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Comprehensive Coverage on Economics - Insolvency and Bankruptcy Code (in Hindi)
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Comprehensive coverage on economics In this lesson we discussed - insolvency and bankruptcy code 2016 and it's amendments

Komal Shekhawat
Written two UPSC Mains (2017-2018) love to teach and learn.

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  2. INSOLVENCY AND BANKRUPTCY CODE Why in news? One-year data on implementation of the Insolvency and Bankruptcy Code (IBC) since December 2016 till December 2017, detailing cases filed, resolved and under-process, was released recently. Further, the President promulgated the IBC (Amendment) Ordinance 2018 in the first week of June.

  3. OOcreditors O strategic bankruptcy, rehabilitationConsumer Protection BANKRUPTCY tinanciald business ebt restructuring law administration dets

  4. FRAMEWORK OF IBC (Regulator) (Adjudicators) Insolvency and Bankruptcy Board of India National Company Law Tribunal: For corporate entities such as companies, LLPs etc. Insolvency Professional Agencies (IPAs); Insolvency Resolution Professionals (IRPs); Information Utilities Debt Recovery Tribunal: For non-corporate entities such as individuals, partnership funds etc

  5. Why is it a Code? IBC consolidates various laws, regulations and rules concerning and classifies insolvency, bankruptcy and liquidation of non-financial entities, systematically and comprehensively. Since a 'Code' is a compendium of laws, thus, IBC becomes a code, than just being a law.

  6. Insolvency: Inability of an entity to pay its bills as and when they become due and payable Bankruptcy: Situation when an entity is declared incapable of paying their due and payable bills Liquidation: Process of winding up a corporation or an incorporated entity

  7. Details of the report card Out of 4,738 applications submitted, 2,750 cases were disposed of either because parties had settled these outside the process or because these lacked sufficient grounds for admission. . Of the remaining 1,988 cases, only 540 cases were admitted for resolution at the end of December 2017, and the rest remained pending of these, only 1.9% were resolved by the end of December 2017: 5.9% cases went for liquidation corporate debtors initiated the proceedings in 20% of the admitted cases. .

  8. Hits and misses of IBC .One main objective of the maximum time limit of 270 days for resolution, was to enable banks to pressurize debtors for recovery or resolution but it was found that out of 540 cases admitted, nearly only one-third were filed by financial creditors (banks and other financing institutions .Operational creditors (vendors, supplies, employees etc.) are opting for IBC because: - It offers credible warning to the corporate debtors These creditors, mostly small or mid-sized dealing with bigger enterprises, operate on a credit cycle and missed payments hurt them bad

  9. In 11 out of 12 cases, referred to the NCLT (as expedited by the RBI), the deadline of 270-days has already passed with on action .

  10. Provisions of IBC (Amendment) Ordinance 2018 Home buyers would be treated as financial creditors and shall have the right to be represented in the Committee of Creditors (CoC) 'Related party' now defined in relation to the individual as well, in addition of the company only previously, to bar it from bidding under the resolution process Vote share changes: CoC to decide on extension of insolvency process beyond 180 days to 270 days and for appointment of IP by 66% vote share (from earlier 75%); other decisions can be taken by 51% vote (it was 75% earlier). The process can be withdrawn altogether by 90% vote share . .

  11. .Via IBC (Amendment) Ordinance, 2017, issued on November 23, 2017, the government introduced Section 29A to stop promoters and defaulters from bidding for companies undergoing resolution and also from submitting resolution plans IFC, a member of the World Bank Group, will support the Insolvency and Bankruptcy Board of India (IBBI) in strengthening the implementation IBC 2016

  12. Suggestions mooted CVC (Central Vigilance Commission) guidelines should not be applicable to the IBC cases, to hep PSB officials take bolder decisions In the regime prior to the IBC, many tax and other exemptions were available to make the stressed assets lucrative for the buyers similar provisions can be provided under the IBC. .


  14. Role of Regional Rural Banking for Rural Development: . Taking the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas. .Making available institutional credit to the weaker section of the society who had by far little or no access to cheaper loans and had perforce been depending on the private money lenders. .Mobilize rural savings and channelize them for supporting productive activities in rural areas. Provide finance to co-operative societies, Primary Credit societies, Agricultural marketing societies. .Generating employment opportunities in rural areas and bringing down the cost of providing credit to rural areas.

  15. Challenges faced by RRBs . Difficulties in Deposit Mobilisation: On account of their restrictive lending policy which excludes richer sections of the village society, these potential depositors show least interest in depositing their money with these banks. .Slow Progress in Lending Activity: It is always difficult to identify the potential small borrowers Most of the small borrowers do not like the bank formalities and prefer to borrow from the informal sources of finance - .Urban orientation of their staff which is rarely inclined to serve in rural areas

  16. GOVERNMENT OWNED NBFCS Why in news? Reserve Bank of India (RBI) recently ended the special dispensations granted earlier for non-banking financial corporations (NBFCs) owned by the government.

  17. The Capital Adequacy Ratio (CAR) also known as capital-to-risk weighted assets ratio is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems around the world Two types of capital are measured Tier one capital It absorbs losses without a bank being required to cease trading Tier two capital it absorbs losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

  18. Tier One Capital + Tier Two Capital Risk Weighted Assets CAR =

  19. Background The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs. . The Reserve Bank can regulate and penalize NBFCs for violating the rovisions of the RBI Act or the directions or orders issued by RBI unde the RBI Act. Earlier, only privately owned NBFCs had to maintain a minimum Capital to Risk Assets Ratio (CRAR) of 15 percent if Tier-1 capital is 10 percent. .

  20. Q) Consider the following statements about Non-Banking Financial Company (NBFC) 1. An NBFC can accept Demand Deposits 2. An NBFC is a part of the payment and settlement system Foreign investment is allowed up to 100% Which of the above statements is correct? a) 1 only b) 1 and 2 c) 3 only d) 1, 2 and 3

  21. Non-Banking Financial Company (NBFC) .It is a company engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority. Foreign investment is allowed up to 100%. Difference between NBFCs & Banks: .Provides Banking services to People without holding a Bank license, An NBFC cannot accept Demand Deposits, An NBFC is not a part of the payment and settlement system and as such, . An NBFC cannot issue Cheques drawn on itself, and Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.) An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-Purchase, Construction of Immovable Property

  22. Putting in place a Board of management has to be one of the mandatory licensing conditions for licensing new UCBs and expansion of existing ones To operate as a multi-state UCB, the minimum capital requirement would be Rs 100 crore.

  23. Significance of the decision Relaxation of dual control: UCBs currently face regulation by both the RBI and the respective State governments. By turning into SFBs, they will be regulated only by the RBI. Risk posed to the system: Some UCBs have acquired the size akin to commercial banks and could pose a risk to the system due to their scale and complexity of business

  24. In case of commercial banks, the present regulatory and legal framework provides reasonable power to RBI for an early resolution which is not the case with UCBs given their weak regulation. In view of this, the time was opportune to reflect on the appropriate size up to which a UCB may be allowed to grow without undue risk to the system.

  25. Q) Consider the following statements about Small Finance Banks: 1. The minimum paid-up equity capital for small finance banks shall be Rs. 2. They are required to extend 100 per cent of its Adjusted Net Bank Credit 50 crore. (ANBC) as priority sector lending (PSL) by the Reserve Bank Which of the above statements is correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

  26. The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore. They are required to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) They are required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.

  27. KRISHI KALYAN ABHIYAN Why in news? Recently Krishi Kalyan Abhiyan was launched by Ministry of Agriculture and Farmer Welfare.

  28. More about the Abhiyan . It was launched with an aim to aid, assist and advise farmers to improve their farming techniques and raise their income. It has been launched from 1 st June 2018 till 31st July 2018 during which various activities to promote best practices and enhance agriculture income will be undertaken in accordance with an action plan formulated by including various departments of the Ministry such as Department of Agriculture, Cooperation & Farmers Welfare (DAC&FW), Animal Husbandry Dairying & Fisheries (DAHD&F) etc. .

  29. FIRST FREIGHT VILLAGE Why in news? India's first freight village is being developed in Varanasi

  30. Q) Consider the following statements about Jal Marg Vikas 1. The project envisages the development of waterway (for commercial navigation) between Allahabad and Haldia on Ganga The project covers Uttar Pradesh, Bihar, Jharkhand and West Bengal. 2. Which of the above statements is correct? a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2

  31. IMPACT OF CHINESE GOODS ON INDIAN INDUSTRY Why in news? The Parliamentary Standing Committee on Commerce tabled a report titled "Impact of Chinese goods on Indian industry" in Rajya Sabha.

  32. Major items imported into India from China % of total imports from China 32.02 Electronic products Nuclear reacters, boilers and parts Organic chemicals Fertilisers Iron and steel Plastic and articles thereof Photography apparatus Ships and boats Iron and steel articles Vehicles other than railways 17.1 9.83 5.3 3.82 2.74 2.09 2.05 1.92 1.81

  33. Highlights of the Report .Numerous anti-dumping investigations have been initiated against China; also majority (i.e. 102/144) of the enforced anti-dumping duties are against Chinese products. All the industries affected by the dumping are not able to reach Directorate General of Anti-Dumping and Allied Duties (DGAD) on account of high cost involved in moving the applications. . .Delayed action in the part of DGAD causes permanent damage to the industry in question, leaving little or no scope for remedial measures.

  34. Chinese exports largely constitute manufactured products related to expanding sectors such as telecom and power (while Indian exports to China are primary products largely) Support by the Chinese government e.g. export rebate, state-owned enterprises, tax discounts within the provinces. Currency manipulation for export competitiveness Non-transparent trade policy, unfair trade practices such as exports subsidies that are against the WTO regulations. Robust and integrated global value chain along with leveraging of economies of scale. .

  35. Recommendations of the Report Governmental should provide financial assistance to recognized industry forums to improve the access of MSMEs/SSls to trade remedial measures. Creation of a DGAD platform for continuous dialogue with the Indian industry on WTO non-compliant subsidies. .Shortening of time period for investigations and notifications. Stringent implementation of anti-dumping framework, to check smuggling, misclassification and other trade malpractices. Augmentation and strengthening of the Directorate of Revenue Intelligence (DRI) workforce.

  36. Working out a formal arrangement with China, to avail price and other relevant information on imports suspected of under invoicing for Indian Customs administration. . .Better enforcement of FTAs and Rules of Origin norms by a joint verification/ certification mechanism with the partner countries. Study of the likely impact of the tariff concessions under ongoing RCEP negotiations on our domestic industry, to ensure zero cost to Indian industrial health Easing of the restrictive and discriminatory clauses being faced by the Indian Industry in public tenders and implementation of Public Procurement (Preference to Make in India), Order 2017 in spirit. State governments should also be sensitized in this regard. .

  37. Necessary and immediate review of the existing inverted duty structure. Production subsidy or incentives should entail government tariff protection, to match the Chinese assistance so that our domestic production gets a real boost. Constitution of steering committee to oversee the revival of the API industry, including reviving PSUs like IDPL and Hindustan Antibiotics, especially at the time when many APls units in China are closing due to strict environment norms there . .To protect the solar industry, ADD may be levied in a differential manner to facilitate level pegging for domestic industry

  38. Recent creation of an integrated single umbrella National Authority, namely, Directorate General of Trade Remedies (DGTR) will be effective in providing comprehensive and swift trade defence mechanism in India. . .Measures have been taken to increase the efficacy of Risk Management System (RMS) to tighten the inspection infrastructure at the entry points. Introduction of the GST will help in business efficiency, better record-keeping infrastructure, easier audits and controls and creation of uniform market across the country. India needs to stay firm on its non-MES status stand to China at the WTO to ensure protection to its domestic industry. . .

  39. Present status of Non-Performing Assets Gross non-performing assets (NPAs) with the banking rose to ever time high 11.6% in March 2018. Around 85% of these bad loans were with the PSBs. The GNPA for PSBs stands at 15.7%. PSBs condition is particularly bad as compared to private banks because they have to lend under various government objectives and under the compulsion of social banking. The Reserve Bank of India has already warned that the gross NPA ratio of scheduled commercial banks could rise to 12.2% by March 2019. .

  40. AMC/AIF led resolution approach Under this, loans above Rs.500 crore would be resolved through an independent asset management company (AMC) which would be funded by alternative investment fund (AIF) AlF would raise funds from foreign and institutional investors. Banks may also invest if they wish. Besides, AlFs can also bid for assets in NCLT. The price discovery of these NPAs will be through open auction by the lead bank in which asset reconstruction companies (ARCs), AMCs and other investors can participate.

  41. Benefits It will ensure the operational turnaround of the banks and stressed companies and help retain and recover the asset value. The plan doesn't involve government interference as it would entirely be led by banks. Also, it does not require any law to be enacted. All provisions comply with existing regulation of banking sector. Hence it will speed up process of resolution. . It is seen as an effort to create a market for assets which is commendable.

  42. ARCs are low-capital institutions. They have to mobilize resources for large scale NPA resolution. But only a few investors have come in so far. ARCs are smaller institutions compared to banks and depend on people's investment. If that money is to be used for buying stressed asset they will be answerable to public. The issue of price at which the banks should transfer the assets to ARCs has always been contentious. There often is a mismatch between the price quoted by bank and the ARCs. .

  43. Significance of Municipal bonds Can Solve financial woes of Indian cities: These can be the solutions to the financial issues of Indian cities which, according to Isher Judge Ahluwalia Committee in 2011, require Rs. 40 Trillion at constant prices over next 20 years. .Leverage future cash flows to finance capital expenditure: As per CARE rating estimates, large municipalities in India could manage to raise Rs 1000 crore to Rs 1500 crore every year by issuing municipal bonds.

  44. Prerequisite for effective issuance as per 'Guidance on use of Municipal Bonds' issued by Ministry of Finance in 2017 Financial Discipline and information disclosure: accounting discipline, quality of financial reporting and periodicity of information dissemination and disclosures by ULBs are key demands for long term investors. Ring Fenced Projects: this along with approved DPRs help build investor confidence.

  45. Way forward As bonds have to be repaid through cash flows, the urban governments should strengthen their own revenue base from other sources as well, such as property tax reforms and user charges. .Money raised from the bonds should not be diverted for other purpose:s as done earlier by several State governments in their projects.

  46. India would need policies to reduce the risks in municipal bonds, following model can be adopted for this: Japan provided a sovereign guarantee to Japan Financial Corporation for Municipal Finance. The Development Bank of South Africa uses its balance sheet to support municipal bond issues. Denmark uses pooled finance/ joint bond issue mechanism to protect bondholders in case one city in the pool defaults. (Some cities in Tamil Nadu and Kerala experimented with this) kerala experimented with

  47. GOVERNANCE/ INSTITUTIONAL MUNICIPAL BONDS: CONSTRAINTS FACED BY ULBS Multi-institutional coordination Weak institutional capacity in Urban sector limiting ULB capacity as well as effciency implementation in project implementationm Higher implementation risks Limited powers for ULB to implement revenue reformsin a multi-institutional setup for project designing and for big ticket projects especially FINANCIAL wAbsence of a formulaic transfer Delay in timely audit of accounts e Inadequate own revenue base a Limited visibility on the of grants from State (in mostdue to capacity constraints at of the ULBs) Short term planning horizonWeak information and reporting ULB & Local fund audit levels buoyancy of own revenue s Over reliance on capital grants for capital works Underdeveloped Financial management practices Higher Transaction costs s Ineffective ecosystem to systems promote municipal bond-Lack Weak Institutional capacity to of incentives to promote bondmanage the incidental actions issuances associated with Municipal Presence of multiple channels/bond issuance institutions for direct lending Underdeveloped financial and (vis-a-vis capital markets) accounting system Lack of Stability in Top Management

  48. FRAMEWORK FOR BOND MARKET DEVELOPMENT Why in news? SEBl has proposed a new framework for bond market development in India

  49. Benefits This move will create the right structure for future borrowing and the financial system will emerge stronger than before. This will reduce reliance on banks for financing corporate which are reeling under bad debts and simultaneously develop a liquid and vibrant corporate bond market. . .By starting off with AA-rated companies, SEBI has ensured that there is minimum risk of default. It will make India par global practices where bond markets dominate and banks are investors in this market. Bonds are an ideal tool for financing long-term infrastructure projects, and can thus help to fill the region's infrastructure investment gap. .

  50. Foreign Direct Investment in an LLP is also allowed and it can be in the form of capital contribution or by way of acquisition of profit shares. Owing to flexibility in its structure and operation, it is useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. It is governed by the provisions of the Limited Liability Partnership Act, 2008. .

  51. The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate. Central Government also has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose. Registrars of Companies (ROC) is appointed under Companies Act and is under Ministry of Corporate Affairs. Its primary duty is to register companies and LLPs under respective states and UTs an ensure their compliance with statutory requirements.

  52. Benefits The scheme will avert the need for going to moneylenders for money before every crop season and help rid of debts over the 4-5 years. The government will issue cheques rather than make Direct Benefit Transfer (DBT) which eliminates the possibility of banks adjusting DBT money against farmers' previous dues. . It can be the template for social and agricultural policy. It is seen as a trial for universal basic income in the country

  53. Challenges/ Drawbacks Lack of proper land records resulted in many farmers left out of the scheme. Several cheques have been returned due to discrepancies in names or survey numbers. The scheme does not exclude rich farmers and wealthy landlords. The scheme does have a provision under which cheques can be returned to the local authorities. But that provision is only voluntary The scheme leaves out tenant cultivators which constitutes an estimated 40% of Telangana's farming population and mostly coming from the poorest and most disadvantaged backgrounds

  54. About Universal basic Income (UBI) It is an unconditional cash transfer to every citizen of the country periodically.

  55. Arguments Against UBl .Conspicuous spending: Households may spend this additional income on wasteful activities or on temptation goods like alcohol, tobacco. Moral hazard: A minimum guaranteed income might make people lazy and opt out of the labour market. Gender disparity induced by cash: Men are likely to exercise control over spending of the UBI which may not always be the case with other in-kind transfers. Fiscal cost given political economy of exit: Given the large population size, the fiscal burden on government would be high. Also, once introduced, it may become difficult for the government to wind up a UBI in case of failure. .

  56. CRISIL DRIP INDEX Why in News? Recently, CRISIL release its rainfall parameter index also known as DRIP (Deficient Rainfall Impact Parameter) Index.