders other than those belonging to the promoter group holding of a
company is also affected by an individual becoming a fugitive economic
offender. This is because they have an indirect interest in the acquisitions of
an individual offender by their shareholding. This implies that they become
‘person having interest’ as per the provisions of the FEO Bill, 2018 which is
defined in the bill as an individual or entity which have a direct or indirect
interest in the property of the offender. Section 8 and 9 of the FEO Bill, 2018
make them subjected to a search and seizure without any notice. They also stand
exposed to facing detention for 24 hours till the time they are not produced in
front of a magistrate. The FEO Bill, 2018 does not clearly state the means to
protect the interest of such innocent stakeholders.
In addition to this, the FEO Bill, 2018 also gives the central
government an excessive rule-making power. One of the provisions in the bill
highlighting this phenomenon has already been discussed above which is that the
title of the property confiscated shall rest with the government without
elaborating on the order of distributing the proceeds of the property. Section
20(1) is another case in point which allows the central government the power to
add or omit any offence by notification from the category of ‘schedule
offence’, the list of which is appended to the FEO Bill, 2018. A better way out
would have been the legislative deliberations for adding or dropping the
scheduled offence rather than creating space for excessive executive overreach.
government an excessive rule-making power. One of the provisions in the bill
highlighting this phenomenon has already been discussed above which is that the
title of the property confiscated shall rest with the government without
elaborating on the order of distributing the proceeds of the property. Section
20(1) is another case in point which allows the central government the power to
add or omit any offence by notification from the category of ‘schedule
offence’, the list of which is appended to the FEO Bill, 2018. A better way out
would have been the legislative deliberations for adding or dropping the
scheduled offence rather than creating space for excessive executive overreach.
The FEO Bill, 2018 has been portrayed to be a panacea to solve all
the existing problems related to fugitive economic offenders and financial
crimes in which they indulge. However, on the other hand, some of the proposed
as well as existing laws (pertaining to or having bearing on corporate law and
financial law) have provisions that further accentuate the incentives to
indulge into offences and abscond. A couple of instances shall suffice to
corroborate the point. The two examples of this are the following; one of the
proposed law and another of an existing law – the Financial Resolution and
Deposit Insurance (FRDI) Bill, 2017 (which was introduced in the Lok Sabha in
August 2017) and the Limited Liability Partnership (LLP) Act, 2008 (which was
enacted in 2009) respectively. These are two instances out of many others where
the law provides incentive for the big corporate to turn into fugitive economic
offenders. The FRDI Bill, 2017 proposes to repeal the existing Deposit
Insurance and Credit Guarantee Act (DICGC), Act 1961. Section 16(1) of the
DICGC Act, 1961 insured the deposits of small depositor up to Rs. 1 Lakhs. The
all-encompassing ‘Resolution Corporation’ that is proposed under this law will
monitor financial firms, assess their risks, take corrective action and resolve
them in case of failures.
the existing problems related to fugitive economic offenders and financial
crimes in which they indulge. However, on the other hand, some of the proposed
as well as existing laws (pertaining to or having bearing on corporate law and
financial law) have provisions that further accentuate the incentives to
indulge into offences and abscond. A couple of instances shall suffice to
corroborate the point. The two examples of this are the following; one of the
proposed law and another of an existing law – the Financial Resolution and
Deposit Insurance (FRDI) Bill, 2017 (which was introduced in the Lok Sabha in
August 2017) and the Limited Liability Partnership (LLP) Act, 2008 (which was
enacted in 2009) respectively. These are two instances out of many others where
the law provides incentive for the big corporate to turn into fugitive economic
offenders. The FRDI Bill, 2017 proposes to repeal the existing Deposit
Insurance and Credit Guarantee Act (DICGC), Act 1961. Section 16(1) of the
DICGC Act, 1961 insured the deposits of small depositor up to Rs. 1 Lakhs. The
all-encompassing ‘Resolution Corporation’ that is proposed under this law will
monitor financial firms, assess their risks, take corrective action and resolve
them in case of failures.
However, the real issue is that legislation provides incentives to
the big fishes in the system to turn fugitive. To corroborate the point, in a
first, Section 52(1) of the FDRI Bill, 2018 carries a draconian provision
according to which if the ‘Resolution Corporation’ which is the resolution body
in this bill satisfied then it can bail-in a financial service provider in
consultation with financial regulator.
the big fishes in the system to turn fugitive. To corroborate the point, in a
first, Section 52(1) of the FDRI Bill, 2018 carries a draconian provision
according to which if the ‘Resolution Corporation’ which is the resolution body
in this bill satisfied then it can bail-in a financial service provider in
consultation with financial regulator.
Thus the depositor’s money lying in the banks can be used for the
purpose of ‘bail-in’ of banks by the as opposed to the usual ‘bail-out’
provisions, where the government is coming to rescue banks. Thus the money of
unsecured creditors (depositors) lying in the banks can be used for liquidating
the banks, and these depositors are also not insured in this proposed bill even
to the extent of meagre Rs. 1 lakhs as provided under the DICGC Act, 1961.
Section 52(7) of the FRDI Bill, 2017 makes the things even murkier. Section 52
(7) (a) states that only those depositors are kept out of the purview of the
bill which is insured by the deposit insurance. However, the exact amount of
this deposit insurance itself is obscured and not specified in the bill.
Besides, this subsection also means that all the deposits beyond the deposit
insurance limit are covered under the bail-in clause. Section 52(7) (b)
provides a further list of specified client assets and liability of
institutions up to 7 days maturity as excluded from the bail-in provision.
However, the absence of any other explanation means that deposits beyond seven
days maturity and the client assets not specified in this section will be
included in for bail-in. This puts the small and marginal depositors at
vulnerability because this provision throws up all their deposits for bail-in
of banks if the need arises.
purpose of ‘bail-in’ of banks by the as opposed to the usual ‘bail-out’
provisions, where the government is coming to rescue banks. Thus the money of
unsecured creditors (depositors) lying in the banks can be used for liquidating
the banks, and these depositors are also not insured in this proposed bill even
to the extent of meagre Rs. 1 lakhs as provided under the DICGC Act, 1961.
Section 52(7) of the FRDI Bill, 2017 makes the things even murkier. Section 52
(7) (a) states that only those depositors are kept out of the purview of the
bill which is insured by the deposit insurance. However, the exact amount of
this deposit insurance itself is obscured and not specified in the bill.
Besides, this subsection also means that all the deposits beyond the deposit
insurance limit are covered under the bail-in clause. Section 52(7) (b)
provides a further list of specified client assets and liability of
institutions up to 7 days maturity as excluded from the bail-in provision.
However, the absence of any other explanation means that deposits beyond seven
days maturity and the client assets not specified in this section will be
included in for bail-in. This puts the small and marginal depositors at
vulnerability because this provision throws up all their deposits for bail-in
of banks if the need arises.
The International experience suggests that there is a need to look
at this provision with certain scepticism. This is in so far as various
countries including Japan, Argentina, Australia, Brazil, China, Indonesia,
South Korea, Mexico, Saudi Arabia, Singapore, South Africa, and Turkey have not
implemented the bail-in provision and also only partially implemented the
financial reforms which were prescribed by the Financial Stability Board (FSB)
and G-20 countries in the aftermath of the global financial crisis (Bose,
2018). Thus the bail-in provision through which banks can be saved from a failure
using the money of depositors is not being implemented by various countries
across the world. There is no reason for such a provision in India particularly
when the government is assuring that the banks are adequately capitalized
(Press Information Bureau, 2018).
at this provision with certain scepticism. This is in so far as various
countries including Japan, Argentina, Australia, Brazil, China, Indonesia,
South Korea, Mexico, Saudi Arabia, Singapore, South Africa, and Turkey have not
implemented the bail-in provision and also only partially implemented the
financial reforms which were prescribed by the Financial Stability Board (FSB)
and G-20 countries in the aftermath of the global financial crisis (Bose,
2018). Thus the bail-in provision through which banks can be saved from a failure
using the money of depositors is not being implemented by various countries
across the world. There is no reason for such a provision in India particularly
when the government is assuring that the banks are adequately capitalized
(Press Information Bureau, 2018).
These provisions will only serve as an incentive for the offenders
to turn fugitive after committing frauds with banks and other financial
institutions. This is because such provision creates incentives for financial
institutions and offenders to fall prey to the problem of moral hazard. The
bail-in provides them with a comfort zone and the banks may not take sufficient
precautions knowing that while the offenders can abscond; the bank failures can
be avoided using public money as insurance. This can arise because of the
asymmetric information between the lenders which are banks and small customers
who are in a relation of unsecured creditors with banks. Since small customers
are usually not aware of the lending patterns of banks, therefore banks may
have the incentive to indulge in risky behaviour. This is more so because
banks, in fact, have a twin insurance cover available now; one from the central
bank, who is a Lender of Last Resort (LOLR) and other from the customers
according to the provisions of this bill whose deposits, can be used to
compensate for the losses of banks. The relationship between a post facto bail
out through LOLR facility and the ex-ante excessive risk-taking by banks that
induces moral hazard has already been pointed in the literature (Krugman, 1998;
Morris and Shin, 2006 etc.). Thus there is no reason to believe that LOLR
coupled with bail-in provision will not further induce the moral hazard problem
and provide a basis for big corporations who can at times be hand in glove with
regulatory authorities to turn fugitive.
to turn fugitive after committing frauds with banks and other financial
institutions. This is because such provision creates incentives for financial
institutions and offenders to fall prey to the problem of moral hazard. The
bail-in provides them with a comfort zone and the banks may not take sufficient
precautions knowing that while the offenders can abscond; the bank failures can
be avoided using public money as insurance. This can arise because of the
asymmetric information between the lenders which are banks and small customers
who are in a relation of unsecured creditors with banks. Since small customers
are usually not aware of the lending patterns of banks, therefore banks may
have the incentive to indulge in risky behaviour. This is more so because
banks, in fact, have a twin insurance cover available now; one from the central
bank, who is a Lender of Last Resort (LOLR) and other from the customers
according to the provisions of this bill whose deposits, can be used to
compensate for the losses of banks. The relationship between a post facto bail
out through LOLR facility and the ex-ante excessive risk-taking by banks that
induces moral hazard has already been pointed in the literature (Krugman, 1998;
Morris and Shin, 2006 etc.). Thus there is no reason to believe that LOLR
coupled with bail-in provision will not further induce the moral hazard problem
and provide a basis for big corporations who can at times be hand in glove with
regulatory authorities to turn fugitive.
The second statute which provides an incentive to turn fugitive is
the LLP Act, 2008. The entity created under this Act is known as Limited
Liability Partnership (LLP). The liability of the partners in this hybrid form
of partnership (hybrid since it combines the features of both company and
traditional partnership) is limited to the amount contributed by them as
opposed to unlimited liability under the traditional partnership. Since the
provisions of the LLP Act, 2008 allows companies, traditional partnerships and
other LLPs to be partner in an LLP, therefore, it has been deployed by the
business group in India as a nucleus to organize group monopolies along with
other corporate governance structures like firms, companies etc. to spread
maximum control over group entities with little ownership. Thus it provides
sufficient avenues for maintaining the familial basis of ownership and control
(which has been the hallmark of business group organisation in India) and
provides the advantage of limited liability in addition to that (Das Gupta
2010). The complex maze of interlocked group structures created using LLP as a
pivotal point with an overlapping set of individuals managing the
interconnected group entities (same individual may be a director in 5 group
companies, partner in 5 LLPs and 5 other partnership firms controlled by group)
allows corporate in India to indulge into frauds, turn fugitive and not fear
the resultant liability which is of course limited to their contribution as per
the provisions of the LLP Act, 2008. The recent case[4]
of an Indian businessman and his family members along with their close
associates turning fugitive after committing bank fraud is a case in point. In
the said case also the fraud was put to effect using a complex maze of entities
including these LLPs in which the family members and individuals themselves
served as partners. The money was rerouted from these corporate entities
including LLPs and was concentrated by these individuals before turning
fugitive. It shows the abuse of this institution by the corporate in India and
points out that the existing statutes especially the corporate governance
statutes as well as regulatory mechanisms are weak and fuel the cause of offenders
to turn fugitive as opposed to deterring them. This is because there is no
identification of business group as a unit of analysis and there is laxity in
defining the threshold for the number of multiple positions which an individual
can take place in group entities under the corporate law. Section 165 of the
present Companies Act, 2013 puts the number of companies in which a person can
be a director as 20 while excluding position of control in all other entities
in defining this number (for instance partner in an LLP or a traditional
partnership etc.)
the LLP Act, 2008. The entity created under this Act is known as Limited
Liability Partnership (LLP). The liability of the partners in this hybrid form
of partnership (hybrid since it combines the features of both company and
traditional partnership) is limited to the amount contributed by them as
opposed to unlimited liability under the traditional partnership. Since the
provisions of the LLP Act, 2008 allows companies, traditional partnerships and
other LLPs to be partner in an LLP, therefore, it has been deployed by the
business group in India as a nucleus to organize group monopolies along with
other corporate governance structures like firms, companies etc. to spread
maximum control over group entities with little ownership. Thus it provides
sufficient avenues for maintaining the familial basis of ownership and control
(which has been the hallmark of business group organisation in India) and
provides the advantage of limited liability in addition to that (Das Gupta
2010). The complex maze of interlocked group structures created using LLP as a
pivotal point with an overlapping set of individuals managing the
interconnected group entities (same individual may be a director in 5 group
companies, partner in 5 LLPs and 5 other partnership firms controlled by group)
allows corporate in India to indulge into frauds, turn fugitive and not fear
the resultant liability which is of course limited to their contribution as per
the provisions of the LLP Act, 2008. The recent case[4]
of an Indian businessman and his family members along with their close
associates turning fugitive after committing bank fraud is a case in point. In
the said case also the fraud was put to effect using a complex maze of entities
including these LLPs in which the family members and individuals themselves
served as partners. The money was rerouted from these corporate entities
including LLPs and was concentrated by these individuals before turning
fugitive. It shows the abuse of this institution by the corporate in India and
points out that the existing statutes especially the corporate governance
statutes as well as regulatory mechanisms are weak and fuel the cause of offenders
to turn fugitive as opposed to deterring them. This is because there is no
identification of business group as a unit of analysis and there is laxity in
defining the threshold for the number of multiple positions which an individual
can take place in group entities under the corporate law. Section 165 of the
present Companies Act, 2013 puts the number of companies in which a person can
be a director as 20 while excluding position of control in all other entities
in defining this number (for instance partner in an LLP or a traditional
partnership etc.)
Thus, to deal with the problem of fugitive offenders what is
required in the first place is an overhaul of the extremely lax corporate
governance structure and regulatory mechanism in India that provides sufficient
avenues and entices the corporate to abuse the provisions and turn fugitive. To
not correct the existing lacunae and running over solutions in the form of
adding new laws is akin to taking no preventions ex-ante, and later on, trying
to build a dam when the flood has already done the damage. The FEO Bill, 2018
seems to fall short on even acting as a credible threat post facto when an
offender has turned fugitive. In fact in the present form it appears to be an
ineffective piece of legislation in so far as it is drafted in a very sloppy
manner, contains legal inconsistencies, has several lacunae as well as
ambiguities and will eventually have economic costs and implications. Thus it
may end up like another defunct law in the statute book. However, the efficacy
of this legislation lies surely in serving as a political gimmick and an empty
rhetoric against corruption for the ruling dispensation in run-up to general
elections.
required in the first place is an overhaul of the extremely lax corporate
governance structure and regulatory mechanism in India that provides sufficient
avenues and entices the corporate to abuse the provisions and turn fugitive. To
not correct the existing lacunae and running over solutions in the form of
adding new laws is akin to taking no preventions ex-ante, and later on, trying
to build a dam when the flood has already done the damage. The FEO Bill, 2018
seems to fall short on even acting as a credible threat post facto when an
offender has turned fugitive. In fact in the present form it appears to be an
ineffective piece of legislation in so far as it is drafted in a very sloppy
manner, contains legal inconsistencies, has several lacunae as well as
ambiguities and will eventually have economic costs and implications. Thus it
may end up like another defunct law in the statute book. However, the efficacy
of this legislation lies surely in serving as a political gimmick and an empty
rhetoric against corruption for the ruling dispensation in run-up to general
elections.
The author is Research Scholar at Centre for the Study of Law & Governance, JNU, Delhi
Bibliography:
Bose,
P. (2018). FRDI Bill, 2017: Inducing Financial Instability. Economic and
Political Weekly Engage, 53(3), 1-13
P. (2018). FRDI Bill, 2017: Inducing Financial Instability. Economic and
Political Weekly Engage, 53(3), 1-13
Das
Gupta, C. (2016). State and Capital in
Independent India: Institutions and Accumulations. Cambridge University Press.
Gupta, C. (2016). State and Capital in
Independent India: Institutions and Accumulations. Cambridge University Press.
Das
Gupta, C. (2013). The Tenacity of the Hindu Undivided Family: Gender, Religion
and Tax Concessions. Economic and Political Weekly, 48(40), 73-75.
Gupta, C. (2013). The Tenacity of the Hindu Undivided Family: Gender, Religion
and Tax Concessions. Economic and Political Weekly, 48(40), 73-75.
Das Gupta, C. (2010). Globalisation, corporate
legal liability and big business houses in India. Cambridge Journal of
Economics, 34, 895–913.
legal liability and big business houses in India. Cambridge Journal of
Economics, 34, 895–913.
Das
Gupta, C. & Gupta M. (2017). The Hindu Undivided Family in Independent
India’s Corporate Governance and Tax Regime. South Asian Multidisciplinary
Academic Journal (SAMAJ), 15(2017).
Gupta, C. & Gupta M. (2017). The Hindu Undivided Family in Independent
India’s Corporate Governance and Tax Regime. South Asian Multidisciplinary
Academic Journal (SAMAJ), 15(2017).
Duggal, R. (2012). The Uncharitable trust Hospital. Economic and
Political Weekly, 47(25), 23-24
Political Weekly, 47(25), 23-24
Ghosh, P. (2018). Mehul Choksi Says Applied For Antigua Citizenship
For “Business Interest”, NDTV, India, 22nd July 2018. (Accessed
from: https://www.ndtv.com/india-news/fugitive-billionaire-mehul-choksi-says-applied-for-antigua-citizenship-to-expand-business-interest-i-1890616)
For “Business Interest”, NDTV, India, 22nd July 2018. (Accessed
from: https://www.ndtv.com/india-news/fugitive-billionaire-mehul-choksi-says-applied-for-antigua-citizenship-to-expand-business-interest-i-1890616)
Ghunawat, V. (2018). Nirav Modi’s seized diamonds don’t sparkle;
Value turns out to be only one-third of ED estimate of Rs 5,100 crore, Business
Today, Mumabi, 4th May 2018. Accessed from: https://www.businesstoday.in/current/economy-politics/nirav-modi-seized-diamonds-value-ed-estimate-pnb-fraud/story/276228.html)
Value turns out to be only one-third of ED estimate of Rs 5,100 crore, Business
Today, Mumabi, 4th May 2018. Accessed from: https://www.businesstoday.in/current/economy-politics/nirav-modi-seized-diamonds-value-ed-estimate-pnb-fraud/story/276228.html)
Henley, J. (2018). Citizenship for sale: how tycoons can go shopping
for a new passport, The Guardian, 2nd June.
for a new passport, The Guardian, 2nd June.
(Accessed from: https://www.theguardian.com/world/2018/jun/02/citizenship-by-investment-passport-super-rich-nationality).
Krugman, P. (1998). What Happend to Asia, mimeo, MIT. (Accessed
from: http://web.mit.edu/krugman/www/DISINTER.html)
from: http://web.mit.edu/krugman/www/DISINTER.html)
Law Commission of India. (1988). One Hundred Thirtieth Report on
Benami Transactions- A Continium. New Delhi: Governemnt of India
Benami Transactions- A Continium. New Delhi: Governemnt of India
Law Commission of India. (1973). Fifty Seventh Report on Benami
Transactions. New Delhi: Governemnt of India Minsitry of Law, Justice and
Company Affairs
Transactions. New Delhi: Governemnt of India Minsitry of Law, Justice and
Company Affairs
Lok
Sabha (2018). Minister of State for External Affairs, Answer to Unstarred Question
no. 1278 in Lok Sabha, 25th July, 2018.
Sabha (2018). Minister of State for External Affairs, Answer to Unstarred Question
no. 1278 in Lok Sabha, 25th July, 2018.
(Accessed
from: http://164.100.47.190/loksabhaquestions/annex/15/AU1278.pdf)
from: http://164.100.47.190/loksabhaquestions/annex/15/AU1278.pdf)
Lok Sabha (2011). 58th Report :The Benami
Transactions Prohibition (Amendment) Bill, 2011. Fifteenth Lok Sabha .Ministry
Of Finance (Government of India). Retrieved from:
Transactions Prohibition (Amendment) Bill, 2011. Fifteenth Lok Sabha .Ministry
Of Finance (Government of India). Retrieved from:
Morris, S. & Shin, H. S., (2006). Catalytic finance: when does
it work? Journal of International Economics 70, 161–177
it work? Journal of International Economics 70, 161–177
Nair, R. (2018). Bill to help government bring back fugitive
economic offenders gets Parliament’s nod
economic offenders gets Parliament’s nod
Press Information Bureau, (2018). Financial Resolution and Deposit
Insurance (FRDI) Bill, 2017 seeks to protect and enhance the depositors’
existing rights and bring in a comprehensive and efficient resolution regime
for financial firms, Ministry of Finance, PIB, Delhi, 2nd January.
Insurance (FRDI) Bill, 2017 seeks to protect and enhance the depositors’
existing rights and bring in a comprehensive and efficient resolution regime
for financial firms, Ministry of Finance, PIB, Delhi, 2nd January.
Press Trust of India (2018). Prez gives nod to bill to deter fugitive
economic offenders from fleeing the country, 5th August
economic offenders from fleeing the country, 5th August
PRS Legislative Brief, (2018). Legislative Brief: The Fugitive
Economic Offenders Bill, 2018 and Ordinance 2018, PRS Legislative Research,
Delhi, India. (Accessed from: http://www.prsindia.org/uploads/media/Fugitive%20Economic%20Offenders/Legislative%20Brief%20Fugitive%20Economic%20Offenders%20Bill%20%202018.pdf)
Economic Offenders Bill, 2018 and Ordinance 2018, PRS Legislative Research,
Delhi, India. (Accessed from: http://www.prsindia.org/uploads/media/Fugitive%20Economic%20Offenders/Legislative%20Brief%20Fugitive%20Economic%20Offenders%20Bill%20%202018.pdf)
Rajya Sabha, (2018a). Rajya Sabha Proceedings, 246th
Session, 25th Juy 2018. (Aceeseed from: http://164.100.47.5/newdebate/246/25072018/Fullday.pdf)
Session, 25th Juy 2018. (Aceeseed from: http://164.100.47.5/newdebate/246/25072018/Fullday.pdf)
Rajya Sabha, (2018b).
Minister of State of Ministry of External Affairs, Answer to Unstarred
Question No. 3060 in Rajya Sabha, Session No. 245, 22.3.2018. (Accessed from: http://164.100.47.4/newrsquestion/ShowQn.aspx)
Minister of State of Ministry of External Affairs, Answer to Unstarred
Question No. 3060 in Rajya Sabha, Session No. 245, 22.3.2018. (Accessed from: http://164.100.47.4/newrsquestion/ShowQn.aspx)
Unnikrishnan, D. (2018). Fugitive Economic Offenders Bill: A potent
weapon, if rightly used, can bring the Mallyas, Choksis back to where they
belong, Firstpost, July 26, 2018. (Accessed from : https://www.firstpost.com/business/fugitive-economic-offenders-bill-a-potent-weapon-if-rightly-used-can-bring-the-vijay-mallyas-mehul-choksis-back-to-where-they-belong-4822951.html)
weapon, if rightly used, can bring the Mallyas, Choksis back to where they
belong, Firstpost, July 26, 2018. (Accessed from : https://www.firstpost.com/business/fugitive-economic-offenders-bill-a-potent-weapon-if-rightly-used-can-bring-the-vijay-mallyas-mehul-choksis-back-to-where-they-belong-4822951.html)
United Nations, (2004). United Nations Convention Against
Corruption, United Nations Office on Drugs and Crime, Vienna. (Accessed from: https://www.unodc.org/documents/brussels/UN_Convention_Against_Corruption.pdf)
Corruption, United Nations Office on Drugs and Crime, Vienna. (Accessed from: https://www.unodc.org/documents/brussels/UN_Convention_Against_Corruption.pdf)
[1] http://www.mea.gov.in/leta.htm
[2] Former Kingfisher Airlines staff writes to PM on unpaid salary
dues, Economic Times, 20th June. (Accessed from:
https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/former-kingfisher-airlines-staff-writes-to-pm-on-unpaid-salary-dues/articleshow/64659482.cms)
dues, Economic Times, 20th June. (Accessed from:
https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/former-kingfisher-airlines-staff-writes-to-pm-on-unpaid-salary-dues/articleshow/64659482.cms)
[3] Synergies Dooray
Automaive Limited Vs. Edelweiss Asset Reconstruction Company Limited and Ors.
C.A. No. 123/ 2017 ( National Company Law Tribunal, 2nd August 2018)
Automaive Limited Vs. Edelweiss Asset Reconstruction Company Limited and Ors.
C.A. No. 123/ 2017 ( National Company Law Tribunal, 2nd August 2018)
[4] Union of India, Ministry of
Corporate Affairs Vs. Gitanjali Gems Ltd. and Ors. Company Appeal (AT) No. 103 of 2018 and Company Appeal (AT) No. 119
of 2018 (National Company Law Appellate Tribunal, 07/05/2018)
Corporate Affairs Vs. Gitanjali Gems Ltd. and Ors. Company Appeal (AT) No. 103 of 2018 and Company Appeal (AT) No. 119
of 2018 (National Company Law Appellate Tribunal, 07/05/2018)
