The National Bank for financing Infrastructure and development Bill, 2021

By Aashima Kakkar

Inroduction

In the Finance Budget for Fiscal Year 2021-2022, the Narendra Modi- led government decided to increase spending on infrastructure projects.

According to the budget announcements, central Government capital expenditure is expected to reach Rs 5.54 trillion next fiscal year, up from Rs4.4 trillion this fiscal year.^[1]

On March 22, 2021, the Finance Minister Ms. Sitharaman introduced a bill called the National Bank for Financing Infrastructure and Development Bill, 2021 (hereinafter as Bill) stating the need to have a specific bank or organisation for funding the many pending and upcoming infrastructure and development projects in the next 25 years. She stated that if the country is to develop in the next 25 years, India needs an organisation willing to take the chance with young entrepreneurs.^[2]

The organisation that is deemed to be called the National Bank for Financing Infrastructure and Development or NBFID (hereinafter as NBFID) shaving an authorised share capital of one lakh crore rupees, will become the principal organisation for providing funds or the principal development financial institution (DFIs).

DFIs was created to provide long-term financing to sectors of the economy where the risks are too high for commercial banks and other traditional financial institutions to handle.

DFIs, unlike banks, do not welcome deposits from individuals. They raise money from the market, the government, and multilateral institutions, and are frequently backed by government guarantees.^[3]

What is a Development Financial Institute?

• A development finance institution (DFI) is a financial institution that invests in infrastructure projects that are important to the country but may or may not meet commercial return standards.
• Because few commercial lenders are willing to take on infrastructure risk, especially after the previous lending cycle’s experience, a development finance institution is required.
• DFIs provide long-term credit for capital-intensive investments with low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems, which are spread out over a long period of time.
• DFIs frequently lend at low, consistent interest rates to encourage long-term investments with significant social benefits.
• Development banks are another name for DFIs. Commercial banks, on the other hand, mobilise short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch, which can jeopardise a bank’s liquidity and solvency.

Establishment of National Bank for Financing Infrastructure and Development

According to Section 3 and Section 5 of the Bill, NBFID shall be set up as an corporate body whose head office will be at Mumbai and the institution may establish its branches all over India with authorised share capital of Rupees One Lakh Crore, which will be divided into 10,000 crores of fully paid up shares of ten rupees each. NBFID shares may be held by the following entities:

• The central government
• Multilateral institutions
• Sovereign wealth funds
• Pension funds
• Insurers
• Financial institutions
• Banks
• Any other entity that the central government deems appropriate.

The central government will initially own 100% of the institution’s shares, which may later be reduced to as little as 26%.

Section 6 – Board of Directors

The board of directors of the institution shall have:

• A chairperson – who is appointed by the Central Government in consultation with the Reserve Bank of India, who presides on every meeting.
• A Managing Director – to be appointed by the Board on the recommendations of the Bureau^[4] and subject to procedures set by the Central Government, who shall be whole time member.
• Not more than 3 Deputy Managing Directors appointed exactly like a Managing Director, who shall be whole time member.
• Two Directors – nominated by Central Government who will also work as the officials of the Central Government.
• Number of Directors not exceeding 3 – elected by the shareholders holding more that 10% or more of total equity, other than the Central Government.
• The Board will appoint three independent directors, or one-third of the total number of directors on the Board, whichever is greater, based on the Nomination and Remuneration Committee’s recommendations:
  • If the percentage of issued equity share capital held by shareholders prevents the election of three directors, or until the directors elected by the shareholders assume charge, the Board may appoint a number of independent directors, not to exceed three, to be appointed by the Board on the Nomination and Remuneration Committee’s recommendations.
  • Provided, however, that at least one of the directors named in clauses (e) and (f) is a woman.
  • These directors will be independent directors under the Companies Act, 2013, for the purpose of immunities available to independent directors.
• Except for the positions of Managing Director and Deputy Managing Director, no person who is a salaried officer or other employee of the Institution may be appointed as a director of the Board.

Disqualification and removal of Directors

Section 10 states that the Central Government has the power to remove Directors from office, if:

• The director is deemed to be insolvent.
• The director has become physically or mentally incapable of acting as Director.
• The Director has committed an offence that involves moral turpitude.
• The director has financial or any other interests that make him prejudiced.
• The director has abused his position in a detrimental manner to public interest.
• The director has been removed from his position in:
  • The Government
  • Any bank including Reserve Bank of India or State Bank of India
  • Any Public Financial Institution or State financial corporation
  • Any other corporation owned by the Government

All the removals are to be done after giving sufficient opportunity to be heard and if any Director is elected or nominated as Member of Parliament, he shall cease to be a director from the date of election or nomination.

The disqualification shall not take effect if:

• 30 days after the adjudication, sentence or order;
• If any appeal is filed within 30 days against the adjudication and until 7 days from the date of sentence of such appeal is disposed of.

Section 11 states that the Chairperson can be removed by:

• Central Government after consultation of the Reserve Bank of India and appoint any other person to fulfil the empty place.
• Board after consultation by the Bureau.
• Shareholders.

Functions and Powers of the institution

Section 17(2) states the function of NBFID as:

• Organise and facilitate participation from investors from India or overseas in infrastructural development projects located all over the country.
• Provide facilities for training in infrastructural development and can advance loans or advances for this purpose.
• Any person involved in infrastructure development activities will receive technical, legal, marketing, and administrative assistance.
• Provide consulting services in the areas of infrastructure development, project structuring, capital structuring, post-commissioning operations, and other related matters in and outside of India.
• Act as trustees in securing any debentures.
• Acquire any institution whose principal object is the promotion or development of infrastructure financing for projects.
• Act as a financial intermediary.
• Structure proposals and negotiate agreements.
• Open any bank account in India or outside India.
• Any other Acts.

Section 17(1) states the powers of NBFID as:

• Form subsidiaries or joint ventures in India or outside India.
• Coordinate its operations and operations of other institutions dealing with infrastructural finance and maintain expert staff to solve issues regarding it.
• Establish trusts under the Indian Trusts Act of 1882 for the purpose of establishing funds to aid in the financing of infrastructure projects in India, or partly in India and partly outside India, including real estate investment trusts and infrastructure investment trusts.
• Support the development of a deep and liquid bond, loan, and derivatives market for infrastructure financing, including infrastructure for electronic and negotiated markets, investor protection, and adjudication.
• Lend and invest in infrastructure projects available in India or outside India.
• Give loans or advances to a company that deals in infrastructure financing. NBFID can also take over or re finance the existing loans of these companies.
• Set aside loans or advance in exchange for selling securities for the amount of the loan.
• Borrow money from Central Government, Reserve Bank of India or institutions outside India in foreign currency – apply for, receive, accept, administer, and manage grants, aids, subsidies, funds or donations, among other things, from national and international sources such as the World Bank, New Development Bank, Japan International Cooperation Agency, US Agency for International Development, Kreditanstalt für Wiederaufbau, European Investment Bank, Asian Development Bank, International Finance Corporation, and others.
• Enter dealings of foreign exchange.
• Act as intermediary in agreements related to debt securities.
• Convert any debt it has extended into equity.

Arguments regarding the Bill

The bill that was introduced in the Lok Sabha was open to discussion and there were many who did not like the implementation of the bill. One of them was opposition leader Jairam Ramesh, who started the debate stating that the concept of DFIs had already been tried, tested, and rejected.

The first of these institutions was established in 1948. As Finance Minister, Manmohan Singh established the Narsimha committee in 1991, which concluded that the era of DFIs was over. “The clock has turned back thirty years after Dr. Manmohan Singh’s Budget, and we are returning to the DFI era,” Mr. Ramesh said.

He demanded an explanation from the Finance Minister for the abrupt change of course.^[5] To which the Finance Minister replied that the NBFID will act as a catalyst for the infrastructure funding ecosystem. He stated that the Centre planned to establish DFIs after learning from other similar financing institutions and realising their contribution to the country’s infrastructure development.

Despite the government owning a 26% stake in the bank, there were claims that the Bill lacks an oversight mechanism. In the event of a default, the Act allows the government to extend a sovereign guarantee. There will be no external oversight, surveillance, or CAG, but the government will provide sovereign guarantees.

The members were not sure where the Government was coming from with this. The members stated that the government today will change, but it could be any other government tomorrow and the Government was enacting a law that will last forever.

There should be some checking mechanisms. The government stated that Chapter VI of the Bill deals with the audit mechanism. The Bill includes safeguards, such as requiring the NBFID to provide a copy of its balance sheet and accounts, as well as a copy of the auditor’s report and a report on the Institution’s operations during the relevant year, to the Central government and the Reserve Bank within four months of the date on which its accounts were closed and balanced.

Every year, these reports would be presented to both Houses of Parliament.^[6]

The government informed the house that over 6500 projects in various sectors have been identified as requiring a total investment of Rupees 111 lakh crores in the country.

Conclusion

The National Bank for Financing Infrastructure and Development to be instituted by the Government has the potential to grow the country but only if it is free from nepotism and bureaucracy.

The results of this bank are yet to be seen, but the only thing this Bank has done till now is the promise of providing jobs to the unemployed.

References

• prsindia.org/
• prsindia.org/ – For the Bill
• .thehindu.com/
• /newsonair.com
• empowerias.com/

1. Government tables National Bank for Financing Infrastructure and Development Bill available at: livemint.com/ ↑
2. Parliament passes Bill to set up National Bank for Financing Infrastructure and Development available at: thehindu.com ↑
3. The National Bank for Financing Infrastructure and Development Bill, 2021 available at: prsindia.org/↑
4. Section 2(1)(c) – Bureau – “Bureau” means a body which the Central Government may notify, for the purpose of recommending candidates for appointment of Managing Director and Deputy Managing Directors under sub-section (1) of section 6 and for removal of a director under clause (ii) of sub-section (1) of section 11 ↑
5. Parliament passes Bill to set up National Bank for Financing Infrastructure and Development available at: .thehindu.com/ ↑
6. Section 25. Preparation of balance-sheet and accounts: (1) The balance-sheet and accounts of the Institution shall be prepared in such form and manner as may be prescribed. (2) The Board shall cause the books and accounts of the Institution to be closed and balanced as on the 31st day of March each year or such other date as the Board may determine.

   Section 26. Audit: (1) The accounts of the Institution shall be audited by auditors duly qualified to act as auditors under sub-section (1) of section 141 of the Companies Act, 2013, who shall be appointed by the Institution in general meeting of the shareholders out of the panel of auditors approved by the Reserve Bank for such term and on such remuneration as the Reserve Bank may fix. ↑