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Monday, January 21, 2019

The rise of government-funded health insurance in India

by Harleen Kaur, Ila Patnaik, Shubho Roy and Ajay Shah.

The National Health Protection Scheme (NHPS) announced in the Budget 2018-19, targets providing affordable health care to 100 million poor households in India. It is arguably the world's largest health insurance scheme and an indicator of transformation of the role of government from being a health care provider, to that of a health care financier. Before independence, India focussed more on public health through interventions like water supply, sanitation and vaccination than providing health care through hospitals. The reorganisation after independence was a result of policy changes that merged public health and health care responsibilities within the same officers of the government, the doctors. A remarkable development in the field of health policy in India is the rise of government funded health insurance programs.

These programs feature purchases of health care services from private health care providers health insurance from health insurance companies. In a recent paper titled, The rise of government-funded health insurance in India, we discuss the history of health policy in India in three phases; pre-independence British India, independent India until the 2000s and independent India after 2000s, to understand the factors contributing to the shift in the health system of the country.

We offer fresh insights into these developments by placing them in a historical perspective. The roots of Indian health policy lay in British India, which laid the foundations of public health. This was done after the Royal Commission of 1859 was set up to investigate the health status of the army in India. The Royal Commission studied not just the army, but the civilian population as well. By and large, their emphasis was on public health and not on health care. The findings of Royal Commission can be summarised in two quotations:


  1. The need for public health rather than health care
  2. "Native hospitals are almost altogether wanting in means of personal cleanliness or bathing, in drainage or water-supply, in everything in short, except medicine."
  3. The need for interventions outside of soldiers
  4. "The health of the English army is indissolubly associated with the health of the population of the country which it occupies"

The legislative and institutional apparatus that was established in British India involved a prime focus upon public health, and a major role for sub-national governments (states, cities). When the Constitution of India was drafted, it largely reiterated this design.


The changes after independence came from two sources; the shift of power to the union government, and adoption of the Bhore Committee report. While the Constitution envisioned a federal arrangement, in practice, power shifted to the union government after independence. The union government designed programs, and financed state governments to implement these programs. There was a consequent atrophying of policy thinking and execution at the state and local government level. This had an impact on many aspects of public policy in India. In the present context, there was an adverse impact upon public health, as a large part of the field of public health consists of local public goods.

The Bhore committee report shifted focus from public health to health care, and gave a leadership role to doctors in health policy. It was adopted by independent India and became the gospel for health system thinking in India. There is an interesting tension in Bhore Committee report, between its recognition of the need for public health as a distinct problem from health care:

 The health services may broadly be divided into (i) those which may collectively be termed public health activities and (ii) those which are concerned with the diagnosis and treatment of disease in general.

versus its emphasis on health care:

Preventive and curative health work must be dovetailed into each other if the maximum results are to be obtained and it seems desirable, therefore, that our scheme should provide for combining the two functions in the same doctor in the primary units. (Emphasis added).


This document was accepted into the thinking of the Planning Commission, and translated into schemes and outlays in the following decades. There was a large scale attempt at building a public sector health care system.

For many decades, this induced the main paradigm of Indian health policy: an emphasis on health care at the expense of public health, weaknesses in local government, a big role for the public sector in the production of health care, and domination of doctors in policy thinking.

This approach worked badly. By the early 1980s, some policy thinkers began questioning this framework. By the 1990s, a great deal of evidence and literature had accumulated, that criticised this approach. Weaknesses in public health were giving a high disease burden. Alongside this, the public sector health care system was not effective. An unregulated, private sector health care system sprang up, to respond to the requirements of the citizenry.

While the mainstream health policy establishment proposed intensification of effort within this paradigm, by spending more money on it, politicians became increasingly concerned that the paradigm was delivering poor results. On the ground, it was apparent that private sector health care was the dominant feature of Indian health care.

This led to the ideas of public funding for the purchase of private health care, implemented through health insurance companies. This approach was attractive as it appeared to more directly translate fiscal outlays into tangible benefits for citizens. This policy innovation, which began in Maharashtra in 1997, spread rapidly across the country. By early 2018, there were 48 Government Funded Health Insurance Schemes (GFHISs).

We argue that there are four areas of concern with this approach. The first problem is the lack of emphasis on public health. The most effective public policy interventions in health are the public goods of public health, which were introduced in the British period. It is an incorrect strategy to have a high disease burden in the first place, and then build a curative layer on top of it. It is better to clean the air than to produce health care services for sick residents.

The second concern is about the conduct of the largely unregulated private health care sector, which yields poor outcomes for citizens. This calls for establishment of a regulatory strategy for the health care industry.

The third concern is about the weaknesses of consumer protection and micro-prudential regulation of health insurance companies, which yields poor outcomes for citizens. This calls for reforms of the regulation of health insurance companies.

Finally, there are important fiscal risks in this journey. Once voters get used to entitlements, they are politically difficult to withdraw. Population-scale health care is expensive, particularly in the context of weaknesses in public health which are giving a high disease burden. This is analogous to the field of pensions, where decisions about pension reforms need to be made only after estimating the implicit pension debt over 75-year horizons. There is a need for greater fiscal analysis, and caution, in the construction of government programs in health which make promises to households about future health care expenditures.


The authors are researchers at the National Institute of Public Finance and Policy.

Wednesday, January 16, 2019

A Maximalist Approach to Data from the IBC

by Adam Feibelman and Renuka Sane.

Under the new Insolvency and Bankruptcy Code, the Insolvency and Bankruptcy Board of India (IBBI) has a statutory responsibility to collect, maintain, and disseminate data about the new insolvency and bankruptcy system. The Board has taken a number of preliminary steps to perform this responsibility. It has developed a user-friendly web site where it posts regulatory materials, orders issued by tribunals and courts, and directories of insolvency professionals and insolvency professional agencies. It has also begun reporting various aggregate and case-level data about the system in its quarterly newsletter. These efforts are an important start and reflect that the Board values data, but they represent only a portion of the relevant and useful data that is, or might be, generated by the system and that could be made available to the public.

In a recent paper, A Maximalist Approach to Data from India's New Insolvency and Bankruptcy System we propose that the Board, along with the Tribunals, that are adjudicating authorities under the Code, take a maximalist approach to data about the new insolvency and bankruptcy system. Gathering and disseminating data about the system may seem like a regulatory function of secondary importance. Yet the availability of comprehensive, reliable, and standardised data about the new system is essential for many purposes and very useful for many others. As others have noted, implementation and reform of the insolvency and bankruptcy is very much a work in progress. Without useful data, regulators and public observers cannot reasonably assess how the system is performing or determine what effect it may be having on its stakeholders and on the broader society. Such data can also provide a uniquely illuminating window into the economy, highlighting economic, financial, and social trends and potential micro and macro vulnerabilities.

Our paper emphasises the institutional responsibility the Board and the Tribunals have to gather and disseminate data about India's new insolvency and bankruptcy system. It also underscores the great opportunity these institutions have to provide a model for transparency about the functioning of the Indian legal system and to gather extremely useful information about the financial vulnerabilities of citizens, households, retail and commercial lenders, and the broader economy.

The American experience

To help frame some of the issues that the IBBI and the Tribunals will face in crafting policies about data collection and dissemination, our paper summarises the evolution of approaches that policymakers in the United States have taken with regard to bankruptcy data and describes some of the research utilising this data.

For most of the history of bankruptcy law in the U.S., bankruptcy petitions and supporting documents have been public documents; as of 2001, those documents and case docket information have been available electronically over the internet for a fee, with limited exceptions for personal information. For many decades, the Administrative Office of the U.S. Courts was charged with reporting very basic aggregate data about bankruptcy cases. Debates over bankruptcy policy and major reforms in 1978 revealed, however, that available information about the system was insufficient to shed meaningful light on key questions of policy and practice.

Over the last two decades of the Twentieth Century, scholars and other commentators who were engaged in empirical study of the U.S. bankruptcy system began drawing attention to the need for more and better bankruptcy data and statistics. In 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, a major reform to the personal bankruptcy laws, the U.S. Congress significantly augmented the responsibilities of the Administrative Office of the U.S. Courts for gathering and reporting data about bankruptcy cases as well as the data collection function of bankruptcy trustees. The aggregate statistics collected and reported by the Administrative Office of the U.S. Courts now provide an essential baseline set of information about the broad scope and trends of the operation of the U.S. bankruptcy system.

However, researchers continue to have concerns about the reliability of this aggregate data. Furthermore, the aggregate statistics provide rough and imperfect information about the determinants of financial distress, details of the operation of the bankruptcy system, or the impact of that system on debtors, creditors, and other stakeholders. The most useful bankruptcy data still appear to be the case-level public documents, especially the petitions and supporting schedules that debtors themselves submit, and qualitative data derived from interviews, surveys, and questionnaires. Studies utilising such approaches have explored the determinants of household, and corporate financial distress, outcomes of corporate reorganisations, the role of hedge funds, and the function of bankruptcy for entrepreneurs.

Research involving these types of data is inevitably costly and time consuming, and it can be difficult to replicate and evaluate. The American experience thus illustrates the value of relevant and reliable aggregate data and the essential need for useful case level data, but it also reflects how efforts to gather such data and make it available raise complicated issues of policy and practicality.

Thinking about data collection in the IBC

Turning to the IBC, the paper suggests that the initial challenge in this regard is identifying precisely what types of information about the new system would be useful for policymakers, stakeholders, and researchers, who should be collecting the data, the need for assuring reliability and uniformity of the data that is collected, and finally access to the data.

What data to collect?

We distinguish between three kinds of useful data about the IBC:

  • Basic procedural data about cases brought under the Code provides an essential core of information about how the system operates. This data certainly includes the number of applications filed under each chapter of the Code in each jurisdiction, as well as more specific information about procedural events through the life-cycle of the case.
  • Data about the primary stakeholders in the system
    includes information on the type of debtors in the system, the nature of their debts and assets, and the characteristics of their various creditors. It also includes information about which parties initiate cases under the Code.
  • Data about the institutions and repeat professional actors within the system. Chief among these are the tribunals and their judicial officers, as well as the functioning of other pillars of the institutional machinery such as the insolvency professionals, the information utilities, and the Board itself.

Who should collect the data?

The Tribunals are well-positioned to gather and disseminate comprehensive aggregate statistics or case-level data about the cases they handle. Yet they have not traditionally performed that role. The Board can also gather and disseminate aggregate or case level information without cooperation from the tribunals, but it must rely on information provided to it by insolvency professionals and insolvency professional agencies. This may be a more cumbersome process in general, but the Board is likely in a better position to gather data about many aspects of cases that are conducted or managed by the insolvency professionals. Given that they likely have overlapping and complimentary capacities for gathering and disseminating data, it would be ideal for the Tribunals and the Board to cooperate or coordinate their efforts to make data timely, accurate, uniform, and easily accessible and usable.

Functionality of the data

The data gathered by the Board and the Tribunals needs to be reliable and consistent. This requires, among other things, systems for recording and retrieving information about procedural aspects of cases filed under the Code, forms designed to facilitate the extraction of data, and careful definition of terms employed in court documents and proceedings. The Board and the Ministry of Corporate Affairs have promulgated some model forms for use within the system. It is not currently clear how well these forms are generating useful data. It may also be the case that other forms are necessary to capture and generate important data from the system.

Access to the data

Policymakers must decide the scope of access it allows to such data. The most liberal approach would be to make data publicly available on an electronic database similar to the PACER system in the United States. Any policy in this regard must balance concerns about privacy with the benefits of widely available data about India's new insolvency and bankruptcy system.

Conclusion

In conclusion, we propose that the Board conduct or allow a study of cases brought under the Code to assess, among other things, what information the new system generates or might generate; how its model forms are utilised and the quality and uniformity of the data they reflect; whether other areas of practice warrant similar model forms; and how the data generated by the system can be most fruitfully assembled and disseminated.

 

Adam Feibelman is Sumter Davis Marks Professor at Tulane Law School. Renuka Sane is an Associate Professor at the National Institute of Public Finance and Policy.

Friday, January 04, 2019

Pick your poison: Money bill privilege or government shutdown?

by Pratik Datta and Radhika Pandey.

On January 2, 2019, the government introduced a bill in the Lok Sabha to amend the Aadhaar Act, 2016. Once again, the opposition is up in arms. Once again, there are apprehensions that this amendment bill will be certified as a money bill to avoid the opposition parties in the Rajya Sabha. In a parallel development, Jairam Ramesh filed a review petition against the Puttaswamy decision last week. The majority of the judges in that case had upheld the enactment of the Aadhaar Act, 2016, as a money bill. They refused to let judicial review be used as an institutional check to prevent abuse of money bills by Lok Sabha. The lone dissent was by Justice Chandrachud, who referred to such abuse as a `fraud on the constitution'. Ramesh's review petition now seeks to reopen this issue.

In this backdrop, this post revisits the basics to better appreciate the rationale for the Lower House's money bill privilege. In doing so, we highlight two extreme constitutional designs to overcome a common problem - how to decide on the funding for government agencies?

The problem

All government agencies need funds to function. These funds need to be appropriated from the state's finances every year. In liberal democracies, this funding decision cannot be left to unelected executives. Instead, the citizens through their elected representatives should have a say in this - should funds be released to the government? If so, how much? Consequently, the legal mechanism for such annual appropriation requires the citizens' elected representatives in the legislature to pass an appropriation bill into a law. In India, money bills perform this critical function (see Article 110(1)(d)).

In a bicameral legislature, an ordinary bill becomes a law usually after it is approved by the Lower House, the Upper House and the President. If the bill fails to receive approval from any one of them, it does not become a law. In that event, the prior law continues. Life moves on. Not so for an appropriation bill (or money bill in India). Failure to enact such a law would result in a funding crunch, potentially causing a government shutdown.

Solutions

There are broadly two different ways of resolving this problem.

The simpler solution is to leave it to negotiation among politicians in the Lower House and the Upper House, and the President. This option is costly because of coordination and hold-up costs. And till the negotiated solution is reached, the government remains shutdown, wasting huge public resources.

An alternative solution is to reduce the number of approvals needed to enact an appropriation bill into a law. The Lower House, being directly elected, could be empowered to enact an appropriation bill into law without any approval from the Upper House and the President. However, there is a flip side to this arrangement. The Lower House could abuse this privilege by camouflaging ordinary bills as appropriation bills to avoid opposition from Upper House and the President. Consequently, this arrangement may resolve the government shutdown problem at the cost of diluting the sanctity of the bicameral legislature itself.

Interestingly, the efficacy of these two different solutions are currently being tested in one of the world's oldest democracies - the USA - and the world's largest democracy - India.

USA

The American federal government has been partially shutdown since December 22, 2018. This is the 3rd shutdown of the US federal government in 2018 and the 21st in American history. However, this is the first shutdown of any significant length since 2013, when the government was shut for 16 days. Such government shutdowns arise out of failure to enact appropriation laws.

Under the American constitution, the House of Representatives (Lower House) alone can introduce an appropriation bill. The Senate (Upper House) cannot do this. An appropriation bill passed by both the Lower House and the Upper House must also be approved by the President to become an appropriation law. A direct consequence of this constitutional design is that either the Upper House or the President could block an appropriation bill, starving the federal government of funds. Further, the Anti-deficiency Act prohibits American executive branch agents from authorising expenditures or obligations in excess of the amount appropriated by Congress. Consequently, failure to pass an appropriation law results in government shutdown in the USA.

The ongoing shutdown started when President Trump refused to approve the appropriation bill for the budget for the current fiscal year that began on October 1, 2018. The President refused to approve the bill since it did not provide necessary funds for building the wall on the US-Mexico border. There are now two options to break this deadlock. Either, the proponents of the budget could negotiate with the President to get his approval on the appropriation bill. Or, the bill could be enacted even without President's approval, if a super-majority (ie. two-third) in each House approves the bill.

Both these routes require hard bargaining and trade-offs by Congressmen across party lines. The reason America accepted this cumbersome constitutional design is possibly best captured in Alexander Hamilton's following observation: "[t]he injury that may possibly be done by defeating a few good laws will be amply compensated by the advantage of preventing a few bad ones".

India

India seems to have adopted the exact opposite position. Our constitution, as interpreted by the Supreme Court, favours having a few good laws at the cost of suffering a few bad ones. After the Puttaswamy judgment, the Indian Lower House could potentially enact any bill, appropriation bill or not, into law using the money bill route. In the process, it can completely bypass any opposition from Upper House or the President. Even judicial review is not permitted. Consequently, there is currently no institutional check on potential abuse of money bills by the Lok Sabha. If left unchecked, such abuse may very well end up being the death knell of our bicameral model of legislature. However, from the perspective of resolving government shutdowns, the Indian system is undoubtedly efficient. India never experiences government shutdowns for failure to enact appropriation laws like in USA.

Conclusion

Is this trade-off worth it? The Indian Supreme Court may soon find itself asking this question. Jairam Ramesh's review petition offers the Supreme Court yet another opportunity to revisit this critical constitutional issue.

 

Pratik Datta and Radhika Pandey are Researchers at the National Institute of Public Finance and Policy.

Tuesday, January 01, 2019

State capacity in regulation in India, 2018

29 January: Analysing the National Medical Commission Bill: Composition, Malhotra, Roy.

17 July: Building State capacity for regulation in India, Roy, Shah, Srikrishna, Sundaresan.

18 September: DEA released a draft payments law, which features significant regulatory process improvements.

30 September: MCA established a committee to review the Competition Act.

10 October: Cabinet approved the establishment of NCVET and the associated legal instrument.

22 October: IBBI released a regulation on the regulation-making process. Press release.

and there was a great debate about privacy and the new proposed privacy regulator -- the DPA -- with the Srikrishna report, their draft bill, our response to their call for comments, and Suyash Rai's article on this.

Monday, December 31, 2018

Value destruction and wealth transfer under IBC

by Pratik Datta.

India experienced a major structural change with the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). Since its enactment, India's ranking under the Insolvency head in the World Bank Group's Doing Business report has sharply risen from 136 to 103, attracting international attention. Yet, as per IBBI data, till end of September 2018, only 20% of the cases admitted were successfully resolved under IBC, while 80% ended up in liquidation. And now, even the constitutionality of IBC is under serious challenge before the Supreme Court of India for discriminating against operational creditors.

In view of these contemporary challenges facing IBC, my paper titled Value destruction and wealth transfer under the Insolvency and Bankruptcy Code, 2016 argues that many of these challenges fall within two conceptual categories - the value destruction problem and the wealth transfer problem. The paper uses the law and economics literature on insolvency to identify the potential sources of these two problems within the IBC.

Value Destruction Problem (VDP)

A well-designed insolvency law should help in correctly determining if an insolvent business is suffering from financial distress or economic distress. A business is financially distressed when total value of its debt exceeds its net present value. Insolvency law should facilitate a going-concern sale or restructuring of a merely financially distressed business. But a financially distressed business could also suffer from economic distress - the net present value of the business could be less than the total value of the assets of the business were they to be broken up from the business and sold separately (break-up `liquidation value'). In such cases, insolvency law should facilitate liquidation, whether through a going-concern sale or a break-up sale.

A poorly designed insolvency law could inadvertently push a merely financially distressed business into liquidation, causing value destruction. Value destruction could also happen due to delayed restructuring. I refer to these as Value Destruction Problem (VDP).

IBC suffers from VDP

VDP could arise under IBC. Secured financial creditors comprising the super-majority (i.e. 66%) in the Committee of Creditors (CoC) may not necessarily have the right incentives to sustain a merely financially distressed, but not economically distressed, company. This is because the secured creditors are not entitled to going concern surplus. Instead, such creditors are likely to have a stronger incentive to immediately liquidate the financially distressed company and realise the liquidation value, thus destroying the going concern surplus of the company.

To illustrate, let's consider a hypothetical example. Suppose a company has two types of creditors - secured financial creditors and unsecured operational trade creditors. It owes $100 to its secured financial creditors, $30 to its unsecured operational trade creditors, and the liquidation value ('L') of the company is $90. If the company is continued as a going concern for next 6 months, there is a 0.5 probability that in good state ('G') it will be worth $200 and a 0.5 probability that in bad state ('B') it will be worth $40. In other words, if the company is continued for the next 6 months, the expected going concern value of the company would be $ (0.5).(200) + (0.5).(40) = $120. Assuming discount rate to be zero (for simplicity), since the net present value ($120) is higher than the liquidation value ($90), the company is not economically distressed. It is only in financial distress because the total debt of the company ($130) exceeds its net present value ($120). Therefore, the value maximising option would be to keep the company going, so that both the financial and operational creditors can recover a total of $120 as against only $90 if the company is liquidated.

However, if things go well and after 6 months the company is actually worth $200, the secured financial creditors will still get only $100, the value of debt owed to them. On the other hand, if things go badly and after 6 months the company is actually worth $40, they will get the entire $40. Therefore, the expected return for secured financial creditors would be $ (0.5).(100) + (0.5).(40) = $70 - much lesser than what they would get in liquidation ($90). Therefore, the secured financial creditors comprising the CoC would rationally prefer to liquidate the company for $90, although ideally the company should have been sustained to get $120. Looked at from this perspective, IBC suffers from VDP.

L G B E(v)
FCs 90 100 40 70
OC 0 30 0 15
Sh. H. 0 70 0 35
Company's value 90 200 40 120

Wealth Transfer Problem (WTP)

When insolvency law provides cramdown powers to majority claimants to facilitate restructuring, it raises the possibility of abuse. Majority claimants in control over the restructuring of the corporate debtor may be able to advantage or disadvantage different groups of beneficiaries by structuring of the securities, contract rights or other property received by each. They could even abuse this control to derive disproportionate private benefits by transferring wealth away from the dissenting minority claimants through the restructuring plan. Wealth transfer could also happen if valuation of the corporate debtor is left to one particular class of creditors. Senior creditors have an incentive to undervalue the company's business, while junior creditors have an incentive to overvalue it. I refer to these as Wealth Transfer Problem (WTP).

IBC suffers from WTP

The IBC empowers majority financial creditors with 66% vote by value in the CoC to impose a resolution plan on the dissenting minority financial creditors as well as the non-voting operational creditors. However, it does not provide proportionate protection to dissenting financial creditors. Till October 5, 2018, IBC regulations required the resolution plan to identify specific sources of funds to pay the `liquidation value' due to dissenting financial creditors. On October 5, 2018, this minimum protection was removed. Therefore, currently there is no specific provision under the statute or regulations to protect dissenting financial creditors from potential wealth transfer by abusive use of cramdown powers by majority financial creditors.

Further, the IBC overlooks a basic distinction between restructuring and going concern sales. Restructuring, being a hypothetical sale of the corporate debtor's business to the claimants of the corporate debtor, some finite notional value has to be placed on the business of the corporate debtor. Therefore, restructuring requires a valuation benchmark, according to which the rights of each claimant in the restructured business has to be determined. No such problem arises in a going concern sale for cash to a third party after proper marketing exercise. Consequently, no such valuation benchmark is necessary for a sale transaction. However, the IBC uses the liquidation valuation benchmark to protect operational creditors in both restructuring as well as sale transactions. This creates opportunities for wealth transfer from operational creditors in sale transactions under IBC.

To illustrate, assume that a corporate debtor has entered insolvency resolution process under the IBC. It has a going concern value of $130 and break-up `liquidation value' of $110. The face value of debts owed to its financial creditors is $100 and to its operational creditors is $30. If the company is liquidated on break-up basis, then the financial creditors would get $100 and the operational creditors would get only $10. However, if the company is sold for cash to a third party at going concern value, then the financial creditors could get $100 and $30 will be left over. Applying the creditor protection rules under the IBC, the financial creditors could approve a resolution plan that provides only the break-up liquidation amount ($10) to the operational creditors and the remaining $20 to the lower claimaints like shareholders. This would effectively amount to a wealth transfer from the operational creditors. Looked at from this perspective, IBC suffers from WTP.

Conclusion

Recently, the NCLAT in the Binani case tried to solve the WTP by taking an extreme position. It held (para 48) that a resolution plan must not discriminate against dissenting financial creditors or non-voting operational creditors. This broad non-discrimination principle developed by NCLAT is problematic. It could be misused by out-of-the-money minority financial creditors or non-voting operational creditors to engage in hold-up strategies to extract a better deal for themselves, causing wealth transfer from the majority financial creditors. Additionally, an increase in hold-up costs and coordination costs could in turn result in value destruction. It is rather ironic that in a bid to resolve the WTP under IBC, the Binani ruling could end up creating avenues for further WTP as well as VDP.

Solving the contemporary challenges emanating from the VDP and the WTP under IBC would require deeper policy thinking. Indian policymakers need to take into account the root causes of these problems, as highlighted in this
paper
. Ultimately, the fundamental legislative design choices underlying IBC may need to be revisited.

 

Pratik Datta is a Researcher at the National Institute of Public Finance and Policy.

Friday, December 28, 2018

An incomplete guideline: Enabling India's health facilities to cope with disasters

by Supriya Krishnan.

Health facilities offer the first line of response in any disaster. Damage to hospitals impedes long-term recovery of victims. The recent floods in Kerala highlighted the frailty of health systems. The flood damaged a 125-year-old hospital that serves 3.5 lakh people. This was similar to the Chennai floods (2015) where 18 patients died due to a hospital power failure. The Gujarat earthquake (2001) collapsed a 281-bed civil hospital leading to 172 deaths. Such losses and lapses in health infrastructure are not a recent problem in India. Then, how are Indian states formulating plans to make their hospitals resilient?

Resilient hospitals

The governance response to manage natural disasters in India is the Disaster Management Act 2005. The Act requires state governments to formulate state disaster management plans (SDMPs) to detail how to prepare, mitigate, respond and recover from disasters (Section 23). A component of these plans is medical preparedness and mass casualty management. When both time and resources are constrained, these SDMPs are essential for knowledge transmission to enable faster decision making. We review SDMPs of Indian states to study the inclusion of guidelines for disaster management of health facilities.

We utilized two recognised guidelines for resilient hospitals to review the SDMPs: 1) WHO indicators; and 2) India's national guidelines for hospital safety. In 2010, the World Health Organization (WHO) laid down indicators for "Safe Hospitals in Emergencies and Disasters". The indicators are made for countries to assess the vulnerabilities of existing health facilities and upgrade them to ensure continuous operations. WHO organises the indicators into three assessment checklists: Structural, Non-Structural and Functional. Countries are required to adapt actions in these checklists to suit their local context and protocol.

In 2016, the National Disaster Management Authority (NDMA) India laid down guidelines for Hospital Safety. These guidelines are in line with the WHO guidelines and build upon further requirements suitable for Indian frameworks for hospitals. To ensure a fair comparison of Indian SDMPs, the global indicators that were not addressed by any Indian SDMP have been excluded from the evaluation altogether. Based on the two documents (WHO, NDMA), the following list of indicators was chosen for assessment:

  1. Structural: Indicators that enable the facility itself to withstand the shock from disasters such as design and engineering standards, location, compliance with fire codes and building materials.
  2. Chosen indicators (2): Design codes; location/ land use.

  3. Non-structural: Indicators for the smooth functioning of the facility following a crisis such as a lifeline equipment, architectural elements, service installations, handling of hazardous substances and general security of the facility.
  4. Chosen indicators (1): Safety checklists.

  5. Functional: Indicators that enable the facility to be fully operational to respond during disasters such as emergency procedures, site accessibility, communication and monitoring systems.
  6. Chosen indicators (8): Equipment and supplies; Plans for emergency and disaster: Contingency Plan, Medical Preparedness Plan, Psycho-social care and mental health, Hospital networking, Mass casualty management; Human Resources: Emergency teams, training, and drills.

  7. Others: Indicators not part of the WHO guidelines but present in most SDMPs to enable better management of health resources during a disaster.
  8. Chosen indicators (8): Mobile hospitals; Media; District level data; Capacity of facilities; Standard Operating Procedures (SOPs) of departments in charge; GIS; list of hospitals; Use of National and State Disaster Resource Network (SDRN).

We studied SDMPs of 24 states that were available in the public domain on websites of State Disaster Management Authorities or allied departments (such as the Revenue Department).  The plans were text mined for keywords related to health like "hospitals", "health", "medical" and "casualty". Each paragraph containing any of the keywords was then evaluated against the above indicators to check for actions/guidelines for compliance. For each indicator addressed, one point was assigned to that plan document. The resulting scores are tabulated in this SDMP scoreboard spreadsheet. A map of India with state scores is presented below in Figure 1.

Figure 1: State-wise scores for the inclusion of health in State Disaster Management Plans (SDMPs)

The current state of plans

A broad overview of SDMPs indicates the lack of a comprehensive framework to ensure the inclusion of relevant aspects. There are significant gaps in the style and comprehensiveness in drafting the plans. Hospitals are identified as critical lifelines but requirements for health are scattered throughout different sections for different SDMPs. Plans were also out of date. Even though the law requires states to update their plans annually, only 12 states had updated their plans till 2016. Plans dedicate the majority of their sections towards response to a disaster, rather than preparedness in their Standard Operating Procedures (SOPs). Jammu and Kashmir, Himachal Pradesh, Punjab and Meghalaya address the most indicators while Haryana, Jharkhand and Andhra Pradesh address less than half the chosen indicators. The following is a detailed evaluation per indicator:

Structural indicators: Structural indicators are the most communicated and find mention in 75% of the documents. E.g. Himachal Pradesh mentions that 48% of its medical institutions are located in highly vulnerable districts and must comply with codes of the Bureau of Indian Standards (BIS). Punjab recommends assigning a quality auditor agency to monitor construction in seismic zones 3,4 and 5 (medium to very high earthquake risk).

Non-structural indicators: Non-structural indicators are the least addressed in all documents. Less than 50% refer to even one of the indicators from the WHO Safe Hospitals indicators. Points on the safety of medical equipment, furniture, backup supplies are mentioned as part of larger checklists for response but most do not provide actionable points. The plans do not refer to any other universal guidelines that hospitals may follow for the safety of non-structural aspects.

Functional indicators: Functional indicators find a mention in 75% of the documents. All states recommend the preparation of a medical preparedness plan, mass casualty management plan and checklists to train health workers for emergencies. An essential requirement to enable functional continuity of hospitals during emergencies is a list of all available health facilities and supporting services (such as power station, police station, ambulances). A mere 45% of documents provide any information on health facilities in the state. Odisha highlights provisioning of a dedicated high tension power line to the district headquarters hospitals for uninterrupted communication with the health control room.

Other indicators: Other indicators such as mobile hospitals, media management and public relations, district-level data and SOPs are well addressed. 19 of the 24 states mention utilizing the India Disaster Resource Network (IDRN). It is an online portal that includes data of health professionals and medical equipment to accelerate decision making during a disaster. Assam and Gujarat have established a functional State Disaster Resource Network (SDRN). Some states elaborate on existing programs to strengthen their health systems to respond to disasters:

  1. Assam: Study on the multi-hazard safety aspect of schools, hospital buildings in Guwahati City along with retrofitting solutions.
  2. Gujarat: Safety audit of hospitals.
  3. Jammu and Kashmir: Vulnerability assessment of hospitals; promote hazard resilient construction; and implement a disaster preparedness plan for hospitals.
  4. Uttar Pradesh: Medical database for health facilities; resource management and identification of a medical incident command system.

Level of detail in plans

The level of detail of a State Disaster Management Plan did not seem proportional to the disaster proneness of the state. Flood and earthquake-prone Uttarakhand, flood-prone Bihar and the recently flood-ravaged Kerala fair below average on the scoreboard.

The collapse of the civil hospital during the Bhuj earthquake triggered the last revision of the Indian Seismic Code for Earthquake Resistant Design of Structures (IS 1893: 2002). This has also improved the inclusion of structural indicators in most SDMPs as there is both legal mandates and evolved guidelines for health facilities to comply to.

Non-structural indicators have few or no guidelines in India. The NDMA guidelines on Hospital Safety (2016) elaborates on this in detail. But as a relatively recent document, it has not seen adoption in SDMPs yet. This needs more attention while formulating plans as non-structural safety includes a spectrum of indicators for equipment safety, power/water supply backups, architectural elements, fixtures, electrical installations etc that are essential to reduce service disruptions.

Functional indicators such as post-disaster psycho-social support and mental health find a mention in more than half the documents but Meghalaya is the only state with a detailed guideline. At least one-third of the survivors of the super-cyclone in the state of Odisha suffered disabling psychiatric symptoms. NDMA has recognised this issue as "a continuum of the interventions in disaster situations" and laid down guidelines on Psycho-social Support and Mental Health Services (PSSMHS) in Disasters (2009) that states may follow.

Conclusion

While plans alone will not determine the quality of response to a disaster, lack of a well-drafted plan will reflect in poorly implemented practices when both time and resources are limited. In comparison with global frameworks, India's SDMPs need to improve inclusion of non-structural and functional indicators to better guide the resilience of health facilities. Our study pushes for the creation of a systematic methodology to evaluate plans to start filling these gaps. This mainstreaming of resilience is essential to reduce the negative consequences of a disaster and promote overall well-being. This is achievable through a systematic regulatory framework to evaluate and improve state disaster management plans and assign a value to documented processes.

Data sources and analysis

  1. Link to State Disaster Management Plans (SDMP) utilized for this study.
  2. Link to the evaluation SDMP scoreboard spreadsheet.
  3. Link to the extracted lines relating to health from all State Disaster Management Plans.
Table 1: Compliance scoreboard for the top four and bottom four states (refer spreadsheet for details on each indicator)
State Structural (2) Non-structural (1) Functional (8) Others (8) Total score (20)
Jammu & Kashmir 2 1 6 7 16 (80%)
Himachal Pradesh 2 0 7 6 15 (75%)
Meghalaya 2 0 5 8 15 (75%)
Punjab 2 0 7 6 15 (75%)
Andhra Pradesh 1 0 4 2 7 (38%)
Jharkhand 0 0 2 4 6 (30%)
Haryana 0 0 0 3 3 (15%)


References

EM-DAT. Emergency Events Database by Centre for Research on the Epidemiology of Disasters (CRED), Accessed on September, 2018.

ADB 2005. India Post Tsunami Recovery Program Preliminary Damage and Needs Assessment by Asian Development Bank, United Nations and World Bank, March 2005.

Hengesh, J.V., Lettis, W.R., Saikia C.K., et al., 2002. Bhuj, India Earthquake of January 26, 2001 Reconnaissance Report, Hengesh, J.V., Lettis, W.R., Saikia, C.K., Thio, H.K., Ichinose, G.A., Bodin, P., Polet, J., Somerville, P.G., Narula, P.L., Chaubey, S.K. and Sinha, S., Earthquake Spectra 2002

BIS 2002. Indian Standard Criteria for Earthquake Resistant Design of Structures IS 1893 (Part 1): 2002 by Bureau of Indian Standards, June 2002.

Gupta 2000. Cyclone and After: Managing Public Health Meena Gupta, Journal Article, Economic and Political Weekly, 2000.

WHO 2010. Safe Hospitals in Emergencies and Disasters, Technical Report, World Health Organization, 2010.

NDMA 2016. Guidelines: Hospital Safety, National Disaster Management Authority, Government of India, 2016.

IPHS 2012. IPHS Guidelines for District Hospitals, Indian Public Health Standards, Guidelines, 2012.

GHI. A disaster safety checklist for hospital administrators by GeoHazards International.

GoI 2005. Disaster Management Act 2005, Government of India, 2005.

NDMA 2007. Guidelines: Preparation of State Disaster Management Plans. National Disaster Management Authority, Government of India, July 2007.

 

Supriya Krishnan is a consultant with the United Nations Office for Disaster Risk Reduction and was previously a researcher at the National Institute for Public Finance and Policy. The author would like to thank Shubho Roy for valuable feedback and guidance through the writing of this blog.

Saturday, December 22, 2018

The Indian bankruptcy reform: The state of the art, 2018

by Ajay Shah and Susan Thomas.

In 2016 and 2017, we wrote `State of the art' articles on the Indian bankruptcy reform. This article presents the third in this series, the state of the art as we see it in 2018.

A few anecdotes about IBC at work are high in the public imagination. The takeover of Bhushan Steel by Tata Steel was an unexpected output in nearly all elements of the insolvency. Bhushan Steel is a plant with a capacity of 5 million tonnes of steel per annum which was producing 3 million tonnes per annum under financial distress. Under the new management, it is expected to produce 5 million tonnes of annum. The recovery rate for creditors was an impressive 63%. Unsecured bond holders, expecting nothing, received significant cash. Another surprising resolution was that of Sharon Bio Medicine, where the unsecured creditors got close to 98% of their dues.

Some cases have been unpleasant surprises. Those that stand out include Binani Cement, Essar Steel, Jaypee Infratech.

There has been a great deal of rumination of these cases, and other such anecdotes in the policy discourse. We try to think systematically about these questions in this article, which distills the insights of the associated literature. It is useful to think within the classification scheme of inputs - outputs - outcomes. In the case of the Indian bankruptcy reform, these three pillars map to:

  • Inputs: Laws (both Parliamentary law and subordinate legislation), the institutional infrastructure that is required for the IBC to work, and capabilities of various private persons.
  • Outputs: Transactions that go through the system and the performance of all parties that come together to make these transactions happen.
  • Outcomes: Recovery rates, the growth of credit and the rise beyond simple secured credit, and the deeper changes in behaviour by private persons who borrow and lend. All these agents re-optimise their strategies based on their perception of the working of the bankruptcy process.

Outputs: How much time do cases take?


Survivor function after a case is admitted at NCLT. Source: IGIDR FRG.

The graph above shows the `survivor function' of cases that are admitted at NCLT on date 0. At date 0, the survivor function takes the value 1, which means that 100% of the cases are pending. As time flows forward, some insolvencies are resolved. The cases that are still pending are the `survivors'; the survivor function shows the fraction of cases that are not resolved.

The IBC intended that cases would ordinarily be completed in 180 days. We see that by 180 days, there is a probability of about 0.9 that a case is not resolved.

The IBC intended that under special cases, cases could survive to 270 days. If the IBC was implemented correctly, the survivor function would be down to 0 by 270 days. We see that by 270 days, there is a probability of 0.8 that a case is not resolved.

Things are more challenging when it comes to the biggest cases. The dashed red line shows the RBI-12 firms. For these firms, none was resolved in 180 days and at 270 days, the survivor function had reached 0.9.

While 180 or 270 days may appear to be arbitrary cutoffs, they were enshrined in the Act and this should matter. A casual examination of the survivor function does not even show a kink at 180 or 270.

If, instead, we want to simply apply common sense, and wonder about what gets done in the first year after a case is admitted, the answer is: about half of all cases are resolved. But when it comes to the RBI-12, about 90% of the cases are pending, one year after admission.

From 2015 onwards, it has been clear that pulling off the IBC reform is a complex puzzle. By 2018, we are able to compute this survivor function of admitted cases, and we see that there is a problem.

Outputs: Resolution plan versus liquidated


When a firm is resolved, it can be liquidated, or it can transition into a resolution plan. When we think of the outputs of the IBC, it is useful to know the fraction of firms that fall into each of these buckets. Surprisingly, there is a third outcome: cases that are dismissed by the appellate authority. We summarise the facts here:

As of January 2018 As of September 2018
Resolved 26 52
Liquidated 134 212
Dismissed after IRP admission 4 Unknown
Ongoing 323 816

Outputs: A few firsts


First case where interim financing is obtained?
Not known. There is no public data about interim financing.
First vote by a creditors' committee?
Not known. There is no public data about what happens in the IRP.
First case to complete IRP with a super-majority in favour of a restructuring plan?
Synergies Dooray Automative Ltd.
First case where the promoters are ejected?
Innoventive Industries. This is a guess, as the relevant documents about the bankruptcy process are not released.
First case to commence liquidation?
Bhupen Electronic on 7th August 2017.
First case to complete liquidation?
None.
First individual insolvency that commenced?
Provisions for individual insolvency are not yet notified

Outcomes: Important gains are taking place outside the public eye


The IBC is delivering poor outputs. Particularly with large firms, the institutional arrangements do not deliver rapid resolution. There is increasing gloom surrounding the bankruptcy process for large firms. When enough money is at stake, it is efficient for persons to spend millions of rupees of lawyers per year, and obtain delays through litigation.

While this is the case, the IBC is delivering important gains, outside the public eye: It is reshaping the behaviour of borrowers.

Private negotiations are always more efficient and reach better outcomes when compared with the formal process of bankruptcy law. In out-of-court negotiations, debtors and creditors have more flexibility on the structure of the resolution than when under the watchful eye of the IBC adjudicator. For instance, efficient resolution plans will involve various schemes under the Companies Act (Sections 230-234, Companies Act 2013), which are already available to the stressed firm. What the IBC does is to provide the threat of the worst case scenario. Numerous private negotiations take place under the shadow of IBC:

  1. Shareholders of many stressed firms would sell off the business, or obtain fresh equity capital, at an early stage of distress, when they know how things are going to work out under IBC.

  2. There is anecdotal evidence that firms are behaving better with regard to financial and operational creditors, now that the threat of IBC is in the picture. The IBC helps set the stage for a better renegotiation between the borrower and the lenders.

These gains are among the desired outcomes of the bankruptcy reform. Since they tend to be invisible to the public eye, they tend to generate no news stories. For this reason, the gains for India owing to the bankruptcy reform tend to be understated.

One area where this learning by Indian promoters may be seen in the quick negotiations and settlement of cases after an IBC filing. This is seen in the FRG Insolvency Cases Dataset : Of the 830 cases for which were final orders were passed by the NCLT till 30 November 2017, 137 were dismissed as settled.

We should focus on how the incentives of promoters are changed. For these agents, the important issue is: Will we be harmed if we default?. The IBC is likely faring well on this, even if only a small fraction of large cases are resolved in a year.

In this thinking, it is important to distinguish between the stock of defaulted firms and a decision made from today onwards about default. For the stock, IBC induces fresh thoughts in negotiation for all parties. For the future, borrowers see their prospects after default, and are less likely to default.

Inputs: the law


Amendments to the law have been energetically pushed out. A first amendment was in January and a second in August of 2018. But the law remains a work in progress in many ways. Gaps between the text of the law and the design principles of the BLRC continue to cause problems in the other elements listed ahead. Further, some of the amendments have become the source of new problems in the smooth functioning of the law. Three major issues concern the inclusion of home buyers as financial creditors, the change in the threshold of cramdown from 75 percent to 66 percent, and the 29A amendments ruling out the debtor from providing a resolution plan during the Insolvency Resolution Process.

A short while after the first 12 large cases came into the IBC, Section 29 was modified to keep the promoter out of the resolution process. Under the new arrangement, promoters know a lot about the business and lack incentive to give this knowledge to new owners. This is value destroying (Choudhary, 2018). Further, promoters may have little incentive to preserving value once it becomes clear that a firm is headed towards default. In the extreme scenario, promoters may accelerate cash extraction if they see a world where theft goes unpunished and default leads to a loss of control of the company. At the same time, participants in the IRP are unlikely to compete with the promoter, so keeping the promoter at a distance from the IRP may give confidence to others who are interested in taking over the enterprise. In the BLRC design, it was important to differentiate between promoters who were guilty of theft and fraudulent practices from those who were not. However, there has been little focus on the provisions where the resolution professional can identify fraud in the accounts of the firm, which should have been a pathway to debar the promoter from any further involvement with the stressed firm.

Conceptual thinking on the exclusion of promoters from the bankruptcy process came out after 29A was enacted (Feibelman and Sane, 2017; Sengupta and Sharma, 2017; Shah, 2017). As argued by these articles, 29A has given unanticipated effects, and an escalation of delays in the bankruptcy process. Private detectives all over India are ferreting out family connections and defaulted businesses of the Indian business elite. This section has become a tool for competitors to hinder the resolution of a distressed company.

Many amendments of the law, such as 29A, are based on practical considerations and lack conceptual coherence or grounding in the empirical evidence. The desire for good outcomes, at the level of one anecdote at a time, has given bad outcomes on the overall distribution. An example of this lies in the tension between recovery rate in one particular case versus the sanctity of process. We have been too quick to jettison the sanctity of process. While this may seem nice at the level of a certain case, it undermines the incentives of participants to take the IBC process seriously, and to commit long-term resources in their participation (Shah, 2018).

Inputs: the IBC institutional infrastructure


The law required four new elements of institutional infrastructure to become operational. Given such a burden of requirement, it is quite a remarkable feat of implementation that within six months of the law being passed, the first cases were being filed under this new law. The adjudication authority, the National Company Law Tribunal, was already in place by the time that the law was passed. So, the front-runner in institutional development was the Insolvency and Bankruptcy Board of India, IBBI, which was up and running on the 1st of October, 2016. After that, came the Insolvency Professional Agencies, IPAs, and the Insolvency Professionals, IPs. The Information Utilities or the IUs, are yet to make their presence felt.

The regulator and the subordinate legislation
The regulator has been one of the four institutions under the law that has performed well in its startup phase. But now that this phase is behind us, there is a need to strengthen institutional capabilities and feedback loops between the regulator and the rest of the insolvency ecosystem (Khurana, 2017). The checks and balances described in Roy et. al. (2018) need to be put into the law to ensure accountability. The regulation-making process needs to rise from fire-fighting and practical thinking and to evidence-based and research-based thinking. IBBI is at the Indian frontier, on the sound working of regulators, by binding itself to a sound regulation-making process. At the same time, a research-driven regulation-making process requires a commensurate statistical system and a research community, both of which are at present lacking.
The IPA industry and the IP industry
The IPA industry is still to establish itself as a competitive industry, where the IPA plays a regulatory role. The BLRC had visualised the IPAs would play a regulatory function that is akin to what NSE and BSE do in the brokerage industry, and this has not arisen. The IBBI has recognised the difficulties and is now exploring the SEBI approach to financial market infrastructure institutions. On the other hand, a large IP industry has developed, with IPs often being placed into complex situations that they are poorly prepared for. As an example, Shrivastava, 2018, brings back remarkable tales from the field, where learning by doing is taking place. However, in the absence of IPA capability, IPs remain largely unregulated. The relationship between the Committee of Creditors, IPs and promoters have not yet been clarified in the minds of all three kinds of participants. The IPs have often been deferential to promoters. Under the IBC, the IP is supposed to choose whether to conduct a forensic audit, to look back in the recent two years for malfeasance in the form of cash extraction from the business. There is little evidence of IPs having done this. We are able to see one example: The IP of Binani Cements conducted a forensic audit into the affairs of the company and has filed an application before the NCLT alleging diversion of funds by promoters (Lavi, 2018). Since IBBI was constituted, no IPA has taken action against an IP, and only 4 final orders have been passed by its Disciplinary Committee.
The IU industry
The Information Utilities are an important institutional feature of the law that has yet come into being. Participation in this industry has been hobbled through restrictions in regulations and concerns about legal liability of the IU. The block of Parliamentary law required for the IU industry to work properly has not come about. While the BLRC had envisioned a private, competitive IU industry, there are attempts to create a monopoly IU by the RBI (Regy, 2017). Public sector monopolies tend to work poorly and the attempt to establish a Public Credit Registry can further derail the nascent IU industry.
Adjudication
The block of Parliamentary law required for the NCLT to work properly has not come about. As a consequence, the NCLT has taken shape like a conventional Indian tribunal. The case load has started generating a back log and delays at NCLT, due to capacity constraints. The BLRC vision was for the adjudication to not engage in commercial decisions during the process of insolvency resolution. NCLT, and amendments to the law, are bringing NCLT back into commercial decisions (Datta and Sengupta, 2017; Feibelman, 2018). The NCLT and other courts have now begun using their adjudication powers to favour resolution as opposed to liquidation; re-bids are being allowed and even resolution is being given another chance. This is a disruption for the efficiency of the bankruptcy process. The NCLT has also taken the view that piecemeal sale of assets is not allowed even though the IBC does not expressly prohibit such a practice. Before the relevant amendments were brought in, the Supreme Court (and even NCLTs) was allowing settlement of cases after admission, something that was not provided for under the IBC as it existed. Each such event creates a flawed jurisprudence, and harms the objectives of the Indian bankruptcy reform.

Three of the four institutions under the IBC took off at an admirable pace. However, under the combination of being tasked to deal with cases not under its domain (such as the defaults to home buyers which would have been more optimally dealt with under the Real Estate (Regulation and Development) Act, 2016) or with large cases in its infancy (such as the large 12 cases that the RBI placed into the IBC in 2017) and being inadequately resourced to deal with this jump in workload, the institutions are predictably beginning to show delays in performance.

Inputs: The creditors


One of the most important features of the law is the power that is given to the creditor in the phase of insolvency resolution. Our articles in earlier years raised concerns about the incentives of lenders and the efficiency of their choices, given the weaknesses of banking regulation and the dominance of public sector banks. These concerns remain:

  1. The lack of organisational capacity in banks, to make decisions, persists. Process failures are apparent when representatives of public sector banks claim to have no final decision making authority at meetings, a carry-over from their role during the CDR scheme process. As a result, they abstain from voting. In extreme circumstances, there have been votes by these representatives that are not upheld by their managements. The IBBI has tried to allay this concern by imposing an obligation on the resolution professional to ensure that only authorised representatives are present at the creditor meetings. It is yet to be seen how much the financial creditors cooperate with the resolution professional.

  2. Banking regulation continues to be an important constraint shaping the behaviour of banks on the Committee of Creditors (CoC). A resolution plan that delivers value of anything less than what the bank is presently carrying as the asset value in its books, is likely to be rejected. The RBI continues to coerce banks to use the IBC, but this is the wrong solution (Zaveri, 2018). The February 2018 diktat by the RBI which requires cases with more than aggregate exposure of Rs. 20 billion and above to be compulsorily referred to IBC after 180 days of failed negotiations is another coercion that does not centrally address the incentive problems created by banking regulation. Instead, more technically sound regulation at RBI is essential, where assets are always marked down sharply, so that the bank looks forward to the (small) payout from the bankruptcy process as a source of new net profit. If banking regulation forces a bank to write down a Rs.100 loan to 0, then the bank will vigorously pursue obtaining (say) Rs.10 in the insolvency resolution process. Without it, a bank dominated CoC will end up providing tacit support for any alternative to accepting a market price that is lower than regulatory valuation -- and the easiest option is delay.

  3. Auctions are not an appropriate mechanism for collective resolution. A consequence of bank dominated creditor committees is an excessive attempt to reduce decision making into a formulaic process, close to the procurement processes followed by the government. As an example, IBA has come out with a bid evaluation matrix. Such a framework has a focus on a single number quoted by the bidder in an auction (Mehta, Sinha, 2018). Auctions are important during the liquidation stage, but not in resolution (Doshi, 2018). Auctions work well in cases with low complexity of credit structures. But the typical insolvency case will have complex financial obligations and asset structures. While the public sector bank dominated committees will take comfort that a standard procedure will rescue them from potential CVC scrutiny later, the use of such a mechanical procedure is likely to deliver sub-optimal business outcomes. Ironically, such outcomes increase the chances of a future inquiry. This problem is not a feature of public sector banks only. Matters have been made harder through a Supreme Court ruling in February 2016 that employees of private banks will be treated as `public servants' for the purposes of the Prevention of Corruption Act. This has made private bank employees behave more like public servants.

  4. Auctions may be an appropriate mechanism for individual corrective action. If a public sector bank is unable to engage in commercial, speculative, forward-looking thinking, better outcomes will be obtained by selling off distressed debt through auctions. Unlike the complexity of the commercial decisions that a member of the CoC has to take, the sale of distressed assets can be the outcome of of simply running an auction and choosing the highest bidder. Here too, banking regulation may hold the key. If a stressed loan of Rs.100 is marked down to 0, and a bank sees an up side potential of Rs.20 by selling off the loan versus an up side potential of Rs.10 by going onto the CoC itself, then rationality will prevail. If, on the other hand, the regulatory valuation of the asset (in this example) is Rs.30, then the best strategy for the bank is to do nothing.

Inputs: The buyers


For high recovery rates, there should be a large base of participants in the IRP from outside the existing creditors and debtor. There have to be interim finance providers, specialists in managing financial stress who can buy loans and debt securities from creditors who have lower appetite in holding those assets, as well as buyers who are specialists in resolving business stress itself. The Indian credit ecosystem has relatively few participants who can play these multiple roles. As a consequence, the existing evidence on transactions in the IRP stage currently present a skewed and stunted picture:

  1. The present legal framework constrains the sale of stressed bank loans only to the Asset Reconstruction Companies (ARCs), who in turn have to hold a fixed fraction (15 percent) of these assets in their book. There are a limited number ARCs, holding a limited amount of capital that is available to purchase stressed loans. This increases the cost of a resolution both because of higher delays (going through an ARC will necessarily increase the time taken to participate) and higher costs (a transaction through an intermediary introduces an additional layer of cost, compared to directly transaction with the debt holder).
  2. A standard approach taken during the IRP is to aggregate a sufficient base of the credit, so as to control and manage the decision of the committee of creditors. There appears to be significant uncertainty in what constitutes the liabilities of the stressed entity, which in turn decides the weights that various creditors hold in the committee of creditors. For example, IDBI Bank which was a creditor in the Binani Cements IRP had their weights in the committee of creditors adjusted upwards at a significantly advanced stage of the bidding process. This creates delays and deters outside participants. There is similar uncertainty in identifying the assets that are available in the stressed entities. The IUs were intended to have solved these problems, but the IUs have not materialised.
  3. Many financial and non-financial firms have expended resources on developing bids, only to face failure for unreasonable reasons such as a deviation from the process defined in the law. This has generated reduced interest from prospective participants. In numerous recent experiences, the IRP seems to obtain only one or two bids. Many private equity funds or large listed companies have seen the difficulties of the IBC and made a conscious call to avoid IRP participation.
  4. We are still at the early stages of a process where new financial firms such as private equity funds have successfully completed a stressed asset transaction. After such experience builds up, dedicated stressed asset funds come about and succeed, and then a great wave of capital comes in. This process is still many years away, given the paucity of credible outcomes so far.

An input that is lacking: a knowledge rich environment


A recurrent theme disrupting a smooth path towards easier participation and higher certainty of outcomes is a lack of abundant, commonly available data. Defaulting firms, lenders, IPs, IBBI and NCLT have disparate facts about transactions, and systems for dissemination do not yet exist to bring these all together. The few initiatives on data release tend towards being practitioner oriented: e.g. the user has to supply a case docket number. There are no public systems that release machine readable data-sets that can be used for research. The BLRC design for the bankruptcy process was based on a central assumption of improved access to information. This is a missing piece of infrastructure in the evolving IBC ecosystem.

Where is data for the working of the Code coming from? The most readily and consistently accessible source of such information is the set of orders that are issued by the NCLT at various stages that an admitted case goes through in the process towards resolution. The data-set of cases collated in the FRG IBC dataset is collated after analysing the cases with orders posted at the NCLT website about admission or dismissal into the IRP. The second source of information is a similar collection of orders IBBI website and information derived from these orders in the IBBI newsletters. The data dissemination systems are not perfectly synchronised yet. There are gaps observed between the derived data in the IBBI newsletters compared to the source NCLT orders.

For listed companies, the core principle of securities law is that all information that shapes the thinking of speculative traders should be disclosed rapidly to the market. The existing principles-based SEBI LODR correctly embeds this principle. But today, neither defaulting listed companies nor listed lenders are disclosing default events, at what stage of the resolution process they are at in the IBC, the details of chosen resolution plan, etc. (Shah and Zaveri, 2018). In such an environment, there is little published research on the Indian bankruptcy reform. Initiatives like Chatterjee et. al. (2018), where the authors hand-construct a data-set and analyse it, are valuable but rare.

Given the lack of data, the field is dominated by anecdote, practitioner experience and media coverage. Decision making by practitioners and policy makers tends to pursue outliers. While such seat of the pants thinking does generate certain self-correcting mechanisms, the pace of learning is inefficient. Sengupta and Sharma, 2018, have built an annotated reading list which pulls together the extant literature. A lot more is required by way of data and research, to strengthen this literature.

The return of nurturing


The Bankruptcy Legislative Reforms Committee (BLRC) is explicit on the purpose of the bankruptcy code: it is to achieve a rapid resolution. Whether this takes the form of debt restructuring, enterprise restructuring, or enterprise liquidation is not important. The key point is to rapidly resolve the enterprise failure that is visible at default, and to release capital.

In recent months, we see a return to the old rhetoric of SICA and BIFR, where the desired outcome was the continued survival of the firm, and that there are persons other than the committee of creditors who should have a say in the commercial decisions that the law put in the hands of this committee. The term `stakeholders' is being used a lot. The judiciary, for instance, is assuming roles in deciding who is eligible to be a resolution applicant, is demanding progress reports during the resolution phase, is deciding whether fresh bids need to be submitted and is even providing a fresh opportunity at revisiting resolution proposals even after the expiry of 270 days.

This is antithetic to the concept of bankruptcy of firms. If such ideas gather momentum, they could potentially feed into the future decisions of judges, regulatory staff or law makers. This would derail the 2016 attempt at Indian bankruptcy reform. The essence of a well functioning bankruptcy process is that the only focus of the committee of creditors should be upon their own financial performance. There should be no deviation from this ethos of a market-based economy.

Conclusion


The Indian bankruptcy reforms, unlike in most other countries, have been developed top down rather than bottom up. The bankruptcy process requires an institutional infrastructure: the law, IBBI, subordinate legislation, IPAs, IPs, IUs, organisational capabilities in lenders, a wide pool of buyers. The skills and institutions that ought to have emerged out of the needs of financiers and enterprises, have been forced into being by creating them by law. In two years since the start of the reforms, institutions that have a well-defined role in the process of insolvency resolution have been rapidly developed and deployed to carry out their tasks (the regulator, the adjudicator and the insolvency professional). Those institutions that can be substituted for are yet to get the stimulus and support for development (IPA, IUs).

Into this fragile, relatively unproven institutional infrastructure, when large cases were placed, we engaged in premature load bearing (Shah, 2018). As a consequence, only five of the 40 large cases have emerged from the IBC process. This yet-nascent system continues to grapple with delivering the equilibrium that the law was created to deliver. We are still at the early stages of revelation of the Indian corporate credit crisis. There is a large pool of distressed companies in India (Shah and Sinha, 2018), which will start to trickle into the bankruptcy process, when private negotiations with financial or operational creditors break down.

The bankruptcy reform has yielded valuable gains in the behaviour of borrowers, both towards financial creditors and towards operational creditors. One hard political economy problem -- of establishing the apparatus through which the divine right of promoters is questioned -- has been achieved. But a bankruptcy process which reliably goes from a default to a solution within six to nine months remains elusive.

The way forward lies in building data-sets and knowledge, and high quality policy teams, which will carry this work program forward on all the multiple fronts described above, both within the IBBI and outside of it. As with many other parts of Indian economic reform, the centre of the puzzle lies in establishing feedback loops, from evidence to research to policy.

Acknowledgements


We thank Josh Felman, Sumant Batra, Varun Marwah, Gausia Shaikh, Anjali Sharma and Rajeswari Sengupta for useful discussions. We thank all participants at the IBBI-IGIDR-FICCI Insolvency and bankruptcy reforms workshop, the Insol India 2018 conference, the IBBI-IGIDR Insolvency and bankruptcy reforms conference and the EMF 2018 for shaping the thinking.

References


Chatterjee et. al., 2018. Watching India's insolvency reforms: a new dataset of insolvency cases, Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, National Law School of India Review, September 2018.

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