Rounding up migrants
Context
- The Home Minister Amit Shah’s announcement in the Rajya Sabha that a National Register of Citizens (NRC) will be implemented across India, and repeated again in Assam, has ignited interest in the existing legal framework in India for illegal migrants.
News summary
- The first enactment made for dealing with foreigners was the Foreigners Act, 1864, which provided for the expulsion of foreigners and their arrest, detention pending removal, and for a ban on their entry into India after removal.
- The Passport (Entry into India) Act, 1920, empowered the government to make rules requiring persons entering India to be in possession of passports. This rule also granted the government the power to remove from India any person who entered without a passport.
- The Foreigners Act, 1946 empowers the government to make provisions for regulating the entry of foreigners into India. Its most important provision is that the ‘burden of proof’ lies with the person, and not with the authorities. This has been upheld by a Constitution Bench of the Supreme Court.
- The Foreigners (Tribunals) Order, 1964 empowers district magistrates in all States and Union Territories to set up tribunals to decide whether a person staying illegally in India is a foreigner or not.
- The Illegal Migrants (Determination by Tribunals) Act, 1983 was introduced for the detection and deportation of illegal migrants who had entered India on or after March 25, 1971.
- One factor for its failure was that it did not contain any provision on ‘burden of proof’ similar to the Foreigners Act, 1946.
- In 2005, in the Supreme Court not only quashed the IMDT Act but also closed all tribunals in Assam functioning under the Act. It, then, transferred all pending cases at the IMDT tribunals to the Foreigners Tribunals constituted under the Foreigners (Tribunals) Order, 1964.
Mechanism required to address IL and FS
Context
- India finds itself struggling to plug a hole in its shadow banking industry that gorged on lending to a real estate sector where buyers have turned tail.
Failure of financial corporations:
- The Reserve Bank of India is expected to refer Dewan Housing Finance Corp. Ltd (DHFL) for insolvency proceedings that have been hastily tailored for financial companies.
- India’s bankruptcy mechanism is missing vital components that it had agreed to put in place after the global financial crisis.
- The government last year withdrew the Financial Resolution and Deposit Insurance Bill from Parliament after an outcry over a clause that would have let depositors’ money get converted into equity in the event of a bank or credit company turning insolvent.
- The bill’s timing was unfortunate; it was tabled in the middle of a bad loan clean-up of state-owned banks, and fears of pensioners losing their life savings were easy to whip up.
- Adequate deposit insurance was the solution, and the Centre has finally gotten around to it, now that the collapse of Punjab and Maharashtra Co-operative Bank has caused so much distress.
Question around DHFL’s insolvency resolution
- We have a system that can preserve value for creditors who have lent the company ₹84,000 crore.
- India may not have the legislative apparatus in place, but it knows what needs to be done with collapsing financial institutions.
- The Group of 20 financial stability recommendations were based on the premise that the market, not the state, must address stress in the system.
- We may not yet have an overarching body like the US Federal Deposit Insurance Corp., which can identify and resolve financial stress expeditiously, but its toolkit is divided among India’s central bank and other financial sector regulators.
Validity of legal framework
- As for the legal framework, such cases can now be referred to the National Company Law Tribunal for resolution.
- The courts could also back the claims of underinsured depositors. Earlier this month, India’s top court upheld the standard hierarchy of claims (with secured lenders first in line) in bankruptcy proceedings, another issue that had held up the resolution of such firms.
Significant challenges for DHFL
- Its loan book looks largely healthy, especially its mortgage lending section. Buyers have shown interest in these assets and the insolvency process is expected to draw more.
- Bondholders and banks have their credit secured by underlying assets, although charges of fund diversion could diminish recovery.
- KPMG, the audit firm appointed by creditors, has flagged fraudulent transactions that could add up to about half the exposure banks have to DHFL.
- If these charges are substantiated, banks may have to write off their loans to the beleaguered mortgage lender, and it would complicate any resolution plan involving a swap of debt for equity.
Way forward
- DHFL is being investigated by the Enforcement Directorate on charges that, if upheld, could result in the attachment of its assets.
- This would make it tougher for resolution professionals to find buyers for DHFL’s healthy loan portfolio.
- If its insolvency resolution does run aground, India would have no option but to subject its shadow banking industry to the same mechanism until it can put a more robust process in place.
- Credit rating agency Moody’s Investors Service has flagged stress among non-banking financial companies as a key risk to India’s growth outlook.