Author name: CBCL

[By Dhanush Thonaparthi] The author is a student of NALSAR University of Law.   Introduction Economic Social and Governance (ESG) policy is a concept of growing relevance among business houses, replacing the more traditional Corporate Social Responsibility (CSR) concept. It is reflected in the legislative and policy space of the government, with the most prominent example of this being the introduction of the Business Responsibility & Sustainability reporting mandated by The Securities and Exchange Board of India (SEBI), for India’s top 1000 listed companies by market capitalization. In this context, the article argues that banks should incorporate the ESG performance of a company alongside other factors when considering a lending decision, with persuasive reasons for the same and examples as to how ESG is already becoming a key factor in credit ratings and lending decisions. What is ESG and how is it relevant for companies?  ESG includes three components, its pillars, namely Environmental, Social and Governance. ESG refers to a set of standards regarding a company’s activities and behavior concerning the components of ESG. These factors, in the corporate context, are used to look at the long-term sustainability of a company. With an increased global push towards environmental consciousness, respecting social considerations, and better governance in companies, this framework becomes important in evaluating a company’s future performance and opportunities. Achieving high ESG standards also becomes important for companies in the context of the stakeholder theory[1], which postulates that corporate success is not dependent only on shareholder and management satisfaction, but also on its relationships with its customers, the Government, creditors, and the public. The long-term survival and profitability of a company depend on it maintaining a good relationship with all its stakeholder groups. This is where ESG standards play an important role, considering that they address the environmental aspect, (which has been a major point of concern across countries and the public) the social aspect (mostly relating to the general public welfare, which is important for a company’s reputation and goodwill) and the governance aspect (better governance instills public and corporate confidence, meaning access to cheaper lending, more and better customers and more investment options). How is ESG relevant to banks when making lending decisions  Banks are financial institutions driven by profit motives and financial considerations. A major concern for banks is non-performing assets and delays in repayments by borrowers, reducing the profitability of the bank. This can lead to unrealized gains and/or unnecessary litigation for recovery, both of which any bank will want to avoid. Therefore, banks would want metrics that help determine whether a lending decision could translate into an unprofitable venture. A key factor that can be incorporated into such metrics is ESG. A review of the literature on ESG as a factor in corporate lending has found that better ESG performance may correlate with lower credit risk, legal risk, and downside risk.[2] Additionally, a survey by Morningstar indicates that better sustainable performance leads to better risk mitigation. We are currently undergoing the largest wealth transfer in history, with experts suggesting that nearly sixty eight trillion dollars of wealth will be transferred to the newer generations. We are in the middle of the largest wealth transfer in history. This is important for financial institutions as millennials fear climate change and would be willing to sacrifice financial benefits in favour of sustainability, and a company that is able to gain a leadership position in sustainability will be more preferred by millennials. Before delving into more specific reasons as to why ESG is important for banks in their lending decisions, we have to, first consider the Environmental pillar of ESG. Companies that are compliant with existing laws and regulations are less likely to be penalized and fined for any potential violation. The future outlook regarding environmental legislation is that it will be more protective of the environment, leading to more restrictions for a company, which translates into more potential liabilities for companies that do not comply and additional costs for compliance. For banks, this becomes important as a compliant company is less likely to incur these additional liabilities that add to the company’s costs. A company that goes beyond legally mandated environmental norms is more insulated from changes in regulation making it less susceptible to changes in legislation. Secondly, the Social pillar of ESG is important for banks, as it helps determine the brand value of the company and to assess how much public goodwill the company enjoys. If companies do not value the rights of people, it leads to public resentment and outcry, which forces the governments to intervene, leading to unnecessary interference and even litigation and reparations. An example in this regard is the case of Facebook. Facebook had to pay nearly 725 million dollars to settle a class action lawsuit after it disclosed that information relating to 87 million users (about twice the population of California) was improperly shared with Cambridge Analytica. Thirdly, Governance is an important pillar for banks to take cognizance of when lending, primarily because better governance means better company performance, a higher level of employee quality, and reliable company disclosures. If a company has bad governance practices, it can spell disaster for banks that choose to make lending decisions based on the company’s financials as disclosed by the company itself. A good example of bad governance translating into unreliable disclosures is the well-known Satyam scandal. In this case, the company had falsified accounts, inflated the share price, and invested enormous amounts in property. Upon admission by the company’s chairman, the fraud became known, leading to a collapse of the market’s reputation and confidence in the company. This is a prime example, demonstrating how dishonest and inefficient governance practices can lead to the collapse of a company, putting lenders at immense risk of their loans turning into non-performing assets or defunct loans. Fourthly, companies must be able to align themselves with the social values of the public and contribute towards the welfare of the society they operate in, because company perception plays

[By Saiyam Shah] The author is a student of Auro University.   Introduction Insurance, particularly health and life insurance, plays a pivotal role in alleviating stress for most individuals and families, assisting them in coping with unforeseen and unfortunate circumstances. People with disabilities (PWD), especially those with congenital disabilities, are often denied access to health and life insurance policies solely based on their disabilities, without any proper risk analysis or objective justifications. Testimonials of the PWD, who were denied insurance or were not given the amount they were entitled to when required on inconsequential grounds are many. Though the judicial intervention has provided some relief, the attitude of the Insurance Regulatory and Development Authority of India (IRDAI) was not impressive until the intervention of the Delhi High Court.. This article delves into the recent developments concerning discrimination against PWD in insurance-related matters and highlights what IRDAI can learn from the practices of the Australian Human Rights Commission (AHRC) to curb instances of discrimination. The initial section highlights the importance of health and life insurance and sheds light on the direct and indirect discrimination faced by PWD. Subsequently, it briefs about the provisions pertaining to discrimination. In the next part, it delves into two significant decisions by the Delhi High Court on the issue of discrimination and concludes by addressing recent developments and advocating for IRDAI to consider issuing binding circulars or non-binding guidelines akin to those adopted by the AHRC to take substantial steps towards reducing instances of discrimination and fostering a fair and inclusive insurance environment for all. Importance of insurance for the PWD As it is for every individual, health and life insurance are essential for PWD to mitigate accidents and other such uncertain events. As noted by Thomas Weston in the context of the UK, but also applicable generally, the PWD (1) are less likely to be employed by the private sector, (2) their income may be lower than their counterparts, and (3) specific needs for assistive equipment, care, and therapy add to their daily cost burden. Therefore, it becomes all the more necessary for them to have health insurance to financially deal with the uncertain events requiring immediate payment of a large amount. Direct and indirect discrimination Often, PWD are denied health or life insurance solely based on their disability without conducting an objective assessment of the risk factors and considering the possibility of providing a policy with a higher premium and non-standard terms. The PWD are discriminated against by: (1) denying to provide the insurance policy, (2) providing the policy with non-standard terms and/or a higher premium and (3) not paying the legitimate insured amount when required on inconsequential grounds. The discrimination is also visible in instances involving family insurance plans. The legal provisions Section 3 of the Rights of Persons with Disabilities Act (RPWD Act) prohibits any kind of discrimination based on disability unless one satisfies that the same act or omission is a proportionate means of achieving a legitimate aim. Section 24(k) of the Act mandates the appropriate government to make a comprehensive insurance scheme for the PWD, and 26 mandates it to make insurance schemes for employees with disabilities. However, the customised insurance policies, customer service, and range of options available in the private sector make it imperative to ensure that they are available to everyone, including PWD. India has ratified the UN Convention on the Rights of Persons with Disabilities, article 3 of which obligates the states to abide by the principles of non-discrimination and full and effective participation and inclusion in society. Article 25(e) of the CRPD obligates the states to prohibit discrimination against PWD in the provision of health and life insurance where such insurance is permitted by national law. Due to the lack of express provision addressing this issue, the litigants seek relief U/A 14 and 21 of the Constitution against such practices. Protection in foreign jurisdictions The Australian Disability Discrimination Act (ADDA) allows discrimination in life and health insurance only if (i) it (1) is based upon actuarial or statistical data and (2) is reasonable having regard to the matter of the data and other relevant factors; or (ii) if the same is not available and cannot be reasonably obtained, the discrimination is reasonable having regard to any other relevant factors. The US’s Affordable Care Act prohibits insurance companies from not providing insurance to people with pre-existing conditions. Other countries or states, that have some express provision against such discrimination include Hong Kong, Japan, Spain, the UK, Portugal etc. Judiciary on disability discrimination Are PWD more prone to accidental risks? In Vikas Gupta v. Union of India (2012), the petitioner filed a PIL against the discrimination in premium as well as the maximum amount ensured in the Postal Life Insurance Policy for government employees. The respondent defended their actions on the ground that PWD are more prone to accidental risks. As rightly countered by the petitioner, (1) there is no such empirical data to support such a general statement, and (2) living with a disability and suffering from a disease are not synonymous. Can a class be excluded on the ground of the contractual relation The bench referred to LIC v. Consumer Education & Research Centre and observed that though insurance is a contract between the insurer and the insured, the conditions prohibiting a class from entering into such a contract are unconstitutional. The LIC had distinguished the persons working in government, semi- government and reputed commercial firms from those living in vast rural and urban areas engaged in unorganized or self-employed sectors and denied insurance policy to the latter. The court struck down the classification as violative of Article 14 of the Constitution. The bench, applying the same case, held that charging a higher premium and discriminating on the basis of the disability is unconstitutional. Saurabh Shukla v. Max/Niva Bupa Health Insurance & Co.; IRDAI’s failure as a sectoral regulator Regulations ; a paper tiger IRDAI’s 2016 Health Insurance Regulations, Para 8(b) and (C), used

[By Vaibhav Gautam] The author is a student of NALSAR University of Law.   INTRODUCTION Earlier last month, the Reserve Bank of India released a comprehensive circular (“Circular”), on the compromise settlements and technical write-offs, to provide the lenders with multiple options to recover the maximum possible amount from their distressed assets without delay. The RBI’s primary objective behind this move appears to ensure greater transparency in the process of resolving distressed assets. However, this circular can also be seen as an attempt to widen the applicability of the compromise settlements as envisaged under the Prudential Framework for Resolution of Stressed Assets, 2019, (“Prudential Framework”). At the same time, the circular has stirred controversy and invited criticism from several stakeholders, such as major bank unions, like, All India Bank Officer’s Confederation (AIBOC), and All India Bank Employees Association (AIBEA), which are representative of around 6 lakh bank employees. There is a genuine concern among bank unions that a willful defaulter’s refusal to pay the owed amount might potentially lead to a loss of the general public’s money and confidence in the banks. Through this article, the author aims to analyze the said circular, as envisioned by the RBI and also attempts to demystify some of the concerns that have been associated with the circular. BACKGROUND The term “compromise settlement,” as explained by the RBI, basically means that the Regulated Entities (“REs”), primarily the banks, can enter into a negotiated agreement with the borrowers. The main purpose of such a resolution process is to effectively streamline the resolution process and also to rectify the problems that are caused by the distressed assets, such as huge losses for the lenders, financial instability in the economy, etc. Compromise Settlements resolve this by allowing the lender to recover the maximum possible amount of such distressed assets by reaching a mutually beneficial agreement involving a waiver of claims by the borrower, and a partial waiver of the amount by the banks. This is not the first instance of the RBI introducing such a concept. In 2007, RBI provided for compromise settlements as a valid resolution practice, where the banks were allowed to enter into compromise settlements with the borrowers, contingent on the decision of the management board of the bank. In the present circular, RBI has clarified its position regarding the compromise settlements, however this time they have also taken other REs into account, such as cooperative and local area banks. It has also reiterated the prescriptive cooling period of a minimum of 12 months, where the borrowers can take fresh loans after the said period. Later, on June 20, RBI published FAQs on the circular, where it provided clarification that this process of compromise settlements is not a major overhaul of the current resolution framework but rather it has been in practice for more than 15 years, with the earliest guidelines being released in the year 2007. CONCERNS OF THE STAKEHOLDERS One of the major concerns raised by the stakeholders, particularly bank unions has been that this circular will unduly advantage the defaulters by condoning their fraudulent or default act, thereby, eroding the public’s confidence in the banking system. Furthermore, it might set a dangerous precedent by allowing the defaulters to settle their large defaults by paying a minuscule amount of their original debt. Secondly, bank unions have further argued that these guidelines bring a sudden change into the process of clearing distressed assets from banks’ accounts, and will lead to the reversal of the guidelines that are provided under the Prudential Framework of 2019. Additionally, there is an apprehension that this reversal might entail major implications for the overall economy, such as systemic instability in the financial institutions, adverse market behavior, etc. Lastly, there is a concern that the circular would allow the defaulters to restructure their loan records to keep their reportable Non-Performing Assets (NPA) levels lower than they are, through the process of “evergreening.” This process allows for additional adjustments to be made to the existing debts of the borrowers, to make the repayment more feasible. However, instead of constituting a concrete solution to the recovery of distressed assets, evergreening is a temporary measure and different from compromise settlements. UNRAVELLING THE BANK UNIONS’ CONCERNS The concerns of the bank unions are seemingly contrary to the purpose envisioned by the RBI. These guidelines as provided by the circular impose the liability on the REs, primarily the banks to create and enforce a comprehensive framework that would be contingent on the approval of the management board of the bank. This requirement aligns with the ultimate goal of the circular, i.e., to increase the transparency and accountability between the lenders and the borrowers. The circular also clarifies the position on the minimum cooling period of 12 months. Accordingly, it will be the discretion of the banks to decide the upper limit of the cooling period. And only after that period has ended can the fresh loans be issued to the respective borrower. It is crucial to understand that rather than setting a dangerous precedent, this requirement puts a reasonable and justifiable restriction on the willful defaulter who seeks to get a fresh loan from a bank. The compromise settlements that are undertaken in consonance with these guidelines would be without prejudice to criminal proceedings and other penal matters. Hence, the argument that it unduly advantages the willful defaulters and the fraudsters, is not tenable. With respect to maintaining the integrity of the process, the permission of the board plays an imperative role, as it is provided in the circular, such borrowers might get debarred from issuing a fresh loan for 5 years. It is largely a misplaced concern of the bank unions to assume that the present circular would bring major changes to the process that is provided under the 2019 framework. It is pertinent to note that the Prudential framework deals with the illegibility of the defaulters for restructuring their debts whereas the current circular concerns compromise settlements. So, essentially, they are