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Wednesday, May 28, 2014

The treason of the learned

I was reading John Gray in the New Statesman on Mao Zedong:
... the collection has the shortcomings that are to be expected in a book of essays by academic authors. The prose style is mostly stodgy and convoluted, and the contributors seem anxious to avoid anything that might smack of a negative attitude towards the ideas and events they describe. “As a group,” the editor continues, “we are diverse with respect to age, gender, ethnicity and political sympathies.” He is right that, judged by prevailing standards, it is a well-balanced group. All of the relevant disciplines are represented – history, area studies, literature, political science and sociology – and although ten of the 13 contributors teach in the US, the collection is representative of the range of views of China that you will find in universities in much of the world. However, the fact that it reflects the present state of academic opinion is also the book’s most important limitation.

Reading the essays brought together here, you would hardly realise that Mao was responsible for one of the biggest human catastrophes in recorded history. Launched by him in 1958, the Great Leap Forward cost upwards of 45 million human lives. “When there is not enough to eat, people starve to death,” Mao observed laconically. “It is better to let half of the people die so that the other half can eat their fill.” He did not specify how those condemned to perish would be made to accept their fate. Ensuing events provided the answer: mass executions and torture, beatings and sexual violence against women were an integral part of a politically induced famine that reduced sections of the population to eating roots, mud and insects, and others to cannibalism. When Mao ordered an end to the horrific experiment in 1961, it was in order to launch another.
There is a Principal-Agent problem going on with academic authors. You may think that academics should seek the truth and do things that matter, but what most academics do on most days is worry about what journal editors and referees would think about their work if X was done. This generates all kinds of distortions. It's more like the fashion industry than most of us care to admit: will blue look better than black? The journal editors define what is fashionable and hordes scurry after that. It's bad enough in economics (link, link). It's much worse in the humanities where the anchor to empirical evidence is weaker than the weak link to reality that's found in economics.

Gray's article also reminded me of the famous essay by Omar Ali (link, link) on the Indian and Pakistani Left. I often get struck by the odd subset of persons that write on India in the New York Times.

Saturday, May 24, 2014

Living within the Handbook: One recent example

by Arjun Rajagopal.

We recently ran a workshop for India's financial sector regulators, providing a walk-through of the Handbook on adoption of governance enhancing and non-legislative elements of the draft Indian Financial Code. Despite its catchy title, the Handbook is a serious document, outlining the commitments made by India's financial regulators at the Eighth Meeting of the Financial Stability and Development Council (FSDC).

The Handbook places great emphasis on the role of Boards of regulators:

  • Boards are to engage in careful deliberation supported by staff research.
  • Proceedings are to be transparent and participatory.
  • All decisions are to be clearly communicated through one type of legal instrument.

At the same time Boards are supposed to be responsive and decisive. Taking these requirements together, the implication is that Boards ought to meet more often, and that regulators should make fewer rules. The rules that are made, however, should be detailed and forward-looking, and should derive legitimacy from the fact that the public was consulted as part of the rule-making process.

All very well, we were told. But what does all this look like in action?

For a live example, we might step out of the world of finance for a moment, and look at the contentious and highly technical debate surrounding `net neutrality' in the US. The US Federal Communications Commission (FCC), is the regulator charged with making rules governing the use of the internet, and is in the process of deciding whether it will be permissible for transmission of some users' data to have priority over others'. The issue goes to the heart of the architecture of the internet, and has important implications for rights and commerce in the digital realm. The "Board" of the regulator is made up of five Commissioners; according to the news coverage of the issue, the Commissioners voted 3-2 to open up their proposed rules to extended public debate and commentary. A closer look at this decision, and the public's engagement with the rulemaking process, is a fascinating demonstration of the sound regulatory process in action.

The Notice


The Commission's decision and the proposed rules were published in the form of a comprehensive Notice of Proposed Rulemaking made available on its website. The document begins with a simply stated question: "What is the right public policy to ensure that the Internet remains open?" This is followed by a detailed treatment of the various issues it has identified, as well as the substance of the proposed rules. The document makes detailed reference to prior proceedings, government reports, academic treaties, and of course to the existing legal and regulatory framework, and relevant case law. It is certainly a lot more detailed than than many of the regulatory documents we work with here in India.

Detailed dissent


Statements from all five Commissioners have been published alongside the notice. The statements present the Commissioners' own viewpoints and their arguments. Strangely enough, one of the dissenting statements harshly criticizes the detailed, cogent Notice, saying that it is not detailed or cogent enough! The statement articulates substantive disagreements on the legal and economic issues. According to dissenting Commissioner Michael O'Rielly:

...before taking any action on any issue, the Commission should have specific and verifiable evidence that there is a market failure. The Notice does not examine the broadband market much less identify any failures.

Crucially, he also claims that there have been deficiencies in the rulemaking process:

...to say the cost-benefit "analysis" is woefully inadequate is an understatement. The Notice devotes several pages to a wish list of disclosures, reporting requirements, and certifications that will impose new burdens and carry real costs, but may not even be meaningful to end users... However, there is no attempt to quantify and compare the costs of the proposed new requirements against the supposed benefits - just a single paragraph seeking comment on ways to reduce the burdens. Proposed rules should be accompanied by a fulsome cost-benefit analysis that includes a detailed and extensive review of current law, especially as it applies to other federal agencies that we seek to imitate. The Commission's short-shrift approach to cost-benefit analysis cannot continue, and I intend to spend time improving this important function.

Regardless of the actual merits of the argument, it is nice to see a live debate over rulemaking and cost-benefit analysis (Chapter 4 of the beloved Handbook, for those who are following along) being carried out in public by the Board itself.

Engagement with the public


As with finance, regulation of telecommunications is an area in which sophisticated practitioners and academics have a rich history of commentary and advocacy. Industry groups, as well as advocacy organisations like the Electronic Frontier Foundation pick apart and scrutinise rules and rulings in this sphere. What is most interesting here, is the way that transparency has enabled a broader audience to get into the guts of the debate, nuanced as it is. The tech site "The Verge" has used footage from the open meetings of the Committee to create a video encouraging the public at large to engage directly with the regulator through its public comments submission page. Does this make life miserable for the Commission? Maybe, but this kind of highly public engagement gives disparate and opposing forces a fair chance to make their best arguments.

Links


Background:
Handbook Chapter 4 - Framing Regulations:
Handbook Chapter 7 - Transparency in Board Meetings:

Conclusion


Justice Srikrishna's Financial Sector Legislative Reforms Commission, which drafted the Indian Financial Code, worked on two tracks. The first element was writing down the market failures in finance which require a government to do something. The second was establishing good governance practices for how financial agencies should work. Both steps are novel by Indian standards. It is, however, quite easy to obtain intuition on how these things actually work by looking at advanced economies, particularly in contentious episodes such as the net neutrality debate.
The working of regulators is not specific to finance; the IFC and the Handbook can easily scale to other regulators.

Tuesday, May 20, 2014

Rebooting commodity futures

Once the subject of commodity futures moved into DEA, there was an opportunity to start afresh on all policy questions in this field. The first step towards that is a DEA committee report which got released today. This forms the intellectual framework through which regulation-making at FMC can be redone as is required for the implementation of the Handbook.

Sunday, May 18, 2014

Making the central government more manageable and effective

For the government to work, cabinet meetings must work well. For a meeting to work well, it can't have more than 15 persons. That gives you a real meeting, a conversation, an argument. If big groups are assembled then people just do speeches at each other and nothing is accomplished.

Fragmentation of inter-related functions into separate ministries has hampered work. We have shiny electricity generation plants that haven't been switched on as there is no coal -- this is the failure of cooperation between the Ministry of Coal and the Ministry of Power.

The US Cabinet consists of 15 ministries. The UK Cabinet has 22 members in all. In India, we have 33 ministers and then we have a long list of others who are cabinet members. The failure of the bloated Cabinet to work as a mechanism for arguments and planning has given rise to the proliferation of GoMs, and mini-Cabinet structures like CCEA, where the actual work gets done. These coping mechanisms have their own problems.

Why did we get a bloated cabinet structure?

  1. Operating a vast socialist State requires much more government. As we pull back the State from indiscriminate meddling to the narrow goal of addressing market failures, this requires fewer building blocks. As an example, when India's objective was to cut off trade integration into the world, we needed a big machinery in the Ministry of Commerce.
  2. Coalition politics gave us the pressure to invent more ministries, more ministers of state, etc. With that compulsion behind us, we can now come back to a tight and simple design. There is no reason to have a single Minister of State.

Once you start questioning the status quo, we see numerous opportunities for change, with ministries that don't need to exist, as Ila Patnaik has argued.  In some cases, all that's going on is an ownership function of a PSU -- e.g. Steel (SAIL) or DFS (PSU finance companies). For these, all that's required is a mechanism with multiple holding companies that will perform the ownership/governance function. The British ran India from Raisina Hill and we don't require a whole lot more than that. A sensible compact design would consist of:

  1. Finance
  2. Home
  3. External affairs
  4. Defence
  5. Transportation
  6. Energy
  7. Justice
  8. Agriculture
  9. Commerce
  10. Labour
  11. Health
  12. Education
  13. Urban development
  14. Poverty alleviation

That would give a 15-man Cabinet including the Prime Minister. This would be a tight and coherent body that would be able to talk with each other in depth, coordinate and plan.

It would also generate improved leadership by the PM and accountability to the PM. In the field of management, we have a thumb rule: One person should not have more than 7 persons reporting to him. In similar fashion, if the Indian PM has an 80-person Cabinet, he almost surely knows nothing about what most of them are doing. In contrast, with this 14-person Cabinet sketched above, the PM would have the capacity to have a sense about what each minister is doing, which would generate enhanced accountability and thus performance.

Moving to such a compact structure requires carefully analysing all existing departments of government, shutting down some, placing PSUs into holding companies, and putting others under the above 14 heads.

Thursday, May 15, 2014

Fixing the Indian capital controls against DR issuance by Indian firms

by Pratik Datta and Arjun Rajagopal.

Yesterday, the Ministry of Finance accepted the report of the Sahoo Committee on depository receipts. Depository Receipts, also known as DRs, are financial instruments that are issued on the back of domestic securities, for sale to investors abroad: Indian securities are deposited with a custodian in India, after which a depository institution in a foreign jurisdiction may issue corresponding DRs. Each DR represents one or more underlying Indian securities. In this way, issuers of Indian securities can access the international capital markets and foreign investors can gain exposure to Indian securities without directly holding the Indian securities.

Before we plunge into the details, here are the key links:


The importance of DRs


Investors around the world generally over-invest in their home country and under-invest in overseas securities. This is a phenonemon known as home bias. Despite improvements in financial infrastructure and communications technology, it can still be expensive and complicated to invest in foreign securities. DRs help to alleviate the problem of home bias: Though the underlying securities are foreign, the investor can take comfort in the fact that the DR itself is issued in her own jurisdiction, in her own currency and subject to her own jurisdiction's laws and regulations. DRs are thus attractive to investors because they offer a combination of simplicity, protection and flexibility as compared to direct investment in a foreign market.

DRs are also an important mechanism by which an economy can achieve competitive neutrality. The principle of competitive neutrality is a key component of a liberalised trade system. The principle mandates that foreign and domestic inputs be treated identically. India made large steps towards competitive neutrality in its real economy when it allowed domestic firms to purchase inputs from international markets at competitive global prices. When an Indian firm issues a DR abroad to be puchased by a foreign investor, it is seeking to procure another input - capital - at a competitive global price.

Why regulate DRs, and how?


In a market economy, any intervention by the State must be justified by the identifying market failures, and demonstrating that the proposed intervention addresses the identified market failure. The FSLRC report and the IFC identify four areas where regulation is legitimate: consumer protection, micro-prudential regulation, (regulation of individual firms), systemic risk regulation and resolution (orderly exit of failing firms). None of these four problems are present with DR issuance by Indian firms.

The investors in DRs are not participants in the Indian securities market. These investors are protected by the authorities and laws of the jurisdiction where the DRs are issued. For example, for an American DR (ADR) issued in the US against Indian securities, US laws provide for protection of investors in such ADRs in US. Indian laws need not provide additional protections to such investors for three reasons. First, such protection is already being provided by US laws. Second, Indian laws do not require an Indian regulator to protect foreign investors in foreign securities in a foreign country. Third, additional protection, if provided by Indian laws, will impose additional costs on the Indian issuer.
However, the DR mechanism can be utilised as part of a conspiracy to achieve market abuse and money laundering in the Indian securities market. This requires learning how to handle such problems through effective law enforcement. This approach has informed the Committee's decision to permit issue of DRs only in IOSCO and FATF compliant jurisdictions. (See Table 5.1, page 60, Sahoo Committee Report).

The need for reform


Prior to the Sahoo Committee, DRs are primarily regulated by the FCCB and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993. In addition, DRs are subject to:

  • the existing capital controls regime (under FEMA) as administered by RBI;
  • regulations administered by SEBI;
  • companies law as administered by the Ministry of Corporate Affairs; and
  • the laws on taxation as administered by the Department of Revenue, Ministry of Finance.

In 2013, the Government felt the need to review the Scheme, primarily because of vast changes to the legislative landscape affecting the financial sector since 1993. Three new pieces of legislation had been introduced: the Companies Act, 2013; the Securities Laws Ordinance, 2013; and the Takeover Regulations, 2011. Along with these legislative developments, the macroeconomic and financial landscape had changed as well. The thinking underpinning the 1993 Scheme was no longer well-suited to the needs of Indian firms. The existing framework was riddled with interventions that could not be justified by the objective of identifying and addressing market failures. Further, two decades of incremental modifications to the Scheme had resulted in increased legal risk.

The Sahoo Committee's Recommendations


The report calls for the government and the other regulators to clarify certain critical aspects of the current regulations, in particular the fact that non-capital raising DRs, and both listed and unlisted DRs are all to be permitted. The report also recommends important changes such as:

  1. Unsponsored DRs should be allowed;
  2. There will be no restrictions under Indian law on who can serve as a foreign depository;
  3. DRs on the back of Indian securities must only to be issued in FATF and IOSCO compliant jurisdictions;
  4. A broader category of Indian securities should be allowed to serve as the underlying for DRs; and
  5. Listed voting DRs on the equity shares of a listed Indian company are to form part of the minimum public shareholding of the Indian company under Indian law.

The report is clarifies that it is not the government's job to promote the use of DRs but merely to remove impediments to their efficient use in the market based on the decisions made by private players. However, given the size of the DR market around the world, and the variety of strategic benefits that DRs provide to firms and investors, it is likely that these reforms will expand choice and liquidity in the market.

Participatory process, coherent output


Much of India's policy work is done behind closed doors, with the final recommendations or decisions being tersely communicated through press releases or circulars. Opacity and low public participation diminish the quality of policy outputs, and the legitimacy of any resulting regulations. In order to avoid these problems, the Sahoo Committee drew its members from the public and private sectors, as well as from academia, and held several in-depth consultations with market participants.
The report endeavours to provide a concise overview of the legal and economic context of its work, as well as an outline of the intellectual framework from which its recommendations flow. The report presents holistic recommendations in an accessible Q&A format that is targeted at practitioners and at a wider public who may not be familiar with the intricacies of the subject matter. It also provides a list of recommended specific technical changes to current laws and regulations, and presents these in the form of a draft Scheme that is ready for implementation.

Peering into the future


The Sahoo Committee report has been accepted by the Ministry of Finance. The changes to regulations that are required in implementing this are likely to take place in coming months. Once fully implemented, we may conjecture:

  • Legal risk surrounding DRs will go down.
  • Employees of government and financial agencies will spend less time on interventions which lack an economic justification.
  • The cost of doing business in India will go down.
  • The income of lawyers per unit DR issuance will go down.
  • More Indian firms will issue DRs.
  • The domestic Indian securities market will face greater competitive pressure as Indian firms and their investors will have a choice of meeting each other through exchanges outside India.
  • Home bias against Indian firms will go down.
  • Indian firms will obtain a reduction in the cost of capital for both equity and debt.

    Saturday, May 10, 2014

    Going from vote share estimates to seat estimates

    by Rajeeva Karandikar, Director, Chennai Mathematical Institute.

    My previous blog posts (link, link), showed that opinion polls help us predict the vote shares of major parties (or alliances). This leads us to the next question: converting estimates of vote share into estimates of seats. This is much harder than meets the eye. Sampling is not done in all constituencies. In constituencies where we have respondents in our sample, the sample size is not large enough to predict the winner in these constituencies in isolation.

    Hence, we have to build a mathematical model of voting behavior. It is widely believed that an individual's identity (caste, religion, economic status, gender, age) plays a role in his/her vote. Moreover, this behavior varies from state to state. So if one were to build a model incorporating these parameters, we will end up having a large number of free parameters, particularly as these correlations are likely to change from state to state. Data on these parameters at the constituency level is not available, as census data is compiled and reported at the district level. Thus, this approach is unlikely to yield a good result.

    To get a tractable solution, we do not need to build a model for voting intention of an individual voter- it suffices to build a model for voting behavior of a constituency. One can assume that the socio-economic composition of a constituency does not undergo a major change in 5 years (this is true for most constituencies). We assume that the change in vote share for a given party in a constituency, from the previous election to the current one, is constant across a state, or a smaller geographic sub-region of a larger state. We call this the uniform swing assumption.

    If the sample size at the state level, or a sub-region in a large state is adequate, we can estimate these vote shares via a methodologically proper poll.

    Then using the uniform swing assumption described above, using actual data from the previous election and estimating vote shares of parties across a state or a sub-region of a state enables us to estimate vote shares of major parties in every constituency.

    This is a crude model! In the historical experience, the reality has diverged from the uniform swing assumption. However, it turns out that with some further work, this model yields fairly good estimates of seats at the national level.

    Consider a scenario where in one constituency, out of a sample of size 101, Candidate A gets 52 votes while candidate B gets 49 and in an adjacent constituency also on sample size 101, Candidate C gets 59 votes while candidate D gets 42. While we can be fairly confident that C will win, the same cannot be said of A. What is the best case scenario for B? The scenario is that A and B are almost neck-to-neck with B having a slight edge and yet a sample of size 101 shows B to be behind A by 3 votes. The probability of this happening is the same as the probability of seeing 49 or less heads in 101 tosses of a fair coin, which is 0.42. We assign B a winning probability of 0.42 and A a winning probability of 0.58. On the other hand, the probability of 42 or less heads in 101 tosses of a fair coin is 0.06. Thus, we assign a winning probability of 0.06 to candidate D while 0.94 to C.

    This analogy can be extended to 3 or more significant candidates. We have been using this for the top three candidates: first the best case scenario for the third candidate, then the best case scenario for the second candidate and the remaining for the first candidate. This needs an assessment of the standard deviation of the vote estimates.

    To summarise, based on an opinion poll (or our day-after poll), we obtain statewide vote shares and vote shares in sub-regions of a state and build vote estimates for all major parties in each constituency. Then we convert the vote share estimates in each constituency to predicted win probabilities for the top three candidates. Finally, we add up the probability of wins for a given party across all the 543 constituencies and this yields an estimate of the seats for the party.

    This methodology, developed over 15 years ago, has yielded useful seat estimates. Of course, this element also has an errting to seat estimates go in opposite directions, which is lucky. Sometimes, the two errors conspire to go together and give bad results.

    From October 2005 onwards, CNN-IBN, CSDS-Lokniti and I have done numerous poll projections. Most of these are based on post poll surveys, but occasionally these are also based on pre-election polls. Here is the listing of all such occasions: a comparison of what we said and what happened. I am giving vote share estimates and my seat estimate corresponding to that and the actual vote share and seats.

    BIHAR(October, 2005)


    Vote EstimateVote ActualSeat EstimateSeat Actual
    JDU-BJP3637127-137147
    RJD+313172-8065
    Others333229-3931

    ASSAM 2006


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Congress313152-6053
    BJP111210-1510
    AGP222025-3124
    Others363726-3539

    TAMIL NADU 2006


    Vote EstimateVote ActualSeat EstimateSeat Actual
    AIADMK+354064-7469
    DMK+4545157-167163
    DMDK1082-61
    Others107-1

    KERALA 2006


    Vote EstimateVote ActualSeat EstimateSeat Actual
    LDF5149107-11798
    UDF414325-3142
    Others880-10

    WEST BENGAL 2006


    Vote EstimateVote ActualSeat EstimateSeat Actual
    LF5350230-240235
    INC161517-2324
    TMC+272932-4031

    PUNJAB 2007


    Vote EstimateVote ActualSeat EstimateSeat Actual
    SAD-BJP414550-6068
    Congress414150-6044
    Others18143-95

    UTTARAKHAND 2007


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Congress313021-2721
    BJP343233-3935
    Others35388-1214

    UTTAR PRADESH 2007


    Vote EstimateVote ActualSeat EstimateSeat Actual
    SP252599-11197
    BSP2930152-168206
    BJP+221880-9052
    Congress11925-3326
    Others131821-2726

    GUJARAT 2007


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP474992-100117
    Congress423977-8562
    Others11123-73

    KARNATAKA 2008


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP303479110
    Congress35358680
    JDS21194528
    Others1412146

    LOK SABHA 2009


    Vote EstimateVote ActualSeat EstimateSeat Actual
    UPA3636210-225262
    NDA2824180-195159
    Left-830-4024
    BSP-624-3221
    Others-26-77

    BIHAR 2010


    Vote EstimateVote ActualSeat EstimateSeat Actual
    JDU-BJP4639185-201206
    Congress986-124
    RJD-LJP272622-3225
    Others18279-198

    ASSAM 2011


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Congress363964-7278
    BJP9117-115
    AGP181616-2210
    AIUDF131311-1718
    Others242112-2015

    KERALA 2011


    Vote EstimateVote ActualSeat EstimateSeat Actual
    LDF364569-7768
    UDF454663-7172
    Others9900

    TAMIL NADU 2011


    Vote EstimateVote ActualSeat EstimateSeat Actual
    DMK+4439102-11431
    AIDMK+4652120-132203
    BJP Front32--
    Others77--

    WEST BENGAL 2011


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Left404160-7262
    TMC+5048222-234227
    Others1011-5

    UTTARAKHAND 2012


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Congress393431-4132
    BJP323322-3231

    PUNJAB 2012


    Vote EstimateVote ActualSeat EstimateSeat Actual
    SAD+BJP414251-6368
    Congress404048-6046

    MANIPUR 2012


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Congress304224-3242
    TMC14177-137

    UTTAR PRADESH 2012


    Vote EstimateVote ActualSeat EstimateSeat Actual
    SP3429232-250224
    BSP242665-7980
    BJP+141536-4447
    Congress121228-3828

    GUJARAT 2012


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP4848129-141116
    Congress+363937-4560
    Others16134-106

    HIMANCHAL PRADESH 2012


    Vote EstimateVote ActualSeat EstimateSeat Actual
    Congress414329-3536
    BJP403829-3526

    KARNATAKA 2013


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP232039-4940
    Congress3737117-129122
    JDS202034-4440
    Others202314-2221

    MADHYA PRADESH 2013


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP4145136-146165
    Congress353667-7758
    Others241913-217

    RAJASTHAN 2013


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP4345126-136162
    Congress333349-5721
    Others242212-2016

    CHHATISGARH 2013


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP424145-5549
    Congress+384032-4039
    Others20197-132

    DELHI 2013


    Vote EstimateVote ActualSeat EstimateSeat Actual
    BJP333432-4231
    Congress23249-178
    AAP273013-2128
    Others17121-53

    Friday, May 02, 2014

    Concerns about the Supreme Court on BCCI

    by Anirudh Burman and Pratik Datta.

    When two parties have a dispute, they show up before a judge, and the judge adjudicates the matter based on facts and laws. The judiciary is not the executive; the judiciary is not the legislature. It is hard to see this vision of a court in recent actions of the Supreme Court of India.

    The Supreme Court reserved its verdict on the constitution of a fresh probe panel to investigate allegations of betting against Mr. N. Srinivasan, the former President of the Board of Control for Cricket in India (BCCI). A month back, the Court had ordered removal of Mr. N. Srinivasan from the post and appointed eminent former cricketer, Mr. Sunil Gavaskar, as the temporary President `to function as and exercise the powers of the President of the BCCI in relation to the IPL, 2014'. This order was given by the Supreme Court in a special leave petition filed by BCCI challenging a judgement of the Bombay High Court.

    We argue here that no law provides for the extraordinary remedy that the Supreme Court granted. The Supreme Court has overstepped its jurisdiction, to interfere in the functioning of a private entity, and supplanted its own remedy in the interest of `those who love cricket'. This decision has serious ramifications for legal process, judicial power and rule of law in India.

    Chronology of events


    The Supreme Court order comes in the wake of allegations of corruption against the previous President of BCCI, Mr. N. Srinivasan. Mr. Srinivasan is a shareholder and the Managing Director of India Cement Ltd., a company which owns the cricket team Chennai Super Kings. Chennai Super Kings participated in the IPL tournament organised by BCCI in 2013. To complicate matters further, the media reported on May 25, 2013 about the arrest of Mr. Gurunath Meiyappan, Mr. N. Srinivasan's son-in-law on allegations of betting and/or spot fixing. On May 26, 2013, BCCI announced that it would set up an internal commission to enquire into allegations of betting and spot fixing against Mr. Gurunath Meiyappan and India Cement Ltd.

    Accordingly, on May 29, 2013, the BCCI constituted a committee comprising two retired Madras High Court judges, Mr. Justice Balasubramaniam and Mr. Justice T.J. Choutha, and the third member was the Secretary of BCCI, Mr. Sanjay Jagdale. Mr. Sanjay Jagdale tendered his resignation from the Commission on May 31, 2013 on the ground of irregularities in constituting the Commission. On June 02, 2013, Mr. N. Srinivasan announced that he would not be involved in day to day activities of BCCI until the complaints had been heard and decided by the Commission. Mr. Jagmohan Dalmiya took over Mr. N. Srinivasan's role. On June 06, 2013, Mr. Dalmiya decided that the Commission should continue with only two members. Subsequently, on June 10, 2013 BCCI ratified Mr. Dalmiya's decision.

    The Bombay High Court case


    In a Public Interest Litigation filed before the Bombay High Court, the Bihar Cricket Association alleged that the Commission was constituted in violation of the Operational Rules of IPL 2013. Admittedly, there was a clear conflict of interest between Mr. N. Srinivasan and the persons or entities against whom the Commission was to enquire. The Bombay High Court was required to examine if Mr. N. Srinivasan had any role to play in the constitution of the Commission.

    Intriguingly, the High Court did find the constitution of the Commission to be faulty but not because of conflict of interest on part of Mr. N. Srinivasan or because of his role in the constitution of the Commission. Rather, it interpreted the Operational Rules of IPL 2013 as mandating at least one member from the IPL Code of Behaviour Committee on the Commission. Since, after Mr. Jagdale's resignation the Commission had no IPL Code of Behaviour Committee member, its constitution was held to be in breach of the Operational Rules (See paragraph 61 of the judgement). However, in spite of this finding the High Court refrained from constituting a fresh commission. It observed that under the Operational Rules of IPL 2013, the constitution of a probe commission is the prerogative of BCCI and it saw `no reason to deprive it of the same at this stage'.

    The Supreme Court's interim order


    BCCI challenged the Bombay High Court order by way of a special leave petition before the Supreme Court. The Supreme Court issued notice on August 07, 2013 to the respondents. The matter came up at five different occasions before the Supreme Court since August 2013. On March 28, 2014 the Court realised that the IPL is round the corner and passed the interim order appointing Mr. Gavaskar as the interim BCCI President.

    Overreach by Supreme Court


    The Supreme Court's order is marked by a lack of reasoning for its interference in the affairs of a private entity. It gives no reason for its order, apart from stating that it is doing so to "ensure that all those who love cricket continue to watch cricket in IPL 2014...". This is not a legally reasoned order. It also does not give adequate reasons for its removal of Mr. Srinivasan from a post he was duly elected to. Lastly, the order compels another private individual (Mr. Gavaskar) to hold a position within a private entity, without clarifying the consequences of a refusal to do so (contempt of court?). Even if the Supreme Court's order is an interim order, it interferes with the rights of private individuals (Mr. Srinivasan and Mr. Gavaskar) and the functioning of a private society. Since their rights have been interfered with, there is every reason to explain the legal and factual basis for its order.

    The Supreme Court does not explain what law allows it to remove Mr. Srinivasan from his position in BCCI. It does not bother to cite the source of its legal power to order one private individual (Mr. Gavaskar) to take over the functioning of a private society without following the procedure under the relevant statute.

    Contrast this with the case of Satyam. Pursuant to the admission of fraud committed by Ramalinga Raju and the other directors, the Central Government filed a petition before the Company Law Board (CLB) the Companies Act, 1956 to restrain all the extant Satyam directors from functioning and seeking permission to appoint 10 nominee directors to function as directors of the company. In its order dated January 9, 2009, the CLB permitted the Central Government to invoke the relevant provisions of Companies Act, 1956 to nominate its own directors on Satyam's board to substitute the extant directors. The CLB's order was based on explicit legal power conferred under the Companies Act, 1956, and never exceeded its mandate.

    This order highlights a marked departure from principles of good governance - there was no sound reasoning to back its order and there was no citation of the exact source of its legal powers to pass such an order in disregard to the prescribed legislative procedure.

    This episode speaks poorly about the priorities of the Supreme Court. The Court has passed a sum total of five orders, to `ensure that all those who love cricket continue to watch cricket in IPL 2014...' even as its pendency numbers increased from 58,519 in December 2011 (link) to 66,692 in December 2012 (link).