Whether Funds From The Consolidated Fund Could Be Earmarked By A Government (Union Or State) For Realisation Of The Debt Liabilities Of The Government?

• Published date: 25 April 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Government, Public Sector, Debt Capital Markets, Financial Services, Corporate and Company Law, Constitutional & Administrative Law
• Law Firm: S&A Law Offices
• Author: Shashwat Srivastava and Tejaswa Naswa

INTRODUCTION

Recently, the Government of India announced its Union Budget for the financial year 2022-2023 with an estimated economic growth of 9.2%. The term 'Budget' generally used by various governments in day-to-day parlance does not find its definition under the Constitution of India ("Constitution"). Rather, the Constitution of India under Articles 112 and 202 provides for an 'Annual Financial Statement' wherein the President of India and Governor of a State respectively lay down a statement of the estimated receipts and expenditures of the respective government for that relevant financial year. This Annual Financial Statement, which is termed as Budget in common parlance, consists of inter alia expenditure to be charged from the Consolidated Funds of India/State. Interestingly, under Article 112(3)(c) of the Constitution, the debt charges for which the Government of India is liable to include interest, sinking fund charges and redemption charges, and other expenditure relating to the raising of loans and the service and redemption of debt, are all those expenditures which are charged upon the Consolidated Fund of India¹.

In this backdrop it becomes pertinent to understand and discuss as to whether the Consolidated Funds could be earmarked by the Government (Union or State) for realisation of the debt liabilities of the Government, specifically borrowing(s) by a government-owned corporation? To understand and answer this complex question, reference to certain Reserve Bank of India ("RBI") Master Circulars needs to be made to comprehend the legal backing to such an action of a government.

RELEVANCE OF RESERVE BANK OF INDIA MASTER CIRCULARS

One contention which could be raised from those questioning this mode of usage of Consolidated Funds by a government, is that being an expenditure forming part of the Consolidated Funds the same cannot be leveraged as a security against any loan taken by a government-owned company. As the argument goes is that the Consolidated Funds consists of public money, including a major portion from taxes paid by citizens of the country which should not be misappropriated by any government for paying towards borrowing of one of its own companies. In this regard, Paragraph 2.3.7.3 (iii) of the RBI Master Circular - Loans and Advances - Statutory and other Restrictions² ("Master Circular on Loans and Advances") provides that:

"In respect of projects undertaken by public sector units, term loans may be sanctioned only for corporate entities (i.e. public sector undertakings registered under Companies Act or a Corporation established under the relevant statute). Further, such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project. The term loan could supplement the budgetary resources if such supplementing was contemplated in the project design. While such public sector units may include Special Purpose Vehicles (SPVs) registered under the Companies Act set up for financing infrastructure projects, it should be ensured by banks and financial institutions that these loans/investments are not used for financing the budget of the State Governments. Whether such financing is done by way of extending loans or investing in bonds, banks, and financial institutions should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment/servicing of debt is not out of budgetary resources".

Here the term "Budgetary Resources" as provided for in Master Circular on Loans and Advances has not been defined anywhere. However, the best source through which the meaning of the term "Budgetary Resources" could be fathomed is from the definition of "Budgetary Allocation" as provided for in RBI Master Circular - Interest Rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident...