Larger consequences PDF Print E-mail
Thursday, 30 October 2014 00:00
AddThis Social Bookmark Button

SC does well to refer Swiss bank list to SIT

After giving the government counsel a tongue-lashing on the HSBC list of account holders on Tuesday, the Supreme Court did well to simply refer the matter to the Special Investigation Team (SIT) and ask it to probe the names expeditiously. Referring the matter to the SIT was a wise decision since, as the government had pointed out earlier, making the names public—which is what AAP chief Arvind Kejriwal has been demanding—would have had unfortunate consequences. For one, not all those who have Swiss accounts have evaded tax, so revealing their names would go against the principle of natural justice. Two, this would go against various international treaties the government has signed which allow making names public only when illegality has been established. Apart from the fact that it would make further access of information from various countries impossible, the immediate fallout would have been the inability to sign the US Foreign Account Tax Compliance Act (FATCA). Not signing FATCA means that remittances sent from the US to India are in danger of facing a 30% withholding tax. With the Supreme Court giving the names in the HSBC list to the SIT, things are back to where they were a few months ago since, in June itself, the government had submitted the same list to the SIT.

While things have turned out well this time around, both the courts as well as the governments need to look at the larger implications of their actions. In the case of the Supreme Court, its recent ruling on giving farmers the first lien on sugar sales, for instance, will have deleterious consequences. Since the first lien so far has been of creditors, the judgment will put bank loans in jeopardy and, as a result, millers may find it difficult to access working capital. More important, the judgment has larger implications as it can be used as precedent to make the lenders’ first lien to second or third place.

In the case of the central government, its directive to merge FTIL with its subsidiary NSEL falls in the same category. There is no doubt the management of NSEL was up to all kinds of mischief, but there are larger consequences of the merger. Right now, under corporate law, the liability of an investor is limited to the investment made in equity of a firm. There is probably a case for ensuring promoters have more skin in the game, by insisting on higher net worth criterion for certain businesses like banks and stock exchanges or large infrastructure projects, but this doesn’t take away from the concept of liability being limited to the amount of shareholding in a firm. The moment this principle is given the go by, there is a danger this will get applied elsewhere, and there is a danger investors will not want to set up firms which, by definition, are limited liability ones. There are ways to punish those that perpetuated the crime, and prison sentences are the obvious solution, but removing the limited liability provision cannot be one of them. The important message is that the cure cannot make the disease worse.



You are here  : Home Economy Larger consequences