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Compulsory voting at elections to local bodies in Gujarat Last week, the Gujarat Local Authorities Laws (Amendment) Act, 2009 received the Governor’s assent.  The Act introduces an ‘obligation to vote’ at the municipal corporation, municipality and Panchayat levels in the state of Gujarat.  To this end, the Act amends three laws related to administration at the local bodies- the Bombay Provincial Municipal Corporation Act, 1949; the Gujarat Municipalities Act, 1963 and; the Gujarat Panchayats Act, 1993. Following the amendments, it shall now be the duty of a qualified voter to cast his vote at elections to each of these bodies.  This includes the right to exercise the NOTA option.  The Act empowers an election officer to serve a voter notice on the grounds that he appears to have failed to vote at the election.  The voter is then required to provide sufficient reasons within a period of one month, failing which he is declared as a “defaulter voter” by an order. The defaulter voter has the option of challenging this order before a designated appellate officer, whose decision will be final. At this stage, it is unclear what the consequences for being a default voter may be, as the penalties for the same are to be prescribed in the Rules.  Typically, any disadvantage or penalty to be suffered by an individual for violating a provision of law is prescribed in the parent act itself, and not left to delegated legislation.  The Act carves out exemptions for certain individuals from voting if (i) he is rendered physically incapable due to illness etc.; (ii) he is not present in the state of Gujarat on the date of election; or (iii) for any other reasons to be laid down in the Rules. The previous Governor had withheld her assent on the Bill for several reasons.  The Governor had stated that compulsory voting violated Article 21 of the Constitution and the principles of individual liberty that permits an individual not to vote.  She had also pointed out that the Bill was silent on the government’s duty to create an enabling environment for the voter to cast his vote.  This included updating of electoral rolls, timely distribution of voter ID cards to all individuals and ensuring easy access to polling stations. Right to vote in India Many democratic governments consider participating in national elections a right of citizenship.  In India, the right to vote is provided by the Constitution and the Representation of People’s Act, 1951, subject to certain disqualifications.  Article 326 of the Constitution guarantees the right to vote to every citizen above the age of 18.  Further, Section 62 of the Representation of Peoples Act (RoPA), 1951 states that every person who is in the electoral roll of that constituency will be entitled to vote.  Thus, the Constitution and the RoPA make it clear that every individual above the age of 18, whose name is in the electoral rolls, and does not attract any of the disqualifications under the Act, may cast his vote.  This is a non discriminatory, voluntary system of voting. In1951, during the discussion on the People’s Representation Bill in Parliament, the idea of including compulsory voting was mooted by a Member.  However, it was rejected by Dr. B.R. Ambedkar on account of practical difficulties.  Over the decades, of the various committees that have discussed electoral reforms, the Dinesh Goswami Committee (1990) briefly examined the issue of compulsory voting.  One of the members of the committee had suggested that the only effective remedy for low voter turn outs was introducing the system of compulsory voting.  This idea was rejected on the grounds that there were practical difficulties involved in its implementation. In July 2004, the Compulsory Voting Bill, 2004 was introduced as a Private Member Bill by Mr. Bachi Singh Rawat, a Member of Parliament in the Lok Sabha.  The Bill proposed to make it compulsory for every eligible voter to vote and provided for exemption only in certain cases, like that of illness etc.  Arguments mooted against the Bill included that of remoteness of polling booths, difficulties faced by certain classes of people like daily wage labourers, nomadic groups, disabled, pregnant women etc. in casting their vote.  The Bill did not receive the support of the House and was not passed. Another Private Member Bill related to Compulsory Voting was introduced by Mr. JP Agarwal, Member of Parliament, in 2009.  Besides making voting mandatory, this Bill also cast the duty upon the state to ensure large number of polling booths at convenient places, and special arrangements for senior citizens, persons with physical disability and pregnant women.  The then Law Minister, Mr. Moily argued that if compulsory voting was introduced, Parliament would reflect, more accurately, the will of the electorate.  However, he also stated that active participation in a democratic set up must be voluntary, and not coerced. Compulsory voting in other countries A number of countries around the world make it mandatory for citizens to vote.  For example, Australia mandates compulsory voting at the national level.  The penalty for violation includes an explanation for not voting and a fine.  It may be noted that the voter turnout in Australia has usually been above 90%, since 1924.  Several countries in South America including Brazil, Argentina and Bolivia also have a provision for compulsory voting.  Certain other countries like The Netherlands in 1970 and Austria more recently, repealed such legal requirements after they had been in force for decades.  Other democracies like the UK, USA, Germany, Italy and France have a system of voluntary voting.  Typically, over the last few elections, Italy has had a voter turnout of over 80%, while the USA has a voter turnout of about 50%. What compulsory voting would mean Those in favour of compulsory voting assert that a high turnout is important for a proper democratic mandate and the functioning of democracy.  They also argue that people who know they will have to vote will take politics more seriously and start to take a more active role.  Further, citizens who live in a democratic state have a duty to vote, which is an essential part of that democracy. However, some others have argued that compulsory voting may be in violation of the fundamental rights of liberty and expression that are guaranteed to citizens in a democratic state.  In this context, it has been stated that every individual should be able to choose whether or not he or she wants to vote.  It is unclear whether the constitutional right to vote may be interpreted to include the right to not vote.  If challenged, it will up to the superior courts to examine whether compulsory voting violates the Constitution. [A version of this post appeared in the Sakal Times on November 16, 2014]

The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Lok Sabha during Monsoon Session 2017.  The Bill is currently being examined by a Joint Committee of the two Houses of Parliament.  It seeks to establish a Resolution Corporation which will monitor the risk faced by financial firms such as banks and insurance companies, and resolve them in case of failure.  For FAQs explaining the regulatory framework under the Bill, please see here.

Over the last few days, there has been some discussion around provisions of the Bill which allow for cancellation or writing down of liabilities of a financial firm (known as bail-in).[1],[2]  There are concerns that these provisions may put depositors in an unfavourable position in case a bank fails. In this context, we explain the bail-in process below.

What is bail-in?

The Bill specifies various tools to resolve a failing financial firm which include transferring its assets and liabilities, merging it with another firm, or liquidating it.  One of these methods allows for a financial firm on the verge of failure to be rescued by internally restructuring its debt.  This method is known as bail-in.

Bail-in differs from a bail-out which involves funds being infused by external sources to resolve a firm.  This includes a failing firm being rescued by the government.

How does it work?

Under bail-in, the Resolution Corporation can internally restructure the firm’s debt by: (i) cancelling liabilities that the firm owes to its creditors, or (ii) converting its liabilities into any other instrument (e.g., converting debt into equity), among others.[3]

Bail-in may be used in cases where it is necessary to continue the services of the firm, but the option of selling it is not feasible.[4]  This method allows for losses to be absorbed and consequently enables the firm to carry on business for a reasonable time period while maintaining market confidence.3  The Bill allows the Resolution Corporation to either resolve a firm by only using bail-in, or use bail-in as part of a larger resolution scheme in combination with other resolution methods like a merger or acquisition.

Do the current laws in India allow for bail-in? What happens to bank deposits in case of failure?

Current laws governing resolution of financial firms do not contain provisions for a bail in.  If a bank fails, it may either be merged with another bank or liquidated.

In case of bank deposits, amounts up to one lakh rupees are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).  In the absence of the bank having sufficient resources to repay deposits above this amount, depositors will lose their money.  The DICGC Act, 1961 originally insured deposits up to Rs 1,500 and permitted the DICGC to increase this amount with the approval of the central government.  The current insured amount of one lakh rupees was fixed in May 1993.[5]  The Bill has a similar provision which allows the Resolution Corporation to set the insured amount in consultation with the RBI.

Does the Bill specify safeguards for creditors, including depositors?

The Bill specifies that the power of the Corporation while using bail-in to resolve a firm will be limited.  There are certain safeguards which seek to protect creditors and ensure continuity of critical functions of the firm. Order of priority under liquidation

When resolving a firm through bail-in, the Corporation will have to ensure that none of the creditors (including bank depositors) receive less than what they would have been entitled to receive if the firm was to be liquidated.[6],[7]

Further, the Bill allows a liability to be cancelled or converted under bail-in only if the creditor has given his consent to do so in the contract governing such debt.  The terms and conditions of bank deposits will determine whether the bail-in clause can be applied to them.

Do other countries contain similar provisions?

After the global financial crisis in 2008, several countries such as the US and those across Europe developed specialised resolution capabilities.  This was aimed at preventing another crisis and sought to strengthen mechanisms for monitoring and resolving sick financial firms.

The Financial Stability Board, an international body comprising G20 countries (including India), recommended that countries should allow resolution of firms by bail-in under their jurisdiction.  The European Union also issued a directive proposing a structure for member countries to follow while framing their respective resolution laws.  This directive suggested that countries should include bail-in among their resolution tools.  Countries such as UK and Germany have provided for bail-in under their laws.  However, this method has rarely been used.7,[8]  One of the rare instances was in 2013, when bail-in was used to resolve a bank in Cyprus.

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[1] ‘Modi government’s FRDI bill may take away all your hard-earned money’, India Today, December  5, 2017, http://indiatoday.intoday.in/story/frdi-bill-banking-reforms-modi-government-india-parliament/1/1103422.html.

[2] ‘Bail-in doubts — on financial resolution legislation’, The Hindu, December 5, 2017, http://www.thehindu.com/opinion/editorial/bail-in-doubts/article21261606.ece.

[3] Section 52, The Financial Resolution and Deposit Insurance Bill, 2017.

[4] Report of the Committee to Draft Code on Resolution of Financial Firms, September 2016, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/FRDI%20Bill%20Drafting%20Committee%20Report.pdf.

[5] The Deposit Insurance and Credit Guarantee Corporation Act, 1961, https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/dicgc_act.pdf.  s

[6] Section 55, The Financial Resolution and Deposit Insurance Bill, 2017.

[7] The Bank of England’s approach to resolution, October 2014, Bank of England.

[8] Recovery and resolution, BaFin, Federal Financial Supervisory Authority of Germany, https://www.bafin.de/EN/Aufsicht/BankenFinanzdienstleister/Massnahmen/SanierungAbwicklung/sanierung_abwicklung_artikel_en.html.