Removing exemption-from-liability clause does that
At a time when private investment was showing no signs of reviving and the government was too cash-strapped to really boost its capital spending, the National Investment and Infrastructure Fund (NIIF) offered the perfect solution. Indeed, it even offered a way out of the ballooning NPA problem since the fund could buy stressed assets, take a haircut and then sell them off to private investors. The way it was designed, government equity would be below 51% to keep it out of the purview of CAG/CVC/CBI and sovereign wealth funds would contribute to its equity—this equity would then be leveraged many times over to fund infrastructure and other projects; a professional CEO who would be paid an industry-standard salary would be put in charge, and given NIIF wasn’t really a ‘government-company’ in the strict sense of the term, it wouldn’t be hobbled in its functioning. Given the usual norms of leverage, the original corpus would be multiplied manifold to boost investment levels in the country.
Problem is, NIIF never really took off and, going by a report in The Indian Express, the law ministry has put a fairly serious spoke in its functioning. Under the original proposal, the fund advisor was given ‘exemption from liability’ in case investments went wrong. The law ministry, however, is of the view this is not acceptable since the well-settled legal position was that no one can get a general immunity of this sort. The ministry, however, appears to be taking a narrow legalistic position on this. If, say, NIIF invests in a company that later causes environmental damage, surely the legal responsibility for this has to lie with the company and its managers, and not the investor which is all that NIIF is? Indeed, in the FTIL-NSEL case, when the government ordered the merger of FTIL with NSEL on grounds FTIL had to pay for NSEL’s wrong-doings as it was the owner, this newspaper argued against it since the law on limited liability is clear that owners (FTIL) cannot be held responsible for any action beyond their equity stake in a company (NSEL).
Possibly the fear is that, while selling off bad loans or taking over existing projects, NIIF can take a decision that favours a particular company—the law ministry’s view is that removing the exemption-from-liability’ clause will ensure the fund advisor is prosecuted for this and so this will act as a check on possible nepotism. But this brings us back to the exact situation in which we are today, where banks cannot dare to sell NPAs at a big discount of 70-80% for fear they will be hauled up for favouritism—in the event of no sale, the bad loans just get worse and the economy remains stuck in a rut. While the finance ministry needs to ensure there are enough checks to prevent collusion between the fund advisor and companies, the fact is that several investments by NIIF will go bad and several asset sales will look dodgy in retrospect; any decision to give a 50% discount in one case and 75% in another has to be subjective. If the government can’t agree on this, it has better get used to the idea of 100% of a loan going bad and, more important, the case getting stuck in the courts for decades.