## Wednesday, December 27, 2017

One Man's Stand Against Junk Food as Diabetes Climbs Across India by Geeta Anand in The New York Times, December 26, 2017.

The long winter in banking by Ajay Shah in Business Standard, December 25, 2017.

Jim Simons, the Numbers King by D. T. Max in The New Yorker, December 25, 2017.

The internet is broken by David Baker in Wired, December 19, 2017.

The Rise of Poland’s Far Right by Volha Charnysh in Foreign Affairs, December 18, 2017.

Health care in India by Rajiv Mehrishi in NIPFP YouTube Channel, December 17, 2017.

Turf wars between IAS, IPS officers not good for governance by Basant Rath in Business Standard, December 15, 2017.

Promoter buy-back in insolvency: 'Phoenixing' in India by Pratik Datta and Suharsh Sinha on University of Oxford, December 15, 2017.

SC's wake-up call with bail law by Somasekhar Sundaresan on Wordpress, December 14, 2017.

The Glory of Democracy by David Brooks in The New York Times, December 14, 2017.

Inside China's Vast New Experiment in Social Ranking by Mara Hvistendahl in Wired, December 14, 2017.

Our Policymakers no longer Trust Holders of Capital, and it's Showing by Subhomoy Bhattacharjee in Swarajya, December 12, 2017.

Don't undermine the IBC in Business Standard, December 11, 2017.

Code Girls: The Untold Story of the Women Cryptographers Who Fought WWII at the Intersection of Language and Mathematics by Maria Popova in Brainpickings, December 11, 2017.

How Silicon Valley Kowtows To China from ChinaFile in FastCompany, December 8, 2017.

What Happens When the Government Uses Facebook as a Weapon? by Lauren Etter in Bloomberg, December 7, 2017.

Visions, Ventures, Escape Velocities: A Collection of Space Futures by Center for Science and the Imagination on Arizona State University, December 6, 2017.

Shredding the Putin Playbook by Laura Rosenberger and Jamie Fly in Democracy, Winter, No. 47.

## Thursday, December 14, 2017

### How well is India's land record digitisation programme doing: Findings from Rajasthan

Good titles in land improve the security of land tenure, and also enable land holders to capitalise land, either by mortgaging it, or making productive use of it. Conversely, the lack of clear titles in land reduce the security of land tenure since titles are prone to challenge, and inhibit productive use of land since it is difficult to signal title over land (here). It is therefore essential for a well functioning land market to have a well developed land titling system.

The Government of India has been running a program for improving land titles called the Digital India Land Record Modernisation Program (DILRMP, titled the National Land Record Modernisation Program until 2015) since 2008. The DI-LRMP was initiated to improve land titles in India, with the ultimate objective of creating a system of conclusive titling. The title recorded with the state is considered conclusive proof of the title to land in a conclusive titling system.

To be conclusive, a titling system requires that (a) all land transactions be recorded by the government, (b) the applications for registering land titles be verified scrupulously before they are registered, (c) the status of a title once registered is final and not open to dispute (curtain principle - or drawing a curtain over past defects/ disputes), and (d) the registry be completely updated in relation to the status of titles as they are present on the ground (mirror principle). The DI-LRMP aims to create this system all over India through the following activities (see NLRMP Guidelines):

1. Digitisation of textual revenue records (contained in Record of Rights, revenue records are updated through "mutation", and are presumptive proof of the title recorded in the RoR) and registration records (records with the registration department - all agreements pertaining to transfers of land have to be registered, save specified exceptions), including maps.

2. Integration of the processes of mutation (RoR updation), registration and map generation/ creation.

3. Creation of modern record rooms, capacity building within the administrative machinery.

4. Allowing for processes of land registration to be initiated online in addition to physical processes.

5. Fresh land surveys and mapping in areas where required.

The completion of these activities is envisaged to take India close to a conclusive titling system. Our team was one among three coordinating research institutions to conduct the first assessment of the progress of the DI-LRMP. The NIPFP team chose the state of Rajasthan to conduct this study. Rajasthan is the largest state in India constituting 10.4 percent of the total area and contains 5.67 percent of the total population of India.

Our study was able to highlight:

1. Issues with the implementation of the DI-LRMP, at different stages of implementation; and

2. The issues faced by the local administration in the maintenance of land records and in implementing the DI-LRMP.

The removal of systemic and administrative issues highlighted in this report may make the implementation of the DI-LRMP more effective. The report based on the study is available here.

### Land records in Rajasthan

Work on computerisation of Records of Rights started in 1999-2000, well before the NLRMP was conceived. These activities got subsumed by the Land Records Computerisation project which was later subsumed by NLRMP.

Rajasthan's history presents some interesting challenges to this exercise. The state was originally composed of five main Riyasats (princely states), and several smaller ones. Each of these five Riyasats used different units to measure land. For example, a bigha in one Riyasat was the equivalent of 3000 sq.ft., while in another it was close to 1600 sq.ft. These differences still persist today. Not only are the units of measurement different, but some of the official terms used in relation to land records also vary across districts. The state government tried to introduce the metric system in 1976, but as per discussions with local officials and villagers, it was rarely used in practice by the local populace who were more comfortable with the old measurement systems. With the DI-LRMP there is a renewed effort to standardise units of measurement across the state.

1976 was also the year the state government last undertook re-survey operations across the state. The re-survey operations which will be undertaken under DI-LRMP will be the first since then. All maps currently in use were made using traditional techniques. They will be replaced by maps made using High Resolution Satellite Imagery.

In spite of early movements towards improvements in land records, the level of implementation of DILRMP in Rajasthan remains low. This is highlighted in the findings from our study.

### Scope of the study

Our study evaluated the implementation of DI-LRMP through four activities:

1. Collecting state-level data from government websites of the Department of Land Resources, Government of India, as well as the websites of the Departments in charge of Revenue and Registration, Government of Rajasthan;

2. Interviews with senior officials in the Departments of Revenue and Registration in the Government of Rajasthan;

3. Performing test-checks on the land record websites on the government of Rajasthan, and

4. Studying the implementation of DI-LRMP in two tehsils in Rajasthan.

The research team undertook the tehsil level study with the help of local retired revenue officials. This facilitated interactions with local officials in the revenue and registration offices in the two tehsils. In addition, the study involved a visit to five villages each in the two selected tehsils, interactions with villagers, and collection and verification of information relating to a sample of ten parcels in each village (a total of 50 parcels in each tehsil).

### Findings

#### State-level findings

We first collected state-level data from websites of the Rajasthan Government, and verified it in conversations with government officials. The state-level data reveals the following:

1. Most RoRs (revenue records) have been digitised, but maps have not been updated through modern survey methods and the maps available online at present are digitised copies of cadastral maps.

2. Our test-checks revealed that while most records of rights are available online, there was a significant volume of cases where the records were not available/accesible. There is a uniform problem of the absence of legacy records online.

3. The RoR is available only in paper form locally in a total of 1603 villages out of 47,918 villages.

4. Only a small proportion of the RoRs are available with digital signature of the designated official (3,632 villages out of 47,918), and RoRs of most villages are not available in a legally usable form (42,683 villages).

5. Most tehsils in Rajasthan have functional and usable maps, albeit in paper form. 88 tehsils out 242 have some proportion of damaged or mutilated maps. In all other tehsils, 90 percent or more of maps are in a usable condition.

6. While there has been some provisioning for online registration, most of the processes are still manual. Out of 527 Sub-Registrar Offices (SROs), 117 SROs have online systems for verifying documents and paying stamp fee duty.

7. The state of Rajasthan has made very little progress on integration of all three processes - mutation, registration and map generation. The process of registration alerts the revenue records database by noting the fact of registration in some form in 15 SROs, but this does not work the other way round, i.e. the process of changes in revenue records does not alert the registration database.

An analysis of the findings from the state highlights significant steps required to be taken for the implementation of the DILRMP. This was also confirmed by our study of DILRMP implementation in the two tehsils selected for the study.

#### Tehsil-level findings

Tehsil selection: The two tehsils selected for the study were Girwa and Uniara. Both tehsils are at different stages of implementing DI-LRMP:

1. Girwa: Girwa is part of the sub-humid southern plains agro-climatic zone. It is situated on and around the rocky hills of the Aravalli Range, at an average elevation of 540 meters. The climate is moderate year-round with moderate seasonal variation in temperature and humidity. Rainfall is scanty with little to moderate year-on-year variation. The main reason for selecting Girwa as one of the sample tehsils is that it is a good representative of the typical tehsil. It represents the typology of about 184 tehsils, out of 314 tehsils in Rajasthan in terms of the status of land records computerisation.

2. Uniara: Uniara is a tehsil in Tonk, Rajasthan and is situated approximately a three-hour drive away from Jaipur, the state capital. The tehsil is primarily agricultural, with little or no industrial activity. The tehsil is largely rural, with no large cities in its close vicinity. Uniara is part of the semi-arid eastern plains agro-climatic zone. The terrain is flat barring a few areas to the northwest. The climate is predominantly dry and there are large seasonal variations in temperature. Rainfall is scanty with large year-on-year variation. Uniara is cited as an example of a model tehsil in Rajasthan with respect to land records modernisation. It was also featured in the Success Stories of NLRMP report published by the Department of Land Records, Government of India.

#### Findings from Girwa and Uniara

Vacancies: We found significant vacancies in the local administrative units in both tehsils. Tables 1 and 2 provide details of the sanctioned and vacant positions in Girwa and Uniara respectively.

 Post Sanctioned Vacant Patwari 52 20 Land Revenue Inspector 13 0 Naib-Tehsildar 3 1 Tehsildar 1 0

 Post Sanctioned Vacant Patwari 54 35 Land Revenue Inspector 13 4 Naib-Tehsildar 3 1 Tehsildar 1 0

Accuracy of recorded land area: We measured a total of 99 parcels across the two tehsils (Figure 1). In 30 percent of the cases the area is within 5 percent of the area on record. In 25 percent of the parcels, the difference between the area on record as compared to the area as measured, is 10-20 percent. In 24 percent of the sample parcels, the difference between the area on record as compared to the measured area is more than 20 percent. It must be noted that digitised cadastral maps were not available for either tehsil for the purpose of our study. The deviation recorded here is the deviation from the area recorded in the RoR.

Figure 1: Difference Between Area on Record vs Measured

Causes for deviation from recorded area: Encroachment onto neighbouring land is the most frequently observed cause for deviation from the recorded area. We observed two types of encroachments:

1. Encroachment onto adjoining fields i.e. onto private property, and

2. Encroachment onto public property. This can be further subdivided into two types: (a) encroachment onto roads, nallahs and farm roads, and (b) encroachment onto pasture land, forest land and other government-owned land.

Figure 2 provides details on the causes for differences between recorded area and measured area.

Figure 2: Causes of Difference Between Area on Record vs Measured
Note: Only shows parcels where the difference is 10 percent or larger.

Information recorded in Record of Rights: We noted that a number of transactions and kinds of titles are not recorded in the RoRs at the tehsil level. For example, construction on agricultural land is not recorded if less than 500 square metres. Possession, independent of ownership is also not recorded. Encumbrances other than mortgages are also not recorded. This is an impediment in providing conclusive titles, as a number of rights over land are not recorded at all.

Administrative issues: We found local administration under-staffed, lacking basic infrastructure (at the patwar-mandal levels) including electricity in some places, and without network connectivity. Most of the administrative processes are manual. In addition, revenue administration is burdened with a number of tasks at best incidental to land revenue and record management. Some officials pointed out that land revenue collection, a core activity for the revenue department, does not seem like a feasible activity any longer as the costs of collecting revenue far exceed the revenue collection. Building administrative capacity is therefore an important challenge for the state.

### Conclusion

Our report makes the case for legal and administrative changes based on the results of our study. It is important to realise that the process of digitisation must be accompanied by complementary legal changes and administrative capacity building. Rajasthan has an advantage in the fact that its digitisation program is not yet at an advanced stage and some of these issues can be fixed right now rather than later. Additionally, while digitisation may remove some dependency on human interaction with revenue officials, land record management will continue to require sufficient human capital.

Anirudh Burman and Devendra Damle are reasearchers at National Institute of Public Finance an Policy.

### Emerging Markets Finance (EMF) conference, 2017

The Emerging Markets Finance (EMF) conference has been an annual feature in Bombay from 2010 onwards. The 2017 conference program is up.

## Wednesday, December 13, 2017

### Commercial wisdom to judicial discretion: NCLT reorients IBC

When a company defaults on loan repayment, there are various possibilities - the debt could be restructured, the business could be sold as a going concern or the company could be liquidated. The crucial policy question here is: who should make this decision about the company's future? Traditionally, Indian laws have brought an arm of the state - judiciary or executive - to bear on this decision. The Bankruptcy Law Reforms Committee (BLRC) broke away from this tradition and recommended that: when 75% of the financial creditors agree on a resolution plan, this plan would be binding on all the remaining creditors. If, in 180 days, no resolution plan achieves the support of 75% of the financial creditors, the company goes into liquidation. Effectively, no judge or bureaucrat is to substitute for the commercial wisdom of a super-majority of financial creditors. The Parliament adopted this legislative design and enacted the Insolvency and Bankruptcy Code, 2016 (IBC). Recently, the Hyderabad bench of NCLT in K. Sashidhar v. Kamineni Steel shifted this position of law.

The NCLT held that even if the committee of creditors (CoC) fails to approve a resolution plan with 75% of voting share, the tribunal could approve the resolution plan. In short, the future of an insolvent company will be determined not by the commercial wisdom of the CoC but by the tribunal. This decision is not only antithetical to the original legislative intent behind IBC, it also militates against the plain language of the statute.

### Background

Kamineni Steel went into insolvency resolution in February 2017. The resolution plan proposed by the resolution professional (RP) was supported by financial creditors who had 66.67% of the voting power. The remaining financial creditors with 33.33% voting power did not support the plan. They preferred liquidation. According to them the liquidation value of the company was higher than the enterprise value. Faced with the threat of imminent liquidation under IBC, the RP approached the NCLT to approve the resolution plan supported by only 66.67% votes.

The company had also been undergoing the Joint Lender's Forum (JLF) process under the aegis of RBI. Before IBC was enacted, RBI had issued the JLF Guidelines in 2014. These Guidelines provided that on payment default by a corporate debtor in a consortium lending arrangement, the lenders were required to form a JLF to explore options to resolve the stress of the debtor. Any restructuring decision agreed upon by 75% of creditors by value and 60% of creditors by number in the JLF would be binding on all lenders. To facilitate timely decision making by the JLF, on May 5, 2017, RBI issued another notification lowering this threshold to 60% of creditors by value and 50% of creditors by number in the JLF.

The RP of Kamineni Steel relied on the 2017 RBI notification to argue before NCLT that since 60% of creditors by value can make binding decisions in JLF, a resolution plan under IBC supported by the same 60% should also be adequate. NCLT agreed with this argument and approved the resolution plan of Kamineni Steel supported by only 66.67% creditors.

### Analysing the judgement

The judgement was broadly based on three legal arguments.

## Argument 1

It relied on section 30(4) of IBC which states:

The committee of creditors may (emphasis added) approve a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors.

The tribunal held that since the legislature used the word "may" instead of "shall" in section 30(4), the 75% vote rule is not mandatory. The potential consequence of using "shall" in this sub-section has been overlooked in this argument. Had the legislature used "shall" instead of "may" here, it would have meant that in every case the CoC was mandatorily required to approve any resolution plan submitted to them by the RP. That is not the intent of the law. The intent of the law is to let the CoC and not the RP decide the future of the insolvent company and to give the CoC the discretion to approve or reject a resolution plan. This discretion is reflected in the use of the word "may" in section 30(4). In other words, the use of the word "may" is intentional because not every resolution plan submitted by the RP needs to be approved by the CoC. This reasoning has also been supported by Professor Varottil.

Secondly, the word "may" does not dilute the 75% rule either. Section 30(4) of IBC uses the language, "...committee of creditors may approve (emphasis added) a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors". This implies that if the CoC chooses to approve the resolution plan, then the plan can only be approved if it has at least 75% vote of the CoC.

Finally, section 30(6) of IBC states:

"The resolution professional shall submit the resolution plan as approved (emphasis added) by the committee of creditors to the Adjudicating Authority .

This implies that if the resolution plan has not been approved by the CoC (by at least 75% voting share as mentioned in section 30(4)), then it should not be submitted to the adjudicating authority by the RP.

If the relevant provision in IBC were ambiguous, the appropriate external aid to statutory interpretation would have been the BLRC report. For example, the Supreme Court in M/s. Innoventive Industries Ltd. v. ICICI Bank, heavily relied on the BLRC report to interpret various provisions of the IBC. The report would have provided clarity to the legislative intent behind section 30(4). The judgement did not make any reference to the report.

## Argument 2

The judgement relied on section 31(1) of IBC which states:

If the Adjudicating Authority is satisfied (emphasis added) that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

NCLT used a broad interpretation of the words "if the Adjudicating Authority is satisfied" in this sub-section to give itself the power to approve any resolution plan which has not been approved by 75% of creditors by value. This argument overlooks the fact that section 31(1) is triggered only after a resolution plan has been approved by the CoC by 75% vote. If the resolution plan has not been so approved, the need for NCLT to check if the resolution plan meets the requirements of section 30(2) does not arise. In the case at hand, since the CoC did not approve the resolution plan of Kamineni Steel by 75% vote, the NCLT could not have used its power to review under section 31(1).

## Argument 3

The judgement held that since IBC is a new law and RBI as a banking regulator has issued guidelines governing the voting share of banks, the 75% rule in IBC has to be read in conjunction with RBI's circulars.

There is an inherent problem in this argument. JLF is conceptually based on the London Approach - a non-statutory informal workout mechanism originally developed by the Bank of England since 1970s. In India, the process is guided by notifications issued by RBI under the Banking Regulation Act, 1949. Only lender banks can participate in this process. In contrast, IBC is a formal statutory mechanism for collective insolvency resolution. Unlike JLF, all financial creditors, including non-banks, can vote in the IBC creditors' committee. JLF and IBC provide for different procedures under two different statutes. In the event of any conflict between a subordinate legislation under the Banking Regulation Act, 1949 and the IBC, the IBC being a parliamentary legislation should have overriding effect.

### Conclusion

The judgment of K. Sasidhar v Kamineni sets a wrong precedent in the nascent Indian corporate insolvency law jurisprudence. If the dissenting creditors appeal this decision before the relevant appellate tribunal it is likely to be overturned. It is worth noting here that the Mumbai bench of NCLT in a subsequent decision has taken an opposite stand, as highlighted by professor Varottil. The K. Sasidhar v Kamineni judgement should nudge Indian policymakers to consider two issues.

First, in light of IBC, policymakers need to question the rationale for retaining JLF. Even if they choose to retain it, there must be concrete reasons for vital differences between the two procedures. For instance, policymakers need to ask why should there be two different percentage requirements - 60% under JLF and 75% under IBC?

Second, the role of the resolution professional in an insolvency proceeding needs to be reviewed. In the Kamineni case, without securing 75% votes by value of financial creditors, the RP should not have submitted the resolution plan to the adjudicating authority in the first place. Policymakers need to explore institutional reforms to ensure that RPs act in an unbiased manner, like an officer of the court who the adjudicating authority can rely upon.

Rajeswari Sengupta is an Assistant Professor at the Indira Gandhi Institute of Development Research. Pratik Datta is a Chevening Weidenfeld Hoffmann scholar at University of Oxford. The authors thank two anonymous referees for their comments.

The World Might Be Better Off Without College for Everyone by Bryan Caplan in The Atlantic, December 11, 2017. On the question of what is worth knowing: Will BPO hit a staffing crisis? by Ajay Shah in Business Standard, December 21, 2005.

Monika Halan and Shaji Vikraman on the resolution corporation.

Resolution Corporation: The 3rd element of the exit framework by Ajay Shah in Business Standard, December 11, 2017.

Trillion, or 10 kharab? by T N Ninan in Business tandard, December 8, 2017.

Chronicler of Islamic State 'killing machine' goes public by Lori Hinnant and Maggie Michael in AP News, December 8, 2017.

Maternal and child health by Anjini Kochar in NIPFP YouTube Channel, December 7, 2017.

The G.O.P. Is Rotting by David Brooks in The New York Times, December 7, 2017.

Evidence That Ethiopia Is Spying on Journalists Shows Commercial Spyware Is Out of Control by Ron Deibert in Wired, December 6, 2017.

How to Stand Up to the Kremlin by Joseph R. Biden, Jr., and Michael Carpenter in Foreign Affairs, December 4, 2017.

The IMF’s Latest World Economic and Financial Outlook by Andreas Bauer in NIPFP YouTube Channel, December 3, 2017.

Remembering the Chicago Pile, the World’s First Nuclear Reactor by Alex Wellerstein in The New Yorker, December 2, 2017.

Inside the secretive nerve center of the Mueller investigation by Robert Costa, Carol D. Leonnig and Josh Dawsey in The Washington Post, December 2, 2017.

Hospital birth and health in Uttar Pradesh: Trends, opportunities, and constraints by Diane L. Coffey in NIPFP YouTube Channel, December 1, 2017.

How Cashews Explain Globalization by Bill Spindle and Vibhuti Agarwal in The Wall Street Journal, December 1, 2017.

Literarily Hitler by Paul O’Mahoney in Dublin Review of Books, December 1, 2017.

Flynn's Plea Raises New Questions About Whether Trump Obstructed Justice by Adam Serwer in The Atlantic, December 1, 2017.

As FCC Contemplates Repealing Net Neutrality Protections, Indian Telecom Regulator Reaffirms Support for Principles of Non-Discrimination by Jyoti Panday on the Electronic Frontier Foundation blog, November 30, 2017.

The Internet Is Dying. Repealing Net Neutrality Hastens That Death by Farhad Manjoo in The New York Times, November 29, 2017.

Banks as buyers of last resort for government bonds by Daniel Gros in Vox, November 27, 2017.

The Nationalist's Delusion by Adam Serwer in The Atlantic, November 20, 2017.

Great Scott by George Scialabba in Inference Review, August 2, 2017.
Get his books from amazon.in.

What Is a Populist? by Uri Friedman in The Atlantic, February 27, 2017.

## Tuesday, December 12, 2017

### Law Economics Policy Conference - 2017: Conference material is up

The materials of the Law Economics Policy Conference, 2017 conference are up on the website.

## Saturday, December 09, 2017

### What is the right role for promoters in the bankruptcy process?

by Ajay Shah.

#### Promoters and bankruptcy in a good world

We should not see default in a moralistic way. People enter into debt/equity relationships, and sometimes equity is not able to pay, in which case equityholders are pushed out of the way, and debt takes over the company. After that, the Committee of Creditors looks for the person who offers the best price to buy the company. This can be the erstwhile shareholder.

Hence, we should be fine with promoters tossing in a bid into the insolvency resolution process. They may have good knowledge of precisely what went wrong, they help increase competition in the IRP, and may often be the highest bidder. By this logic, having the promoter in the IRP helps increase recovery rates. The recent Ordinance, which amended the IBC to block all defaulters from all IBC activities, has been widely criticised for being out of touch with commercial sense. Two recent articles by Fiebelman & Sane and Sengupta & Sharma explore these issues and the recent Ordinance.

We are furious about theft by promoters of assets from within the company. This does not justify debarring promoters from the bankruptcy process: it justifies S.69 of the IBC, 2016, which initiates a process of identifying and punishing such theft. Debarring promoters from the bankruptcy process would actually increase their incentive to steal in this fashion.

#### Improvised Explosive Devices (IEDs) tucked away inside many Indian firms

There are some unique features of most firms in India which alter this thinking. Most firms in India do not have a clean structure of legal contracts. There are a large number of unwritten arrangements which keep the firm aloft. Examples of these include:

• Oral contracts.
• Legal contracts which are incomplete contracts, where the counterparty is friends/family to the promoter.
• Ongoing litigation.
• Loopholes in land title.
• Elements of tax evasion or violation of law, and the repeated game with politicians/officials that sustain them.
• Arrangements with labour unions which keep the peace.
• The elements of the business where cashflow is stolen by the controlling team.

Each of these hampers the extent to which the business can be taken over by a new person without the cooperation of the promoter. For the new person, things won't work like they used to when the promoter was around, unless the promoter has done a lot by way of handing over.

The phrase poison pills' is used to describe these booby traps hidden in most firms, but as Harsh Vardhan correctly emphasises, poison pills are formal legal structures that can be uncovered in the due diligence. These are more like IEDs that won't be detected in the diligence.

#### How will this influence bidding in the Insolvency Resolution Process?

The Akerlof lemons model' teaches us that when faced with this kind of asymmetric information, bidders will shade their bids down. On paper, you think the firm is worth 30 paisa to the rupee; you suspect there are IEDs embedded within; to be safe you bid 15 paisa to the rupee.

The promoter has better information and hence bids 30 paisa to the rupee. He wins.

Imagine that this process gets repeated many times. The professional buyers, that we so badly require to make the Indian bankruptcy process work, will lose heart. What we need most, for the maturation of the Indian bankruptcy process, is for them to develop organisational and financial capital. Instead, after they lose a few bids, they will exit the business. This will harm competitive conditions in the IRP. When competition is weakened, recovery rates will be harmed.

We will get trapped in the wrong equilibrium, where in most cases, promoters bid and win at particularly low recovery rates.

In the limit, if promoters know that if arms length investors bid low prices, then there can be moral hazard as follows. A promoter can initiate default, knowing that in the IRP he will be able to buy 100% of the equity of the firm at (say) 70% of the value of the debt.

At this stage, of course, this is deductive reasoning, as the database of experience under IBC has not yet built up. We should be suitably cautious in our thinking, knowing that we do not know.

#### What is the way out?

We should not be moralistic about firm failure. But we should recognise that the equilibrium outcome described above is a bad one. We should cautiously consider using the coercive power of the State to exclude promoters from the IRP (in a narrow way: for the company that has defaulted only).

If the promoter is comprehensively excluded from any connection to the IRP, bidders will shade their bids down as they do not know where the IEDs are buried. The solution lies in encouraging side contracts where bidders pay promoters for information about IEDs.

Promoters would then negotiate with various bidders and agree to a side transaction, where they are paid cash in return for full information about the IEDs. Apart from that, they would not be bidders.

This can be achieved by a narrow IBC amendment that requires that the post-IRP equity structure for a company cannot contain shareholding by the erstwhile promoters of that company.

#### IEDs, resolvability, credit risk assessment

A firm that borrows Rs.100 is expected to repay $100(1+r)^T$, but with probability $p$, it goes into default that yields the recovery rate $R$.

Estimating $R$ is about grappling with resolvability. A clean, transparent, simple business can easily be put through the IRP and yield a good $R$. A messy business is one with numerous IEDs. In a messy business, the IRP will involve complex negotiations for bidders with the promoter and there will be greater fear, thus yielding a lower $R$.

Most credit risk analysis in India today focuses on estimating $p$. We should think about $R$ also. Modelling resolvability and recovery rates is as important as modelling the probability of failure. When the credit market works in an intelligent way on these questions, transferable businesses will get debt at a lower cost. Clean firms will obtain a lower cost of capital and gain market share.

#### Complex firms and a supportive institutional environment

It should be noted that the market for control transactions also desires a clean, transparent, simple business where control can be transferred. If you were going to put in a bid for a company in a hostile takeover, you will pay more for a transparent firm. If you were building a firm with the aim of selling it in a control transaction at a future date, you would increase transparency. If you plan to borrow, then greater simplicity will yield better pricing from a rational credit market.

However, complexity is important to many large firms. At the level of the economy, high productivity firms are large complex firms. Economies of scope and economies of scale inevitably lead to business complexity. Firm internationalisation is correlated with firm productivity, and internationalised firms must engage in the complexities of multinational corporate finance which requires much complexity of contracts, holding company structures, tax havens, etc. Recovery rates are lower for complex multinational firms.

As a thumb rule in India, I think that if the managers desire it, it is possible to build a Rs.10 billion company in many industries that is easily transferable. But by the time you get to a Rs.100 billion company, considerable complexity is likely. This harms the cost of debt capital and deters certain control transactions. This induces diseconomies of scope and scale.

To say this differently, when the governance environment cleans up, complex companies will become more viable, and this will permit the economy to better nurture the largest firms which are able to harness economies of scope and scale in order to achieve the highest productivity.

#### Conclusion

1. Credit default is not sin. We should not be moralistic in policy thinking. In a limited liability corporation, the liability of shareholders should be limited to losing the equity capital that they put in. We should not create a new notion of harm to a promoter when his company defaults, well beyond his loss of equity capital.
2. Most Indian firms are peppered with IEDs. The promoter has a unique informational advantage as she knows where the IEDs are buried.
3. Arms length buyers will shade their bids down, reflecting fears of the IEDs. They will not be able to compete with the promoter. This will shrivel the buy side of the bankruptcy process. Barring promoters from the IRP is a way to restore competitive conditions in the IRP and enhance recovery rates.
4. But the promoters know something unique which can improve recovery rates. We should not waste this knowledge. The best arrangement is one where the promoters sell this information to bidders.
5. The recent ordinance debars such side transactions, which is inefficient.
6. Estimating the loss given default is one important element of estimating the fair price of corporate credit. Lenders need to think about resolvability. A clean business, with a structure of complete legal contracts and no IEDs, will be the easiest to carry through the IRP and will get the highest recovery rates. These firms will get the cheapest debt from a rational debt market.
7. The most productive firms are the largest and internationalised firms, which have harnessed economies of scope and scale. But these firms are inevitably complicated, with layered holding structures, multinational corporate finance, use of tax havens, and so on. Under present Indian governance arrangements, these largest firms will tend to have low transferability. This hampers their cost of capital. This is a channel for diseconomies of scale, scope and internationalisation. Improvements in the governance environment are required to remove this handcap in going from a firm size of Rs.$10^{10}$ to Rs.$10^{11}$.

I thank Harsh Vardhan, Bhargavi Zaveri, Josh Felman, Anjali Sharma, Adam Fiebelman, M. S. Sahoo, Susan Thomas, Renuka Sane, and Rajeswari Sengupta for useful discussions on these questions.

## Friday, December 08, 2017

### Digitising land record management in Maharashtra

by Sudha Narayanan, Gausia Shaikh, Diya Uday and Bhargavi Zaveri.

The 2006 Hindi film Khosla ka Ghosla narrates the story of one K.K.Khosla, who buys land on the outskirts of a city to only later find it squandered to squatters. Anecdotally, the story of K.K.Khosla represents the story of many plot buyers in India, for whom the idiom "possession is ninth-tenths of the law", is a harsh reality. Many of the problems associated with this idiom are a direct outcome of incomplete and inaccurate land title records.

Clear and accurate land title records underpin the protection of property rights in any state. Despite the state having conventionally monopolised the function of maintaining and updating land records, until the late 1990s, land titling systems was not the world's "sexiest" topic and got sparse attention from policymakers (Zasloff 2011). As one of the participants at an IGIDR roundtable on Land And Access to Finance described it, a posting in the land revenue administration is commonly regarded as punishment posting for government officials. However, since the 1990s, the connection between clean title records and access to finance and overall economic development, has gained traction.

## A new study on digitising land record management in Maharashtra

In India, the central and state governments have been making concerted efforts at improving the land record management systems and the delivery of clean title records to citizens. Many of these initiatives have largely focused on the digitisation of land records and have been launched under the auspices of the Digital India Land Record Modernisation Programme (DILRMP), formerly known as the National Land Records Modernisation Program.

In a report released in the public domain on 13th November, we record our findings of a field study in Maharashtra, which was aimed at understanding (a) the extent to which land record administration had been digitised; and (b) the efficiency of service delivery of accurate land title records to citizens. We designed this study in collaboration with two other institutions, which conducted similar studies in Himachal Pradesh and Rajasthan respectively. For the purpose of our study, we studied digitisation' of the following aspects:

1. existing land records;
2. the process for recording or effecting a change of interests in land;
3. the process for retrieval of copies of land records; and
4. the inter-connectivity between the different offices of the state administration that maintain land records.

### Absence of a centralised repository of title records

We find that in India, the land records administration systems pre-date independence, and have been largely driven by considerations involving the collection of land revenue, as opposed to the delivery of clean and accurate title records to the public. Although there are State-wise variations, land records in every State are generally spread across three offices of the State administration:

1. Deeds (contracts) registering the transfer of land (and built-up area) are maintained by the offices of sub-registrars (SROs) under the
Registration Act, 1908.
2. Revenue records showing ownership and other interests in individual land parcels are maintained by the revenue records offices under the revenue codes enacted by States. Revenue records are commonly referred to Record of Rights (RoRs) for rural land and Property Register Cards (PR cards) for urban land in Maharashtra.
3. Cadastral maps of villages and land parcels are maintained by the survey offices, which are responsible for conducting State-wise land surveys and parcel-wise boundary demarcation. Cadastral maps are generally made for each village.

Currently, these offices are only partially interconnected, and the level of interconnectedness also varies from to state to state. The absence of a comprehensive repository of information pertaining to the characteristics (such as permitted usage and current built-up status), ownership and all other interests created in respect of a land parcel, leads to incomplete or inconsistent land records. Further, it reduces the efficiency of service delivery of land records to the end-consumer. Consequently, buying and selling land and built-up area is more time consuming and expensive relative to other assets such as securities.

### State, Tehsils and parcels

Our study investigated the abovementioned components of digitisation at three levels:

1. State level: At the state level, we studied the extent to which the land record management system has been digitised in the state. For this, we largely relied on state-reported data. We conducted in-person interviews with officials of the revenue ministry of Maharashtra. We also relied on the data reported by the Maharashtra Government in a Management Information System maintained by the Central Government to track the State-level progress of the Digital India Land Record Modernisation Program (DI-LRMP).
2. Tehsil level study: For the purpose of land revenue
administration, Maharashtra is divided into six revenue divisions comprising of 36 districts, 181 sub-divisions, 358 Tehsils (referred to as Talukas in Maharashtra) and 44,855 villages. After conducting a state-level study in the first leg of the study, we narrowed down two sample Tehsils, Mulshi and Palghar located in Maharashtra. This exercise focused at understanding the extent of digitisation at the level of the sample Tehsils.
3. Parcel level study:We further narrowed our focus to individual land parcels in the sample Tehsils, and studied 100 land parcels spread across 10 villages in each of the two Tehsils. This leg of the study aimed at comparing the land records of the sample parcels with the ground reality. The 100 sample parcels were selected through a stratified random sampling methodology. We inspected each land parcel in the sample and interviewed the owners and persons in possession of the land parcels. We asked questions such as whether a person claiming to be the owner on the ground was reflected as the owner in the records, whether the land was being utilised as per its classification in the land record. We also measured each parcel in the sample to ascertain the discrepancies between the area of the parcel as reflected in the land records and the area on physical measurement of the parcel.

This article gives an overview of our findings on the status of digitisation of land records in Maharashtra at the state level and the service delivery by the land record administration at the level of the Tehsils.

### Digitisation of existing records:

#### Revenue records

We find that currently, throughout Maharashtra, RoRs are prepared digitally, that is, there are no hand written RoRs in Maharashtra, except for one Tehsil. Tables 1 and 2 show that Maharashtra has made significant progress on the digitisation of RoR, with the RoRs of three hundred fifty-seven out of three hundred fifty-eight Tehsils having been digitised and stored on state level servers. This has, however, not been accomplished for eighty-three villages of Jivati Tehsil in the Chandrapur District.

 Total Number of Tehsils 358 Number of Tehsils in which the RoRs have been digitised 357 Number of Tehsils for which the RoRs are stored digitally 357

 Digitised (as a % of the total RoRs in the Tehsil) Mulshi 100 Palghar 92

It is important to distinguish digitisation from scanning processes. In Tables 1 and 2, digitisation refers to the creation and storage of the RoR in a text-searchable digital format.

The digitisation of CMs may or may not be preceded by a survey or re-survey of the land. A survey of agricultural land, using traditional survey techniques such as plane table, in Maharashtra, was conducted before independence. The Maharashtra Government has not conducted a state-wide re-survey of agricultural land since independence. Non-agricultural land located in a village, town or city with a population exceeding 2000 persons, is commonly referred to as "Gaothan land" (abadi areas). A state-wide survey of gaothan areas has never been conducted. Table 3, which summarises our findings on the status of digitisation of cadastral maps, shows that very little progress has been made on this front.

 Table 3: Digitisation of cadastral maps Digitised (as a % of total CMs) Maharashtra 3.79 Mulshi 7.59 Palghar 1.44

Here too, while 100% of the maps held by the state government have been scanned, Table 3 denotes the maps which are 'digitised' after vectorisation.

#### A pilot re-survey with modern survey techniques

Recently, the State Government initiated a pilot re-survey of agricultural land in twelve villages, using modern survey techniques and equipment such as such as High Resolution Satellite Imagery (HRSI), Electronic Total Station (ETS) and Differential Global Positioning System (DGPS), in the Mulshi. We have been informed that the pilot has been completed and the State Government has proceeded to digitise maps of these re-surveyed villages. The RoRs of these re-surveyed villages are also in the process of being revamped to integrate the geo-co-ordinates and aerial images, of the individual land parcels. Figures 1 and 2 contain images of a hand-written RoR and a revamped digitised RoR with geo-co-ordinates and an aerial image of the land parcel integrated in it.

 Fig 1: Hand-written RoR Fig 2: Sample RoR generated from the pilot re-survey in Mulshi

The sample RoR in Fig.2 is a remarkable development in land record administration, as it integrates textual and spatial information pertaining to a specific land parcel in a single document maintained by the state.

### Digitisation of the process of recording a change of interest in land

There are two processes involved in recording a change of interest in land. First, registration of the deed (contract) under which the change of interest is recorded. The Registration Act, 1908 mandates the registration of certain land transactions such as sales and mortgages, and requires the physical appearance of the parties to a contract before the SRO for the registration process. In 2013, Maharashtra made certain amendments to the Registration Act to allow registration through electronic means and issued rules to allow the e-registration of certain documents such as leave and license agreements.

While the State Government has undertaken three initiatives for digitising different stages of the registration process, the process can only be completed by physically attending the SROs, except for leave and license agreements in respect of built-up property. Table 4 summarises the status of digitalisation of each process involved in a land transaction, and gives a comparative overview of Mulshi and Palghar Tehsils.

 Stage Mulshi Palghar Title search Not digitised Not digitised Determination of stamp duty Digitised Digitised Payment of stamp duty and registration fees Digitised Digitised Preparation of the transfer document Digital facility available only for leave and license agreements in one SRO Digital facility available only for leave and license agreements Application for registration Digitised in one SRO Digitised Verification of identity and documents Digital verification of identity done for leave and license agreements in one SRO Digital verification available only for leave and license agreements Getting photographed Digital facility available only for leave and license agreements in one SRO Digital facility available only for leave and license agreements

The second process involves the updation of the RoR. In most
states, the RoR is prima facie evidence of interests created in respect of land. We find that while the data-entry processes at the revenue offices have been digitised entirely, the process of applying for updation of RoRs continues to remain paper-based. Table 5 gives an overview of the status of digitisation of each phase of updation of RoR. While Table 5 gives a comparative overview of our findings in Mulshi and Palghar Tehsils, it represents the status of digitisation of the process for updating the RoR across Maharashtra:

Table 5: Digitisation of the process for updating RoRs
Application for updating the RoR Not digitised Not digitised
Data entry for updating the RoR Digitised Digitised
Generation of a notice inviting objections Digitised Digitised
Certification by the circle officer Not
digitised
Not digitised

### Digitisation of the process for retrieval of copies of land records

Easy access to title records is one of the fundamental tenets of a good land records administration system. We find that while copies of RoRs are easily retrievable from the web by keying in basic details of the land parcel such as the cadastral number, such copies are not certified or digitally signed, which creates challenges for their usage as evidence before courts and other authorities. However, we understand that digitally signed copies of RoRs for a few Tehsils in Maharashtra are available for web retrieval, although we have not been able to retrieve any. The state officials informed us that copies of registered deeds can be retrieved from the web by keying in basic details about the land parcel or the registered deed. However, we have not been able to retrieve any. Cadastral maps are not available for retrieval online. In a nutshell, the process of applying for certified copies of title records continues to be largely physical.

As part of the study, we conducted test checks for retrieving a copy of a document known as Index II (which is a record issued by the SRO containing an extract of the transaction in a registered deed) and RORs. Table 6 contains the results of our test checks for retrieval of land records in Maharashtra.

Table 6: Digitisation of the process for retrieval of land title records
Online Kiosk Office retrieval
Index II Facility available but we could not retrieve copies No Yes
RoR Yes Yes Yes
Cadastral Maps No No Yes

### Time for service delivery

We also studied the time taken for delivery of certain services to the citizens, namely: the time taken for registration, updation of land records and retrieval of certified copies of land records. For this purpose, we conducted test checks on randomly picked applications made in the last three years from each of the offices. Tables 7 and 8 contain our findings of such test checks conducted in Mulshi and Palghar Tehsil level offices.

Table 7: Time taken to obtain certified copy of RoRs and CMs
Minimum (in days) Maximum (in days) Average (in days)
RoRs
Mulshi (when original not digitised) 10 68 29.4
Mulshi (when original digitised) 2 2 2.5
Palghar Same day Same day NA
Mulshi Same day Same day Same day
Palghar Same day Same day NA

Table 8: Time taken for registration and updation of land records
Minimum (in days) Maximum (in days) Average (in days)
Registration of land transfers
Mulshi Same day Same day NA
Palghar Same day Same day NA
Updation of RoR
Mulshi (sale) 48 170 85.2
Mulshi (succession) 37 287 110.4
Palghar (sale) 38 111 52.6
Palghar (succession) 26 67 47.8
Correction of entries in the RoR
Mulshi 33 311 137.25
Palghar 109 535 269.6

### Digitisation of the inter-connectivity between the various offices

As mentioned above, land records are currently maintained across three different departments of the Revenue Ministry. Clean title records require constant co-ordination between these departments. We find that the SROs (where land transaction deeds are registered) and the Talathis (who maintain RoRs at the village-level) are digitally interconnected, so that details of land transactions are regularly intimated to the Talathi, who then initiates the process for updating the RoRs. However, the co-ordination is often affected by breakdowns and power shortages. On the other hand, the connection between the survey department (which is in charge of preparing CMs) and the other two departments is weak. Also, we find that courts, which often pass orders affecting interests in land, are not connected to land records offices.

### Way forward

1. Absence of a comprehensive land records repository:
Title records to a land parcel comprise of the RoR, CMs and registered deeds. All of these are currently maintained by different offices. This inherently creates inefficiencies in the internal management as well as access to title records for the public. Moreover, since these offices are not connected to other forums which are empowered to pass orders affecting rights in relation to land (such as courts, and tribunals), a comprehensive repository reflecting all the interests subsisting in respect of a land parcel, is missing. While digitisation, as is being currently implemented, can increase the efficiency of these silos, the creation of a single repository reflecting all interests in land, will be game-changer.
2. Varying levels of progress in digitisation: We find that while some components of the system are in reasonably advanced stages of digitisation, others are not. For instance, the digitisation of CMs has not seen much progress in the state. Greater progress can be achieved on this front by either dispensing with land surveys for digitisation of CMs, or pursuing alternative survey techniques and easing government contracting processes for conducting surveys. Similarly, the processes of applying for registration, updating mutation entries and boundary demarcation, have not been digitised.
3. Optimising interface platforms for service delivery:
There is scope for bringing in efficiencies in the interface between the public and the land records administration by implementing some reasonably easy processes, such as allowing them to remotely track the status of their applications for land-related services.
Even the platforms currently available do not allow land-holders to access copies of title records that will be accepted before judicial forums. For instance, copies of land records, such as the RoR that can be accessed from the web, are neither digitally signed nor certified. While we understand the process of facilitating such access is underway, until such access is fully operationalised, the absence of certified copies would imply that there is no legal sanctity to land title records retrieved from the web.
4. Infrastructure issues: Throughout the duration of our study, we noticed infrastructure issues such as server breakdowns, slow connectivity, power shortages and shortage of survey equipment, which are major contributors to delays in the service delivery. We noticed the absence of good physical office infrastructure in several offices responsible for maintaining land records. For instance, we found that many of these offices lacked basic facilities such as restrooms and other resources necessary for any record-keeping unit such as photocopiers and printers.

### Conclusion

The average Indian household holds 77% of its total assets in real estate. Anecdotally, land and fixed assets constitute a significant proportion of secured lending in India. The World Bank's Ease of Doing Business Ranking 2018 ranks India in the bottom quartile for property registration. In short, as per these rankings, critical infrastructure for a land market in India, is at best, poor and at worst, non-existent. The recent focus in India on digitisation of land records administration is admirable and is a step in the right direction towards increasing the overall efficiency of land record administration in India.

Even as we seek to improve land records administration through a single-minded focus on digitisation, the next step in this field is to re-think the institution design for the maintenance land records by the state, and re-focus it on service-delivery, as opposed to the collection of land revenue.

### References

Jonathan Zasloff, India's Land Title Crisis: The Unanswered Questions, Jindal Global Law Review, Vol. 3, 2011.

Sudha Narayanan is faculty at IGIDR. Gausia Shaikh, Diya Uday and Bhargavi Zaveri are researchers at IGIDR.

## Thursday, December 07, 2017

### Understanding the recent IBC (Amendment) Ordinance, 2017

by Rajeswari Sengupta and Anjali Sharma.

The Insolvency and Bankruptcy Code, 2016 (IBC) is a landmark reform for India. At its core are three principles. First, businesses can and will fail, and all failure is not fraud. The IBC provides a forum for the creditors to collectively resolve such failures. Second, insolvency resolution is a commercial decision best left to the creditors' collective wisdom. Creditors are better placed than the state or the judiciary to decide whether to resolve or liquidate a firm in distress. Finally, predictability in the resolution process and the resolution outcomes improves the overall credit ecosystem. The report of the Bankruptcy Law Reforms Committee (BLRC) which proposed the IBC clearly explains that such a principles-based approach would yield positive outcomes for the overall credit environment of the country.

One year after the notification of the law, an Ordinance to amend IBC has been promulgated. This Ordinance bars several categories of persons and entities from participating in the IBC processes. In our assessment, by doing so, it goes against each of the three core principles of the IBC. In this article we analyse the Ordinance from three perspectives:

1. Who does the Ordinance disqualify and from which IBC processes? Does the disbarment extend beyond the promoters of the firms in IBC?

2. What is the likely impact of the Ordinance on the IBC?

3. What is the likely impact of the Ordinance on the incentives of the various concerned parties?

### Q1. Who does the Ordinance disqualify? From which IBC processes?

The Ordinance introduces a new section 29A in the IBC. This section identifies eight categories of participants and bars them from participating in three IBC processes. It bars them from being a resolution applicant and submitting resolution bids for firms that are in IBC. Second, it bars them from making any bids in the IBC liquidation process. Finally, it bars them from being associated with the debtor firm while an IBC resolution plan is being implemented.

A critical feature of the disbarment is the extent of its coverage. Not only does the Ordinance bar the eight categories of participants, it also bars all persons connected with them (section 29(i)). The definition of connected person is fairly wide. As per the Ordinance, it includes promoters, holding and subsidiary companies, associate companies, persons in management, persons in control as well as related parties. It is unclear which definition of related parties will be applicable to assess this disbarment. The term related party is defined in three separate laws, each with varying degrees of coverage:

1. Under section 188 of the Companies Act, 2013.
2. Under the Clause 49 of the Listing Agreement laid down by SEBI.
3. Under section 2(24) of the IBC itself where related parties in relation to the corporate debtor are laid down.

The IBC definition of related party is the widest. It includes directors, partners, key management personnel, entities with common directors, advisors, entities associated with policy making, subsidiaries, holding companies, associate companies, shareholders with 20% or more voting rights, and entities that provide or receive managerial or technical assistance.

The eight categories of persons being disbarred are themselves extensive in coverage. These categories are sourced from several laws ranging from the Banking Regulation Act, the SEBI Act, the Indian Penal Code (IPC), and the IBC itself. Laws from foreign jurisdictions also form the basis of one such category. We take a closer look at these categories of disbarment, their possible coverage, and the requirements which form the basis of these disqualifications.

1. Undischarged insolvent (section 29A(a)): Given that the IBC is the insolvency law in force, this category finds its basis in the IBC itself. It effectively excludes all entities that are in the IBC process, and their related parties such as promoters, managers and associate companies, from making resolution bids or participating in liquidation. With this clause in place, only third parties not connected to the firm in IBC can participate in the IBC resolution process. However, the other clauses of the Ordinance include even the third parties in the list of exclusions.

2. Persons convicted for any offence punishable with imprisonment for two or more years (section 29A(d)): This category finds its basis in the Criminal Procedure Code (CrPC) as well as other laws which have penal provisions for imprisonment of two years or more. For instance the Income Tax Act, the Negotiable Instruments Act, and the Prevention of Money Laundering Act all have such provisions for a range of offences. The manner in which this clause has been drafted does not require the person to be awarded an imprisonment of two years or more. It requires only that the offence they have been convicted of have this penalty available as an option. Often the imprisonment penalty in these laws ranges from three months to two or three years. The intent of this clause may have been to disbar persons who have been convicted of serious offences from IBC proceedings, but its drafting overreaches and disbars a far larger group of participants.

This clause creates uncertainty about any IBC bids from persons who may be under investigation for such offences. The Committee of Creditors (CoC) may be biased against such bids due to the risk of future convictions. This clause also has the potential of being abused by vested interests who may use it to create negative biases against competitors' bids.

3. Wilful defaulters (section 29A(b)): This category finds its basis in the wilful defaulter guidelines of the Reserve Bank of India (RBI). There are inherent problems in the process using which some defaulters are classified as 'wilful'. The process is conducted entirely by committees of banks' senior management, who in this case are nemo iudex in causa sua or judges of their own cause. Even though the consequences of being classified a wilful defaulter are steep, there is no appeal mechanism available in the RBI norms. In some cases, the classification as wilful defaulter has been successfully challenged in High Courts.

The RBI norms bar wilful defaulters from accessing bank credit. SEBI has barred them from a wide range of activities in the capital markets- from raising capital, to holding Board positions, to setting up capital market intermediaries such as mutual funds or brokerages. Reports suggest that as of March 2017, banks had classified 8,915 accounts amounting to Rs. 0.92 trillion of loans as wilful defaults.

Since a wilful defaulter is shut out from formal financial institutions and markets, market dynamics would naturally prevent them from submitting any credible bids in the IBC resolution process. Even if a wilful defaulter is able to submit a bid, the CoC in IBC has the power the reject such a bid. Given that commercial incentives were already stacked against any bids made by wilful defaulters, it is unclear why the need was felt to amend the law to exclude these entities explicitly.

4. Any person with a loan that has been NPA for one year or more (section 29A(c)): This category finds its basis in the micro-prudential regulations that RBI imposes on banks under the Banking Regulation Act, 1949. When loan accounts become overdue for more than 90 days, banks are required to classify them as non-performing assets (NPAs). A borrower whose loan remains an NPA for 12 months or more, is barred by this Ordinance from submitting IBC resolution bids. A person may have one or more loans from banks and if even one of them fulfills this condition, then she is barred from bidding in IBC.

This criterion creates uncertainty for participants in the stressed asset market who may have invested in a defaulting firm or wish to buy NPAs from banks. Unless they get clarity that these actions will not disbar them from the IBC process, they will be disincentivised from making such investments.

A recently released Credit Suisse report points to the likely extent of exclusion that may occur on account of this category of disbarment. It finds that more than 50% of the stressed debt in the corporate sector (Rs 7.3 trillion) is with firms whose interest coverage ratio (ICR) has been less than one for two years. An ICR of less than one over such a long period suggests that many of these firms did not have the wherewithal to pay the interest on their borrowings and are likely to be NPA for more than 12 months in the banks' books.

The Indian corporate sector has been in distress from 2010 onwards. For a large part of this period, banks under the umbrella of various restructuring schemes initiated by the RBI allowed corporate distress to remain hidden and unresolved. In the last two years, as part of RBI's Asset Quality Review (AQR) process many of these corporate loan accounts got classified as NPAs. Barring them from the IBC process puts the blame for unresolved distress squarely on these companies and their promoters, and lets the banks and the RBI off the hook despite their role in encouraging the 'extend and pretend' course of action and delaying resolution of corporate distress.

5. Persons disqualified as directors (section 29A(e)):
This category finds its basis in section 164 of the Companies Act, 2013 (CA2013) which lays down the criteria for director disqualification. In October 2017, in a crackdown on shell companies, the Ministry of Corporate Affairs disqualified around three lakh persons from acting as directors. This action was taken under section 164(h)(a) of CA2013, which disqualifies a director of a company that has not filed financial statements or annual returns for three years in a row. There is no appeal mechanism available in CA2013 for a person disqualified as a director.

6. Persons barred by SEBI from the securities markets (section 29A(f)): This category finds its basis in the penal provisions of the SEBI Act, 1956. This disqualification criterion lacks clarity. The SEBI Act empowers SEBI to issues two types of orders through which participants are barred from accessing the securities markets: interim orders and final orders. Interim orders are ex-parte orders that are issued when investigation against the concerned entities is still ongoing. In these cases the concerned parties do not have the remedy of appeals to the Securities Appellate Tribunal (SAT) available to them. In its current form, the Ordinance bars both types of participants from the IBC process: those against whom an investigation is ongoing, and those against whom a final order has been made by SEBI.

7. Persons who have given a guarantee to a creditor in respect to a corporate debtor in IBC (section 29A(h)): This clause does not have any legal basis. Its simply bars any person who has extended an enforeceable guarantee to a creditor in respect of a company in IBC from submitting bids under IBC. Effectively, it makes the act of giving a guarantee an offence which is penalised under IBC.

For a long time, banks in India have followed the practice of taking guarantees from promoters, major shareholders and associate companies for giving loans to companies. If such a company became distressed and ended up in IBC, it is unclear why these parties should be excluded from the resolution process. If these guarantors fail to fulfill their guarantee, IBC can be triggered against them. Similar concerns also arise for parties that have provided credit enhancement facilities, which are nothing more than guarantees.

8. Persons from foreign jurisdictions (section 29A(j)):
This category offers the least clarity, in terms of coverage and intent. It bars from the IBC bidding process any person who falls in categories 1 to 7 as per the laws of foreign jurisdictions.

The drafting of this clause suggests a wide disqualification, even for foreign participants. For instance, it suggests that a person or a company in India who may have an NPA account of more than one year in a bank in the UK is barred from submitting IBC resolution bids for any company in India. Likewise, a person or a company in the UK, who has given a guarantee for a UK company which goes into insolvency as per UK laws, cannot submit a resolution bid for a company under IBC in India.

To sum up: if a person satisfies any of the above criteria or if a person is connected to an entity who satisfies any of the above criteria, then she cannot make a resolution bid or participate in liquidation proceedings in IBC.

The initial discussion around this Ordinance focused on the disbarment of promoters of firms that are undergoing IBC proceedings from the resolution process of their own firms. However, in its current form the Ordinance bars them from any IBC resolution or liquidation, not just of their own firm. It also bars from the IBC bidding process, promoters of firms that are not in IBC, but who fall in any one of the eight categories.

### Q2. What is the likely economic impact of this Ordinance on IBC?

In our view, this Ordinance will impact the IBC in four ways:

1. Procedural impact: The Ordinance introduces substantial procedural uncertainty in the resolution process and opens it up to disputes and litigation. For instance, it is unclear if this Ordinance will apply prospectively or retrospectively. Will it apply to the cases that are already in IBC? Similarly, will it apply to borrowers whose loans were NPA greater than 12 months as at the date of the Ordinance, or after?

It complicates the role of the Resolution Professional (RP) or the Liquidator. These insolvency professionals now have the task of determining the eligibility of applicants as per this Ordinance.

The Ordinance also puts a strain on the 180 (or 270) day timeline of the IBC. In case potential resolution applicants dispute their disbarment, the entire IBC process has to be put on hold till such dispute is adjudicated upon. If this Ordinance is applied to the current IBC cases many of which are already well underway, then the IPs may have to seek bids from new applicants eligible under the Ordinance and discard existing offers that may have been made by persons falling in any of the eight disbarment categories. The timeline of 180 (or 270) days may not be sufficient for the IPs to go through the bid-seeking process all over again.

2. Economic impact on resolution: The Ordinance effectively disqualifies vast sections of the corporate world,
both in India and abroad, from participating in the IBC bidding process. In doing so, it significantly reduces the number of likely resolution plans that maybe submitted in any IBC case in an already gloomy landscape. The lack of competition among the narrow pool of eligible bidders will depress the financial value of any resolution plan that is eventually submitted to the CoC. The smaller the value of the eligible resolution plans, the greater will be the haircuts that the financial creditors, including banks, will be forced to accept. If the Ordinance is retrospectively applied, it will affect the current crop of 402 cases in IBC, including the 12 big cases that the RBI had identified earlier this year. These 12 cases are in the distressed sectors of steel, power, infrastructure, engineering-procurement-construction etc. for which recovery rates are expected to be low. With this Ordinance, the recovery rates in these cases will be even lower than initially expected. It is likely that many of these will end up in liquidation due to lack of sufficient bids.

3. Economic impact on liquidation: In the worst case scenario of no viable resolution bid submitted during the 180 (or 270) days of IBC, the firm in question will go into liquidation. Liquidation recovery rates are in any case lower but the Ordinance further aggravates it by signficantly reducing the pool of prospective buyers in liquidation as well.

Presumably the driving force behind the Ordinance is to keep the promoters of the IBC firm at bay in order to prevent them from buying back the firm at a lower price. In India, third parties may find it difficult to acquire and manage promoter-controlled businesses without the cooperation of promoters. This is because such businesses may be operating on the basis of a large number of unwritten, informal contracts between the promoters and other parties. These maybe difficult for the RP to formalise within the 180 (or 270) day period of the IBC resolution process.

Even if an eligible, external bidder makes a bid for acquiring a firm in IBC, it will apply discounts to the risks it faces on account of these informal contracts. In many cases these risks may be large enough to deter any third party bids. The exclusion of the promoters by the Ordinance may in fact negatively impact the outcome. In such circumstances, liquidation of the firm becomes highly likely.

Large scale liquidations destroy organisation capital of firms. They are bound to have a detrimental effect on jobs, corporate sentiments and the overall economic growth of the country. In other words, the repercussions of the Ordinance may extend far beyond mere promoter exclusion.

4. Impact on IBC principles: By substantially shrinking the universe of eligible resolution applicants as well as potential buyers in liquidation, the Ordinance violates the core principles of the IBC.

The IBC is based on the premise that all business failure is not fraud. The Ordinance by its very design goes against this principle. By disqualifying from the IBC bidding process any defaulter who has had an NPA account for one year or more, or who has given a guarantee, it views business failure and fraud with the same lens. A person may have faced adverse economic shocks such as a business cycle downturn or a commodity price shock as a result of which the firm owned or managed by her may have been unable to repay a loan for more than a year. This is different from a fraudulent or an unscrupulous promoter who may have been siphoning off assets from her own firm and hence has rendered it insolvent by her own actions. The Ordinance treats both these categories on par. In doing so and by disqualifying genuine bidders, it runs the risk of committing what is called a Type I error in statistical analysis.

Another core principle of the IBC is that the resolution outcome is best left to the creditors' collective wisdom. Accepting or rejecting a resolution plan is a commercial decision and the creditors are best-placed to evaluate such a plan. The IBC gives the CoC complete discretion to reject any resolution plan that they may consider unviable or unsuitable. The creditors should have the right to choose a plan based on how much value they will recover in the process. By interfering with this process and by deciding who all are now eligible to submit their bids, the Ordinance risks jeopardising the very outcomes intended by IBC.

An ultimate test of the success of IBC is the recovery rate. As the preamble to IBC clearly states, the primary objective of the law is maximisation of value of assets of the debtor firm undergoing the insolvency and bankruptcy proceedings. Fulfilling this objective requires a competitive bidding process such that there is a fair price discovery mechanism. The Ordinance thwarts this process by removing a large number of potential bidders from the applicant pool. By doing so, the Ordinance may end up lowering the recovery rate in the IBC resolution process. This creates uncertainty in the credit environment of the country. Creditors are encouraged to offer better terms and conditions when they are assured of a certain outcome upon the default of a firm. In an environment of persistently low recovery rates, IBC may not result in the desired outcome of an improved credit culture.

### Q3. What is the likely impact of the Ordinance on the incentives of concerned parties?

The Ordinance, by its sweeping nature, is likely to affect the incentives of several stakeholders, both within and outside of IBC proceedings. Here we conjecture about the change in incentives of three main parties:

#### Promoters and borrowers

The Ordinance shuts out a large fraction of the promoters from the IBC bidding process, not just the wilful defaulters. Once disqualified from submitting bids for their own firms, the promoters have little incentive to co-operate with the RPs and share relevant information using which the RPs can seek potential bids.

In fact, as a firm becomes stressed, the Ordinance creates incentives for its promoters to indulge in high risk behaviour or asset stripping, even is it means running their firms to the ground. This is because the promoters know that with the amended IBC in place, they have no chance to buy back their firm once it enters into IBC.

The Ordinance disqualifies defaulters with an NPA account of one year or longer. This clause creates disincentives for firms that have inherently risky business models to seek bank financing. Since banks are the largest source of finance in India, this may create barriers to firm growth.

In the long run the Ordinance may affect the spirit of entrpreneurship in the country. The essence of IBC is to facilitate quick exits of failed firms and to accept failure as a natural outcome of entrepreneurship. With the Ordinance in place, the amended IBC will lead to promoters losing their firms even if the firms were in genuine distress.

#### Banks

The Ordinance gives incentives to the banks to delay NPA recognition for as long as possible.

By disqualifying a large number of persons, the Ordinance will lower the amount that the banks as the main financial creditors in most of the IBC cases expect to recover. This may result in the banks not recognising accounts as NPA so that the promoters can submit their bids in the IBC resolution process. The more the number of resolution plans submitted to the CoC, the higher will be the recovery rate in the competitive bidding process. It is possible that banks may also pressurise the promoters to pay up their dues but there is also a cost of provision that comes with early classification. If, as a result of the Ordinance, banks can benefit from higher recovery rate and also avoid provisions, they may have a greater incentive to delay NPA recognition.

Further, given that the Ordinance may adversely affect the recovery rate in the IBC process, banks may no longer have the incentive to trigger IBC to begin with. This Ordinance puts at risk even the out-of-court settlements with the eight categories of disbarred participants. For instance, if a plan that involves one of the eight categories of participants is negotiated out-of-court, and IBC subsequently gets triggered by a third party, the negotiated plan cannot be implemented and the RP has to seek fresh resolution bids.

#### Government

Most of the banks in the CoC are public sector banks, especially in the big cases undergoing IBC proceedings. By affecting the recovery rate that these banks may expect to achieve, the Ordinance may also affect the incentives of the government as the majority shareholder in these banks. The government maybe incentivised to encourage public sector firms (PSUs) to bid in the IBC resolution process so that the deals go through at relatively higher prices and the PSU banks do not face large haircuts. This may create an illusion of success in the IBC process but it will result in increased government ownership in the stressed industries which is not an efficient outcome.

If the inevitable outcome of the Ordinance is an increase in the number of liquidation cases, then also the government maybe incentivised to step in and instruct the PSU firms to bid in order to prevent large scale liquidations and resultant job losses.

### Conclusion

Given its wide coverage, it is not clear whose interest the Ordinance is trying to protect or who the Ordinance is trying to punish. It is difficult to ignore the role of the promoter in any Indian business. If the promoter is allowed to bid for her firm as part of the IBC resolution process, there may not be any other bidder because there is a big asymmetry of information that favours the promoter. If, on the other hand, the promoter is completely shunned, then there may not be sufficient number of bids and the firm may go into liquidation.

One way to resolve this conundrum maybe to bar promoters from participating in the IBC bidding process in their full capacity while permitting them to make deals with third parties such as private equity funds, who would be the primary bidders. The share of the promoters maybe capped at a certain threshold in the resolution plan submitted to the CoC by the fund. This could be a reasonable compromise wherein the promoters get some value out of the auction process. They are not able to fully buy back their firms at a discounted price neither are they completely pushed aside. This may also ensure that the firm does not get liquidated and organisational capital is not lost.

Once such a condition is put in place in the amended IBC, there is no rationale for barring all the other categories of persons in the sweeping manner as done by the Ordinance. The IBC process in essence is a commercial one and the Ordinance to amend the IBC should not be driven by moral considerations.

Rajeswari Sengupta and Anjali Sharma are researchers at Indira Gandhi Institute of Development Research, Mumbai. The authors would like to thank Ajay Shah and Josh Felman for useful discussions