Archive for April, 2016

What is insolvency?

Insolvency is a situation where individuals or companies are unable to repay their outstanding debt. It may be resolved by changing the repayment plan of the loans, or writing off part of the debt. If insolvency cannot be resolved, assets of the debtor may be sold to raise money, and repay the outstanding debt.

Why do we need a new law?

Insolvency resolution in India took 4.3 years on an average, as of 2015. This is higher when compared to other countries such as United Kingdom (1 year) and United States of America (1.5 years). These delays are caused due to pendency of resolution cases in courts and confusion due to lack of clarity in the current bankruptcy framework.

As the Joint committee on Insolvency and  Bankruptcy Code 2015 has submitted its report. Thus path for its passage in parliament seems clear. Here, I present  some important features of the Bill and some critical analysis on it.

Important Features:

The Bill has a number of helpful provisions for tackling large loan defaults.

First, it enables the early detection of financial distress by allowing any creditor to commence an insolvency proceeding the moment a default occurs. This is in contrast to the current scenario where principal or interest on a loan needs to be unpaid for at least 90 days from its due date to be classified as an NPA.

Second, the Bill contains very strict timelines for each step in the insolvency resolution process. Subject to a few exceptions, a resolution plan needs to be approved within 180 days, failing which the company goes into liquidation.

Third, it enables an investigation into the affairs of the insolvent debtor and the setting aside of fraudulent, undervalued or extortionate credit transactions that occurred in the lead-up to the insolvency. There are also penalties for concealing information, misrepresentations and defrauding creditors during the insolvency resolution process.

Fourth,New law is premised on the establishment of three institutions that currently do not exist – a regulator to be named the Insolvency and Bankruptcy Board of India (the “Board”), a new profession of insolvency professionals who are to be registered and regulated by insolvency professional agencies (“IP Agencies”) and information utilities that are designed to store and release information on debts and defaults. While it is understood that these institutions would take time to mature and develop, the new legislation should, at a minimum, specify certain things about their functioning to provide a starting point for implementation.

critical Analysis:

Let us think about the new regulator. The Bill vests the Board with wide-ranging powers. These powers include regulating insolvency professionals, insolvency professional agencies and information utilities, by laying out the eligibility requirements and standards for their functioning, carrying out investigations, and monitoring their performance. However, despite this vital role, the Bill does not envisage that the regulator will be established at the time the new law comes into effect. Ideally, the Board should be in place well before the new law comes into effect, to allow sufficient time for it to develop a regulatory framework for implementation.

The transition process for moving from the current legal framework to the new law needs to be thought through. The Bill needs to say which institutions will necessarily have to be operational at the time the new legislation comes into effect. To the extent that some institutions need more time to develop, it must specify the timeframe within which these institutions must be functional and the interim measures that would be in place until this point. For example, insolvency resolution professionals don’t exist as a profession today. As it is likely to take time to administer their examination and develop a sufficiently large pool of such professionals, could individuals or firms with other professional qualifications (such as lawyers or chartered accountants) perform the role of insolvency resolution professionals as an interim measure? Until information utilities are established and have robust procedures for gathering, storing and disseminating information on defaults, could any other body perform their function?

The two tribunals that are to hear insolvency and bankruptcy cases – the National Company Law Tribunal (The National Company Law Tribunal (NCLT) will replace the Company Law Board and the Board for Industrial and Financial Reconstruction, and be an overarching body for resolving insolvencies.It will be established under the Companies Act, 2013 ) for corporations and the Debt Recovery Tribunals (“DRTs”) for individuals – have their own set of problems. The NCLT is yet to become operational and the DRTs are, by all accounts, clogged with high case pendency. Both these tribunals would also continue to hear cases under their existing mandates in addition to those under the new law. This might not be an issue that can be fixed through the legislation, but the government must ensure that the NCLT becomes operational and increase the infrastructure and resources of both these tribunals if they are to hear insolvency cases in the efficient and time bound manner that the Bill envisages.


Countries the world over differ widely in the legal frameworks they have adopted for insolvency and bankruptcy. The US has what is widely acknowledged to be a debtor-friendly regime; the administrator-led system in the UK is more creditor-friendly; while the insolvency regimes in continental Europe fall somewhere in between these two models. However, studies have shown that ultimately the effectiveness of an insolvency regime depends not so much on the specific path the law decided to take, but on whether it is backed by strong institutions for implementation.


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As we talk about market integration in agriculture through Electronic National Agriculture Market portal and also talk about moving toward a economic union by realizing GST. Similarly power sector too need reform such that dream of one nation, one grid and one price come true. It is in 2013 that southern part of India too got connected with the National Grid System and because of that on December 29,2015 no congestion was observed in the electricity grid and single price (2.3/kwh) was  discovered on the power exchange IEX.

Similarly Open Access policy was introduced under the electricity Act 2003  which allows consumer with electricity load above 1 MW  to procure electricity directly from electricity market. Recently Indian Railways the country’s largest single costumer of electricity , has been allowed to shift its purchases to an Open Access regime. Central and state government has come forward to address the DISCOM debt problem. Thus some of these above steps in the direction to discover a single market price for power around the country.

But following challenges still remains:

  1. In 2014-15 the addition of generation capacity was 26500 MW which is much higher than the average annual addition in last five years of 19000 MW. But ability to produce more power is not matched with the  ability to lift the power. Thus power plant ran at historic low load factor of 60% and also due to the stressed discom condition.
  2. Tariff segmentation(10-12 categories are present such as Agriculture, Poultry Farm, Businesses etc) has reached hilarious level, thus complexity of tariff schedule prevents economic actors from responding sufficiently to price signals.
  3. Some states have imposed significant barriers to Open  Access Policy by imposing the cross-subsidy surcharge and additional surcharge for purchasing electricity from the power exchanges (PX) . This problem was meant to be addressed by the National Tariff Policy (2006), which established a methodology for determining the cross-subsidy surcharge to be levied on Open Access consumers, with the goal of reducing it over time. Nonetheless, cross-subsidy surcharges over the years have gone up.
  4. The growth rate of captive power generation between 2006-07 and 2014-15 is 9.3 per cent compared to 4.6 per cent for electricity procured from utilities. This trend could be exacerbated in the coming years, as the decline in oil prices and the cost of renewable energy alternatives may prompt a further shift to captive power.

Though government is committed to address DISCOM debt problem and AT&C losses issue under UDAY scheme. State governments need to rationalise Tariff segmentation from present level of 10-12 to 2-3.While Confederation of Indian Industry is demanding following measures for making single market for power :

i) A new legal architecture for making independent regulators truly independent (including the Central Electricity Regulatory Commission).

ii) Examining the concept of state regulators being replaced by a smaller number of effective regional regulators.

iii) Setting up of a National Power Distribution Company (NPDC) that begins to effectively challenge the hegemony of state-owned discoms. The NPDC can equally well fulfil other pressing objectives of picking up stranded capacities, price-pooling across diversified sources of supply (for energy security, plus encouragement to renewables), providing a national pricing benchmark as well as facilitating a rapid move towards effective Open Access.

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 In the Westminster system of government, the Speaker of the legislature has considerable power and independence. This is a cherished product of a long process to secure the legislature’s independence and fairness. The considerable discretion they enjoy comes with the assumption that it will be used sparingly or wisely.

However, there are at least two recent instances in which Speakers of the legislature have used this discretion to take debatable decisions. The first instance is from the state of Uttarakhand, which was thrown into crisis when the Speaker of the Legislative Assembly refused to allow a division – the counting of legislators’ votes – on the state budget. The Congress-led government of the state had reportedly lost the confidence of several members of the legislative party; it was possible that the Appropriations Bill would have been defeated had votes been counted, and the government would thus have had to resign since it was a money Bill. By refusing to grant a division, the Uttarakhand Speaker in effect declared the budget passed and insulated the government from a key test of democratic legitimacy. The second instance is at the Centre, where the Speaker of the Lok Sabha has permitted a proposed law, the Aadhaar Bill, to be introduced in the House as a money Bill. Whether regulatory legislation such as Aadhaar meets the definition of a money Bill – traditionally reserved for proposals that alter taxation, borrowing, or affect the Consolidated Fund of India – is doubtful. But, just as it is a Speaker’s traditional right and duty to determine when a division is needed, her decision on whether a bill is a money Bill has also traditionally been considered to be the last word. It is worth noting that the two major national parties are on opposite sides of the fence in terms of the debate at the state and the Centre – in Uttarakhand, the Congress is defending the rights of the Speaker, while in Delhi it is questioning them – indicating that this is possibly a problem of institutional weakness that transcends political parties.

                                                     Unfortunately, India now faces a situation where the decisions of the traditionally independent Speaker of the House are being discussed by another branch of government, namely the judiciary. The Supreme Court has stayed an Uttarakhand High Court judgment that rescinded President’s Rule imposed on the state after the Speaker’s controversial ruling. Meanwhile, it has asked the Union attorney general for his views on a petition filed by a Congress leader questioning the introduction of the Aadhaar Bill as a money Bill. So the judiciary and the executive will now discuss a decision that has traditionally been the sole prerogative of the Speaker of the legislature. The elements of a full-blown constitutional crisis are visible. What is needed is to get ahead of the problem. Perhaps the tradition of the Speaker being notionally completely independent of the other branches needs to be revisited. Rather than letting things deteriorate and forcing the judiciary to get involved, the legislature itself should consider what checks and balances can be imposed on the Speaker’s discretion in order to ensure such situations are not repeated.

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Does marital rape amount to sexual violence? It certainly is part of it, and when a woman says she is sexually violated, that is not the only thing happening to her – it is often coupled with the husband not giving money, or beating her. It sounds sensational to say that India must do something. But what must India do? In some cases, the wife who is facing abuse may not want a divorce; she may want a roof over her head. Criminalising does not give her this relief. Also, conviction in ordinary rape cases is very low. It is higher when victims are under 10 years of age. At ages 15-18, it gets low. After that, it gets worse. If a woman says she has been abused by her boyfriend, the conviction rate is abysmal.

If marital rape is criminalised then woman will have to present her case in the session’s court. She has to prove that on that particular night, sex was without consent, that she was not in the mood for it, or he had forced her after she had gone to sleep, or was ill. That will be a challenge.

Lawyers could abuse this too. They will expect huge amounts of money from the victim for filing such cases. That is what we are seeing happening today. This drains the woman economically. The lawyers also tell her that if she is filing charges for rape, the husband will choose to settle, but the husband often fights to try and prove her wrong.

Under 498(a), if the complaint is proved false, men’s groups are demanding that the woman has to pay compensation. That demand will come in the case of marital rape laws too. All this has not helped women at all.

So What alternatives their to help her in such a case?

In the Domestic Violence Act, cruelty is described in various ways- for example, economic violence of not giving money to the wife, physical violence like beating, and emotional violence like humiliating her body or her parents. Then, there is also sexual violence. Domestic violence is a civil law and it gives you remedy. Women can ask for protection and maintenance; they can ask for a restraining order against their husbands. Further, under 498(a) of the Indian Penal Code, any kind of physical or mental or emotional harassment is explained as cruelty. Under explanation ‘b’ of the same section, making demands for dowry is described as punishable. It leads to three years imprisonment, and is dealt with at the magistrate’s court. For the Domestic Violence Act too, the forum is the magistrate’s court.


We don’t need a change in the law to criminalise it, while we need a change in perspective. It should be dealt with 498(a) and the Domestic Violence Act, so that it gives protection to women. If there is a woman being abused, file a case under those laws and let’s see how they progress. If it does not work, why is it not working? We need to focus on that.

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At present, farm marketing varies not only from state to state but also within the states, with each wholesale mandi being governed by its own Agricultural Produce Marketing Committee (APMC). These mandis require separate licences and they charge different marketing fees. The use of technology is low, which means that there is very little transparency in transactions, which eventually hurts farmers.A pan India trading portal , E-National Agricultural Market (NAM) is designed to create a unified national market for agriculture commodities. The first-ever National Policy for Farmers brought out in 2007 by the United Progressive Alliance government also mentioned this need.  The new integrated electronic platform begins, in a limited way, to address many of these problems. Some features of E- NAM as follows:

  1. Farmers can showcase their produce online from their nearest market and traders can quote price from anywhere.
  2. Results in increased number of traders and greater competition.
  3. This would allow them to escape the cartels that dominate local mandis and strangle the freedom to trade.
  4. Ensure open price discovery and better returns to farmer.
  5. Will cover 585 markets across country in three years during first phase. India has 2477 principal mandis and 4843 submarkets  created by the APMCs.

Limitation in implementation of E-NAM: Wide quality variation in farm produce within a state , and even wider variations across states, pose a challenge for the new market. Commodities with similar standards nationally are few. Wheat in Punjab and Haryana is of medium quality while in MP and  Gujrat it is of superior. An electronic platform can only trade standardise commodities. For the rest , the NAM might not be the right platform. A state agriculture market model launched in 2009 by the NCDEX , provide some lessons in market integration. The Karnataka Model  a joint initiative of govt of Karnataka and NCDEX e- Markets, was the first such initiative.

But it is dangerous to presume that a model that has worked well at the state level will automatically succeed at the national level as well. There are too many prerequisites for that to happen. The three most critical among them are a single wholesale trading licence valid across the catchment area, a single-point levy of market fees, and e-auction as the mode for price discovery. Currently, there are too few warehouses equipped with facilities for weighing, grading and standardisation of stocks sold through the electronic platform. Moreover, aggregators would need to emerge that pool together small marketable surpluses of individual farmers for sale to bulk buyers to attract competitive bidding. The Small Farmers Agribusiness Consortium (SFAC), the nodal agency for running the new electronic platform, can serve as an aggregator through its existing or specially created local units.

Getting states on board for full agricultural marketing reform will also be difficult.

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Founded in 1989 at Australia’s initiative, APEC’s members include the US, Russia, China, Australia and Japan. It’s 21 members represent 2.8 billion people and accounts for 57 percent of the world’s gross domestic product and 47 percent of global trade. For 26 years, the APEC has served as the key driver of Asian regional economic integration by developing habits of economic dialogue and cooperation and facilitating market opening and trade expansion. India had applied for APEC’s membership in 1993 and has been an observer at the forum since 2011.

Why APEC membership important for India:

  1. The APEC’s institutional processes of trade facilitation, consultation on standards, and sharing of best practices will help India improve its regulatory regime and business environment. This, in turn, helps make India more attractive to investors and more competitive in international markets.
  2. India’s inclusion in APEC will give a boost to its ‘Act East Policy’ and will further integrate the Indian economy into the Asia-Pacific economic milieu.
  3. The APEC would help India access the transnational supply chains that increasingly dominate the global economy. To achieve the growth rates of 8 to 10 percent for lifting millions out of poverty, India would have to participate in the global trade system.  In recent share of APEC in India’s total exports declined from 46.2 per cent in 2000-01 to 32.7 per cent in 2013-14 while imports from APEC countries to India increased from 29.2 per cent in 2000-01 to 36.2 per cent 2013-14. Membership to APEC may help India in maintaining trade balance.
  4. In addition to facilitating greater regional economic integration, APEC promotes the development of small and medium enterprises in the member countries.
  5. APEC membership is also a facilitating condition for Trans-Pacific Partnership (TPP) membership. It makes more sense for India to join APEC now because it is also negotiating a regional trade pact Regional Comprehensive Economic Partnership (RCEP) where China is an influential member, including the 10 Southeast Asian countries and their partner countries.
  6. Membership in the APEC would promote equal participation by government and private institutions and help deal with the disconnect between policy and business.

India’s candidacy for the APEC is viewed sceptically in some parts of the region for two reasons.

First, critics say India’s past behaviour in trade negotiations, especially in multilateral settings such as the World Trade Organization (WTO), has been reflexively difficult, even intransigent. Some critics fear India would disrupt the APEC’s consultative and consensus-based processes and impede progress on key initiatives. These parties remain unconvinced that India’s government or business community are ready to take more constructive positions despite India’s progress over the past 15 years.

Second, some parties believe that India must prove it is serious about the APEC by completing or committing to certain major steps such as land policy reform or bilateral investment treaty negotiations. It is not unreasonable to look at the government to signal in some significant fashion its desire to be part of the APEC by implementing substantial economic reform.

These perceptions of India’s past stances are based on its behaviour in binding negotiations such as the Doha Round of the WTO. Domestic attitudes about trade, as well as bureaucratic and corporate resistance, have so far made it difficult for India to achieve the scope and pace of reform that would benefit India and its economic partners. Access to APEC’s processes and best practices would help India’s bureaucracy deal with their obstructions. In fact, participation in APEC will over time help India achieve the major policy reforms that India has said it wants. More importantly  APEC is a non-binding forum, and while a consensus of all members is always the goal, some initiatives proceed with a limited consensus of some members. The APEC is a process not a destination And as a non-binding forum for discussion and consultation, it is designed to be flexible even as it holds out the very ambitious goal of pan-regional economic integration.

Making the accomplishment of specific reforms a condition for APEC membership is not consistent with the APEC’s history or character. Throughout its history, the APEC has included economies that have varied widely in their size, stage of development, and trade policy orientation. China was an APEC member for 10 years before making the reform commitments that brought it into the WTO. When Vietnam joined, its economy and policies were very different from those of most APEC members. Now, it is a TPP member. One of APEC’s most important contributions has been to assist the gradual opening of emerging economies. Major policy changes have not typically been pre-conditions for APEC membership.

US was the only major country that did not want India’s entry to forum but now that also watered down after US Congres brought a bill to this effect.The legislation notes that the US-India partnership is vital to the US strategic interests in the Asia-Pacific region and across the globe, and is an integral aspect to the Administration’s Rebalance to Asia. It opens opportunity for India to become part of APEC in near future.

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Accrual Accounting System vs Cash Accounting System:

While cash accounting recognises a transaction only when money changes hands , accrual accounting recognises the transaction at the time it is made, thereby providing more current snapshot. The fourteenth Finance Commission strongly recommended for adoption of accrual based accounting system. It is a means to an end, the end being reforms in public financial management and therefore greater accountability and a greater need for operations of the government to be on commercial lines. The method according to the experts, provide a more accurate picture of the company’s financial position. However it is more complex accounting system than cash accounting which the government uses currently and so is more expensive and time consuming to implement.

Need for Accrual based accounting system:

  1. Accrual accounting is useful in some specific cases such as comparing the cost of public hospitals with private hospitals, for example and in ascertaining why the government is so uncompetitive and why the private players are in a better position.
  2. Budget heads of accounting needs modernisation. The present classification system goes back to around 1974. It has undergone some minor changes, nothing major. What’s happened is that with the greater complexities of the government’s fiscal operations, the need for greater transparency of information and its correct depiction has also become very, very important. A report by the Comptroller and Auditor General of India had found that the archaic classification system had resulted in 11 heads of government spending where more than 50 per cent of the expenditure had no details of how and where the money had been spent. They had simply been classified as ‘other expenditure’. This classification system, called the Chart of Accounts, is like the DNA of the budgetary system.

Challenges in Implementing Accrual based accounting System :

  1. Its relevance to certain departments becomes crucial but most government departments and ministries are policy-oriented ministries. So what if you knew about their assets and liabilities? Accounting information must have relevance.
  2. Another issue with adopting accrual accounting is the cost and time involved. “There are heavy costs involved. Also, experience shows the timeframe for implementation is around 10-15 years for a government of our size. And then there is the issue of the states. If the Centre moves to the accrual system, what happens to the states? Do you have a dual set of statements? Or will you get all the states on board?
  3. In India, our focus isn’t so much to run fiscal surpluses, which may be the focus, say, in Australia but because of our other social sector priorities and heavy subsidy element; our focus is on balancing the budget somehow or the other and remaining within fiscally prudent levels of deficit


The Controller General of Accounts has asked the government to be careful in adopting the accrual method of accounting considering the costs involved as only a few of its departments can benefit. We should tread this subject in a careful manner. There is no such thing as a big-bang approach. And even if you’ve heard of some advanced countries that have made this transition, like Australia, New Zealand, South Africa, UK, you must understand that the background to the introduction of accrual accounting was not that it was an end by itself.

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