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Monday, May 29, 2017

Interesting readings

The task of MOF by Ajay Shah in Business Standard, May 28, 2017.

India Second Most Complex Tax Jurisdiction After China, Deloitte Says by PTI in Bloomberg, May 28, 2017.

Three Years of Modi Management: The Numbers Don't Tell a Good Story by M. K. Venu in The Wire, May 27, 2017.

A bleak outlook - The road to mob rule in Uttar Pradesh by Ramachandra Guha in The Telegraph, May 27, 2017.

Modi Government's New Restrictions on 'Cattle' Slaughter Will Hurt Indian Farmers the Most by Sagari R. Ramdas in The Wire, May 27, 2017.

Rise of war porn: The hyper-nationalism being unleashed today has electoral rather than strategic considerations by Manoj Joshi in The Times of India, May 27, 2017.

Why the BJP must fear its own fringe by Abhijit V. Banerjee in The Indian Express, May 26, 2017.

If Creating Institutions of Eminence is to be More Than a Naming Exercise, Here Are a Few Ideas by Gautam Desiraju in Swarajya, May 25, 2017.

Publishers fear red tape, censorship, Govt gets a warning by Ritika Chopra in The Indian Express, May 25, 2017.

Why religion and building temples is a profitable business in India by
Mohan Guruswamy in Hindustan Times, May 25, 2017.

Farm policy: Dis-ease of doing the business of agriculture by Pravesh Sharma in The Indian Express, May 25, 2017.

Donald Trump' Base Is Shrinking by Nate Silver in FiveThirtyEight, May 24, 2017.

There is no one right way to react to terror. There is a wrong way by Anne Applebaum in The Washington Post, May 24, 2017.

Trump's budget is simply ludicrous by Lawrence H. Summers in The Washington Post, May 23, 2017.

Google's AI Invents Sounds Humans Have Never Heard Before by Cade Metz in Wired, May 15, 2017.

It took a century to create the weekend - and only a decade to undo it by Katrina Onstad in Quartz, May 6, 2017.

Saturday, May 27, 2017

Improved measurement of Exchange Market Pressure (EMP)

by Ila Patnaik, Josh Felman, Ajay Shah.

Exchange rates vs. exchange market pressure

Changes in the exchange rate are very visible. But is the apparent change in the exchange rate a fair depiction of the pressure on the currency market? As an example, consider China's story with the exchange rate:

Figure 1: China's monthly exchange rate returns (upper) and foreign exchange reserves (lower)

The upper panel is monthly returns on the CNY/USD. Positive returns are depreciations and vice versa.  We see large periods of zero change separated by a few months in which there was an appreciation. Does this mean that in the long periods of zero change in the exchange rate, the currency market was quiescent? No. This is a period in which the Chinese central bank was trading in the currency market on a large scale. As the graph of their foreign exchange reserves shows, they went from \$0.4T in 2004 to \$1.9T in 2009. There was a lot of pressure on the currency to appreciate. What we see, as zero or small negative returns, understates the true story.

In order to address this problem, economists aspire to construct a measure of `exchange market pressure' (EMP), which would show the true conditions on the currency market in each month. To borrow a phrase from Amit Varma's podcast, there's an important difference here between the seen and the unseen. The apparent exchange rate change is what we see. What's really going on, in terms of the macroeconomic situation on the currency market, is the exchange rate pressure.

Conventional thinking in EMP measurement

Attempts at EMP measurement have been in progress since Girton and Roper, 1977. There are many EMP measures in the literature. An important one, which expresses the mainstream strategy, is by Eichengreen et. al., 1996 . They propose an EMP index for a country is given by:

\textrm{EMP}_{t} = \frac{1}{\sigma_{e}} \frac{\Delta e_{t}}{e_{t}} - \frac{1}{\sigma_{\bar r}} \left ( \frac{\Delta \bar r_{t}}{\bar r_{t}} - \frac{\Delta \bar r_{US_t}}{\bar r_{US_t}} \right) + \frac{1}{\sigma_i} \left (\Delta \left (i_{t} - i_{US_t} \right) \right)

Where the exchange rate is denoted by $e_t$, reserves divided by base money is $\bar r_t$ and intervention of the central bank at time $t$ is $i_t$. The change in $e_t$ is denoted by $\Delta e_t$; the change in $\frac{r_t}{m_0}$ is denoted by $\Delta \bar r_t$. The three sigmas, $\sigma_e$, $\sigma_{\bar r_t}$, and $\sigma_i$, denote the standard deviations of the relative change in the exchange rate, difference between relative changes in the ratio of foreign reserves and base money in the home country against the reference country (US), and the nominal interest rate differential.

This EMP measure is essentially a weighted average of changes in exchange rate, foreign exchange reserves, and interest rates. To prevent the most volatile component of the index from dominating (usually the forex reserves), each component is weighted by its standard deviations. The resulting EMP index is dimensionless. There is a literature (Pentecost et. al., 2001, IMF.,2007) which finds that these kinds of measures are useful in forecasting currency crises.

Problems with conventional EMP measurement

This approach to measurement has several problems. When there is a fixed exchange rate, the standard deviation in the denominator goes to zero. When a country with an inflexible rate (low $\sigma_e$) experiences a modest change in the exchange rate, this shows up as a large value of EMP. As an example, consider the Chinese experience in the time period covered in Figure 1:

Figure 2: Conventional EMP measure for China

In some months, it is not possible to compute the EMP as we get a divide by zero. In other months also, the graph above does not square with our understanding of what was going on. As an example, consider the period after the Lehman collapse. The EMP measure seems to suggest that this is where the highest pressure to appreciate was seen, which seems incorrect.

A better EMP measure

A recent paper, Patnaik et al., 2017 introduces a new method for measurement of EMP. This new approach seeks to measure EMP in the units of percentage change of the exchange rate of the month. The EMP reported for a month is an estimate of the unseen - the exchange rate change (measured in per cent) which would have taken place if there had been no currency intervention in that month.

Let's treat this new method as a black box and examine how well it works.

Example: EMP in China

Figure 3: Conventional vs. new EMP measures for China

The figure above juxtaposes the conventional EMP measure against the new proposed measure.

There are two gray blocks in the conventional measure, where EMP can't be computed as it was a fixed exchange rate and we encounter the divide by zero. The new measure has no such problem.

In the long period of pressure to appreciate, the new measure shows an interpretable value such as a 5% appreciation in the month, which would have taken place if there had been no trading by the central bank in the currency market. The conventional EMP index is dimensionless and cannot be interpreted in similar fashion.

At the Lehman crisis, the new measure shows a sudden shift in exchange market pressure, followed by a return to the pressure to appreciate. The conventional measure suggests the highest ever pressure to appreciate was found at the time of the Lehman crisis, and this pressure subsided later.

Example: EMP in India

Figure 4: Conventional vs. new EMP measures for India

For macroeconomists who know the Indian experience closely, the new measure makes a lot of sense.

In early 2007, it is rumoured that RBI was purchasing as much as \$1B a day, and there was very high pressure to appreciate prior to the structural break in the exchange rate regime on 23 March 2007. This shows up correctly in the new measure. The conventional measure, in contrast, thinks there was not much going on then.

The conventional measure seems to say that at the Lehman crisis, there was a switch from depreciation pressure to appreciation pressure. This seems unlikely. The new measure shows the highest-ever pressure to depreciate right after the Lehman crisis. This seems correct.

Example: EMP in Russia

Figure 5: Conventional vs. new EMP measures for Russia

There was a long period (2002-2008) with one-way pressure to appreciate. This is picked up in the new measure but not in the conventional measure.

The Russian invasion of Georgia (08/08/08), followed by the Lehman shock in the next month, are associated with an immediate shift to depreciation pressure in the new measure (from August itself, reflecting the Georgia invasion). The conventional measure does not pick up these events correctly.

The Russian invasion of Crimia is followed by pressure to depreciate, in the new measure. This does not appear as clear in the conventional measure.

Example: EMP in Brazil

Figure 6: Conventional vs. new EMP measures for Brazil

The Lehman failure, and the Taper tantrum, show up as episodes of pressure to depreciate in the new measure but not in the conventional measure.


Exchange market pressure is an important tool for better understanding macroeconomics. While the concept has always been attractive, conventional methods for measurement have had limitations. The new measure makes it possible to take interest in EMP as a tool for macroeconomic analysis. This article aims to unveil the new measure as a black box, to show that it works better than the conventional measure. The methodology is presented in the underlying paper. The resulting dataset, with monthly EMP data for 139 countries, has been released, and has diverse potential research applications.


Eichengreen, B., Rose, A., Wyplosz, C., 1996. Contagious Currency Crises , Technical Report. National Bureau of Economic Research.

Patnaik, I., Felman, J. and Shah, A., 2017. An exchange market pressure measure for cross country analysis . Journal of International Money and Finance, 73, pp.62-77.

Desai, M., Patnaik, I., Felman, J. and Shah, A., 2017. A cross-country Exchange Market Pressure (EMP) Dataset . Data in Brief.

Pentecost, E., Van Hooydonk, C., Van Poeck, A., 2001. Measuring and estimating exchange market pressure in the EU . J. Int. Money Finan. 20, 401¡V418.

IMF, 2007. Managing Large Capital Inflows , Technical Report. International Monetary Fund.

Thursday, May 25, 2017

Regulatory Policy in India: Moving towards regulatory governance

by Lalita Som.

Regulatory policy, a comparatively young discipline, is evolving in different ways across the world, reflecting the diverse range of legal, political and cultural contexts on which countries have built their public governance. Regulation, one of the key levers of state power, is of critical importance in managing the economy, in sequencing business behaviour, implementing social policy and influencing behaviour. Regulatory policy thus helps to shape the relationship between the State, citizens and businesses.

In OECD countries, policies to increase competition in markets, and to "roll back the frontiers of the state" in the 1980s and 1990s, broadened to become regulatory reform. Regulatory reform became an essential adjunct to structural reforms, reaching out beyond the network sectors to encompass product market reforms and the liberalisation of professional services. Independent regulatory agencies were developed to manage key aspects of economies and society at an arm's length from the political process. This became known as the regulatory state. The regulatory state paved the way for the idea of regulatory governance (OECD, 2010a).

In OECD countries. regulatory policy has made a significant contribution to economic growth and societal well-being - through its contribution to structural reforms, liberalisation of product markets, international market openness, and a less-constricted business environment for innovation and entrepreneurship. Regulatory policy has supported the rule of law through initiatives to simplify the law and improve access to it, as well as improvements to appeal systems. Increasingly, it has supported quality of life and social cohesion, through enhanced transparency which seeks out the views of the regulated, and programmes to reduce red tape for citizens.

Many OECD countries are concerned about distributional equity – to maximise the welfare of the most disadvantaged, paying attention to distributional consequence of policy actions, albeit not beyond the point at which they would impede on overall prosperity. These insights have had a strong practical influence on approaches to the impact assessment of regulations and especially, analysis of costs and benefits, including distributional aspects and under conditions of uncertainty (OECD, 2010a).

Regulatory reform can be viewed strategically, in both developed as well as emerging markets, as one of the core instruments at the disposal of policy makers. The modern State will have to utilise its regulatory power wisely if it expects to be smarter in order to face challenges like the growing fiscal burden for providing key public services such as health, education and social insurance schemes, in establishing governance arrangements and rationalising complexities to manage the consequences of decentralisation, in supporting the investment climate and in reducing the state's role as an active investor in the economy.

In fulfilling these objectives in an effective way the overall framework of the formulation of laws and regulations requires an explicit whole-of-government approach for regulatory policy, including: responsibility for co-ordination and oversight of regulatory policy; a commitment to assess the cost-benefit of new regulatory proposals and existing regulations, and; the effective implementation of the principles of transparency and public consultation in regulatory decision making (OECD, 2010a).

In emerging markets, extensive state ownership and interference have led to regulatory uncertainty and a business climate that is not conducive to fair competition in open markets. The state's dual role as an active investor and referee has meant that the government is uniquely positioned to shape the applicable legal regime with its interests as shareholder in mind. In many cases, state ownership has created conflicts of interest for the authorities and distorted or suppressed competition. Regulatory institutions and processes are still young in emerging markets, and often regulatory authority is fragmented across a number of bodies, some of which have conflicting mandates. Inadequate co-ordination among government bodies at the national and sub-national levels is a widespread problem, leading to unclear, duplicative, and often conflicting efforts in a number of areas. The lack of sound regulatory governance has meant that popular perceptions of endemic patrimonial politics have persisted, with vested interests and collusion being assumed to operate at the expense of the national interest.

A recent OECD Regulatory Policy Working Paper, Regulatory Policy in India: Moving towards regulatory governance, looks at India’s existing regulatory regime and its evolution in the last two and half decades. The mechanisms of regulatory governance have weaknesses, and in some cases have fallen short of expectations. The paper looks at India's uneven regulatory environment and how its legacy features constrain the evolution of regulatory governance.

Foremost is the difficulty in designing and implementing regulatory policies given the government's inclination to maximize its revenue at the expense of social welfare. This trade-off has compromised effective regulation in the country because of a lack of understanding of what constitutes the objectives of regulatory governance. The paper highlights how the dichotomy between the interests of governments and businesses, as well as that of citizens, has manifested itself over the years in four distinct sectors i.e. mining, hydrocarbons, power and telecoms.

Basic regulation in India is implemented via the concerned line ministries, which may proceed to create industry-specific regulatory authorities that have varying degrees of autonomy, functions, and power. There are significant variations in the structure of the governing bodies, tenure of the members, sources of finances, and interface with the government. A noticeable feature of many of the regulators in India is that they are charged with the promotion and development as well as the regulation of a certain industry. That can result in the regulator thinking of the interests of the industry rather than the users of the industry.

In sectors like insurance, coal, petroleum, telecoms, banking, regulatory strategies are hampered by the presence of State owned firms. The inadequate institutional distance between regulators and state-owned firms, especially when there are no firewalls between them, has meant that the regulators have not promoted enough competition.

In these areas, the State is obliged to play a dual role: i.e. that of market regulator when it is also the owner of commercial SOEs, particularly in newly deregulated, often partially privatised industries. Whenever this happens, the State is inevitably conflicted in its opposing interests as: first, a major market player/firm owner in its own right, and second, as an arbitrator in the (supposedly) neutral, impartial, dispassionate role of regulator.

Regulators are expected to behave independently, and the challenge of independence is to avoid capture by interest groups who stand to benefit from regulation. It is equally significant to avoid regulatory capture by local politicians. Local politicians are attracted by the possibility of large economic rents in perpetuity. Too often, regulators have actively internalised political sentiments in their decision-making. In addition, the elite governmental bureaucracy has a ubiquitous presence in regulatory bodies. Regulatory independence from the executive is difficult to administer if regulators themselves come from a career backdrop of directing political decisions. This strain is exacerbated when regulators are appointed directly from senior governmental positions, requiring them to shift, from administering and defending government positions, to acting as an impartial referee (Dubash, 2008).

Many areas, such as agricultural markets, warehousing, or land, require coordinated approaches to regulation (both rule-making and enforcement) by the central government, and sub-national governments at the state and city levels. Economic liberalisation, coming on the heels of political federalisation, has transformed federal –state relations unleashing unintended and unplanned decentralisation (Sinha, 2004). Any regulatory reform agenda depends crucially on a close co-operation between different levels of government. Federal-state relations have been affected significantly with the rise of multi- party coalition governments and alliance politics in the 1990s. Coalition and alliance partners from states have become progressively more powerful at the national level and more capable of bargaining with the national government. That political reality has added considerable complexity to the environmental and social dimensions of economic decision-making which need the cooperation, and an explicit ethos for regulatory governance, of both national and state governments. The need for multi-level policy coordination has been felt making way for the creation of technical and regulatory agencies at various levels, at times adding to the complexity of policy processes, at others to the bypassing of traditional forms of accountability at all levels (Arora, 2014).

In addition to the legacy features of India’s regulatory environment, the country lacks a coherent policy on regulation. A whole of government policy towards "regulating" would provide the connectivity of different reform efforts and help the concerted effort towards regulatory governance instead of disconnected regulatory reforms. This may include a combination of creating or enabling institutions to embed good regulatory principles into their functioning, but also include the systemic implementation of good regulatory practices such as regulatory impact assessments, public consultation and administrative simplification in priority sectors.

Some sub-national regulators in the power sector and the airports regulator have embedded stakeholder engagement with discernible positive outcomes. the more active use of Regulatory Impact Assessment (RIA) and stakeholder consultation, can inform the government on the cost of some of the trade-offs that India faces in the design of its regulatory policy. Although there exists a certain consensus on the importance of RIA and half-hearted efforts have been made so far to implement it, lack of political will, capacity constraints and limited awareness amongst other stakeholders are impeding its further application. Experience with regulatory governance in the last two decades has resulted in the Regulatory Reform Bill 2013 which intends to legislate an overarching regulatory law to introduce further regulatory reforms and standardise some basic institutional features and processes across all regulatory bodies. The OECD would welcome the opportunity to engage with the NITI Aayog during the redrafting process of this bill.

In addition, India could learn from the experience of both mature and young regulatory governance countries in implementing its regulatory policies. Malaysia which has undertaken large market reforms leading to initiatives for greater regulatory coherence. Australia and New Zealand’s Productivity Commissions, show, most importantly, that the regulatory environment needs to be constantly evaluated to make sure it is keeping pace with the changing technology, business environment, and consumer needs and demands (OECD 2010b). The United Kingdom’s Regulatory Policy Committee provides opinions and scrutiny over the quality of analysis by government departments and are engaged in setting "regulatory guidance" across the government. Korea's Regulatory Reform Committee drives forward the regulatory reform agenda (OECD, 2015).


OECD (2010a). 'Regulatory Policy and the Road to Sustainable Growth', OECD Publishing, Paris.

Dubash, Navroz (2008). 'Institutional Transplant as Political Opportunity: E-Practice and Politics of Indian Electricity Regulation', Comparative Research in Law & Political Economy Research Paper No. 31/2008.

Sinha, Aseema (2004). 'The Changing Political Economy of Federalism in India: A Historical Institutionalist Approach', India Review, Vol. 3, No.1.

Arora, Dolly (2014). 'Trends in Centre-State relations', Indian Institute of Public Administration, New Delhi.

OECD (2010b). 'Review of Regulatory Reform: Australia', OECD Publishing, Paris.

OECD (2015). 'Regulatory Policy Outlook', OECD Publishing, Paris.


Lalita Som has worked for the Organisation of Economic Cooperation and Development, Paris. She can be reached at

Wednesday, May 24, 2017

Interesting readings

The hazards of farm loan waivers by Tanika Chakraborty and Aarti Gupta in Mint, May 24, 2017.

Workers At Tata's Sanand Plant Have Been Awaiting Wage Hikes For Over Two Years, As Unfair Labour Practices Abound by Surabhi Vaya in The Caravan, May 23, 2017.

Banking ordinance opens up Pandora's box by Rajeswari Sengupta and Anjali Sharma in Mint, May 23, 2017.

As Modi and his right-wing Hindu base rise, so too does a celebrity yoga tycoon by Rahul Bhatia and Tom Lasseter in Reuters, May 23, 2017.

Where are the 10 million jobs the govt promised? by Mahesh Vyas in Business Standard, May 22, 2017.

Medicine Is Going Digital. The FDA Is Racing to Catch Up by Megan Molteni in Wired, May 22, 2017.

India's New Tax Is Too Complicated by Mihir Sharma in Bloomberg, May 22, 2017.

Why India needs another statistical revolution by Pramit Bhattacharya in Mint, May 22, 2017.

The New IIP Series: Necessary But Not Sufficient by Deep Narayan Mukherjee in Bloomberg, May 20, 2017.

The Real Power of Journalism? Blockbuster Scoops by Liz Spayd in The New York Times, May 20, 2017.

Washington Post, Breaking News, Is Also Breaking New Ground by James B. Stewart in The New York Times, May 19, 2017.

The Most Important Scientist You've Never Heard Of  by Lucas Reilly in Mental Floss, May 19, 2017.

China Is Building Its Way to an Empire by Noah Feldman in Bloomberg, May 18, 2017.

Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs by Shreesh in Capitalmind, May 17, 2017.

President Trump needs single-page memos filled with charts and his name for first foreign trip by Jason Silverstein in NY Daily News, May 17, 2017. In this: Trump has admitted many times that he likes to avoid reading on the job. He told Axios in January that he likes "bullets" and "as little as possible" on his intelligence briefings, which he rarely attends anyway. He also seemed to admit on the campaign trail that he never reads books.

How army rations helped change food by Veronique Greenwood in BBC, May 16, 2017.

Walmart and Banking: It's Time to Reconsider by Lawrence J. White in Money and Banking, May 15, 2017.

Platonically irrational by Nick Romeo in Aeon, May 15, 2017.

Ease of business still just lip service; red tape, taxes put brakes on Modi's Make In India push in The Economic Times, May 14, 2017.

Chasing Cures for Deadly Scourges, and Getting in Our Own Way by Clyde Haberman in The New York Times, May 14, 2017.

Notes From An Emergency by Maciej Ceglowski on Idle Words, May 10, 2017.

Is India lying about its world beating economy? by Derek Scissors in AEI, May 6, 2017.

American banks think they are over-regulated in The Economist, May 4, 2017.

Tuesday, May 16, 2017

Interesting readings

Does the ordinance solve the banking crisis? by Ajay Shah in Business Standard, May 15, 2017.

Don't expect the next generation to save liberalism by Mihir Sharma in Mint, May 15, 2017.

How Google Took Over the Classroom by Natasha Singer in The New York Times, May 13, 2017.

A Run for Their Money: The Struggle to Exchange Demonetised Notes Did Not End in December at the RBI's Branch in Delhi by Ashish Malhotra in The Caravan, May 13, 2017.

The Nepal-Sikh Alliance That Could Have Changed History by Amish Raj Mulmi in The Wire, May 12, 2017.

The satellite imagery in Google maps and Google earth has gone from 5m to 1m resolution! 'Lost' forests found covering an area two-thirds the size of Australia by Andrew Lowe And Ben Sparrow in Phys, May 12, 2017.

The woman who saved old New York by Jonathan Glancey in BBC, May 12, 2017. She is celebrated in Seeing like a State.

Bankers, proxy firms question sudden orders for transferring CEOs of PNB, BOI by Gopika Gopakumar in Mint, May 12, 2017.

Demonetisation and the Delusion of GDP Growth by Ritika Mankar and Sumit Shekhar in Economic and Political Weekly, May 6, 2017.

Comey's Firing Is a Crisis of American Rule of Law by Noah Feldman in Bloomberg, May 10, 2017.

Scaling the World's Most Lethal Mountain, in the Dead of Winter by Michael Powell in The New York Times, May 9, 2017.

Only 36% of Indian engineers can write compilable code: study by Sam Varghese in Itwire, May 9, 2017.

What Happens When Authors Are Afraid to Stand Alone by Jason Guriel in The Walrus, May 9, 2017.

This data set took six years to create - Worth every moment by Hudson Hollister in Data Coalition , May 9, 2017.

Indian Parliament does not make laws, and MPs have little scope to keep govt accountable by Athreya Mukunthan in The News Minute, May 8, 2017.

China faces resistance to a cherished theme of its foreign policy in The Economist, May 4, 2017.

Why You Need More Dirt in Your Life by Simon Worrall in National Geographic, April 30, 2017.

Irreplaceable Pioneer - Obituary: Ravi Dayal (1937-2006) by Rukun Advani in The Telegraph, June 11, 2006.

Monday, May 15, 2017

Author: Pramod Sinha

Measurement of exports in India

by Radhika Pandey, Ajay Shah and Pramod Sinha.

The Indian statistical system has many difficulties. In general, a certain mistrust of official statistics is well placed. Every user of data must skeptically examine all data that is sought to be used. In this article, we kick the tyres of exports data, juxtaposing two different sources. We are pleased to report that there is no large discrepancy. We conjecture a third possibility for constructing a quarterly measure of exports, based on firm data, and find that this does not work out. In the future, it may work, thus giving a 3rd measure of quarterly exports.

There are two independent sources of exports data:

  1. RBI produces the Balance of Payments data. This obtains information about the exports of goods and services by watching flows of money through banks. This is released quarterly.
  2. The Department of Commerce (DGCI&S) releases monthly data for exports of goods (only). This is based on the daily trade data that it receives from Customs authorities, SEZs and Ports. The phrase 'exports' is used when describing this data, but it is important to always refer to it as 'merchandise exports' or 'exports of goods'.

In order to assess the sanity of these two series, we compare the year-on-year change for them against each other.

The above graph compares the year-on-year change for the BoP exports and the merchandise exports series. Although varying in magnitude, the figure shows broad similarity in the ups and downs in the two series. The rank correlation between the two is 0.93. This seems sound.

The above graph plots the seasonally adjusted point-on-point growth (annualised) for the two exports series. This uses our work on seasonal adjustment. We observe similar trends in the two series. The rank correlation here is 0.83, which is mildly worrisome.

Can firm data yield a third measure of exports?

Large firms are important in India's exports, across both goods and services. As an example, in 2014-15, of the total exports of goods and services of USD 474.24 billion, the annual report data for 4666 exporting companies in the CMIE database reveals exports of USD 248.60 billion. Hence, we wonder: Could we use firm data to construct on exports time series?

The legal framework on reporting of annual financial statements requires that companies report their export income. Section 134 (3)(m) of Companies Act, 2013 states:

There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include: ---(m) the conservation of energy. technology absorption, foreign exchange earnings and outgo , in such manner as may be prescribed.

Rule 8(3)(C) of the Companies (Accounts) Rules, 2014 states:

The report of the Board shall contain the following information and details, namely-- ---(C) Foreign exchange earnings and outgo The Foreign Exchange earned in terms of actual inflows during the year and the Foreign Exchange outgo during the year in terms of actual outflows.

This clarity in legal drafting shapes the disclosure of export income of firms in their annual reports. A large chunk of firms disclose their export income in their annual reports. As an example as on 31st March, 2015, out of 4038 listed firms, 1795 firms are identified as exporters using this annual filing of financial statements. We could use quarterly data for these firms, which is required to be disclosed by all listed companies, to construct an exports measure. In terms of methods, we could do for exports what we have done previously for net sales using firm quarterly data.

When we turn to quarterly data, however, the legal instruments that define disclosure requirements do not clearly require information about exports. Under Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI requires companies to diclose their quarterly results, following the accounting standards prescribed by the Central Government under Section 133 of the Companies Act, 2013. The field on "Income from Operations" includes: (a) Net sales/income from Operations, and (b) Other operating income. (See Annexure I of this circular.) As a result, most firms do not report their 'export income' in their quarterly disclosures. Some firms voluntarily disclose information on exports, but this is part of the "Notes" to financial statements. As an example see Point 4 under Notes of this report.

In the table below, we present a comparison of firms that report exports in their annual reports versus those that report export income as part of their quarterly disclosures. The table shows the proportion of listed exporting firms that report 'export income' in their quarterly disclosures. It shows that a miniscule proportion of firms that are `exporters' as disclosed in their annual reports publish export income as part of their quarterly disclosures.

Year Total Listed Firms Exporters (As per AR) Exporters (As per QR) Share of firms
2000-03-31 3976 1891 54 2.9
2001-03-31 4373 2046 76 3.7
2002-03-31 4800 2013 97 4.8
2003-03-31 4876 1986 106 5.3
2004-03-31 4820 1986 108 5.4
2005-03-31 4990 1982 118 6.0
2006-03-31 4998 2037 131 6.4
2007-03-31 4884 2067 135 6.5
2008-03-31 4882 2084 101 4.8
2009-03-31 4893 2086 109 5.2
2010-03-31 4897 2046 88 4.3
2011-03-31 4867 2032 78 3.8
2012-03-31 4755 1996 49 2.5
2013-03-31 4612 1958 42 2.1
2014-03-31 4436 1911 43 2.3
2015-03-31 4038 1795 34 1.9

Recent improvements in the quarterly disclosures of firms

On 5 July 2016, SEBI has modified the format for publishing financial results under the SEBI (Listing Obligations and Disclosure Requirements) Regulations. This new circular mandates that the quarterly financial statements should follow the format prescribed in Schedule III to the Companies Act, 2013. Schedule III to the Companies Act, 2013 lays down general instructions for preparation of balance-sheet and statement of profit and loss of a company. Through requirements of 'additional information', companies are required to disclose income from exports. The relevant text from the legal instrument is as follows:

5. Additional Information The profit and loss account shall also contain by way of a note the following information, namely-- (e)Earnings in foreign exchange classified under the following heads, namely-- I. Export of goods calculated on F.O.B. basis;...

The revised reporting format becomes applicable for the period ending on or after March 31, 2017. From March, 2017 onwards we hope to see improved reporting by firms of quarterly exports data, which would make possible the construction of a third quarterly exports time series.


The Indian statistical system is riddled with problems of measurement. Critical pillars of the statistical system -- NAS, NSSO, ASI, IIP -- are not trusted. Every user of data must bring critical thinking into the choice of data that will be used. Our analysis above is reassuring in finding agreement between exports data released by RBI and the Ministry of Commerce, and rejects the possibility of constructing an exports measure using the present framework of quarterly disclosures by listed companies. Going forward, with improved reporting by firms we could get a third measure of quarterly exports.


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

Tuesday, May 09, 2017

Interesting readings

So how did that demonetisation thing work out for you? by Tony Joseph in Scroll, May 8, 2017.

When will the jobs come back? by Mahesh Vyas in Business Standard, May 8, 2017.

The journey of a 400 kg buffalo by Harish Damodaran in Indian Express, May 7, 2017.

1965 Nanda Devi spy mission, the movie by Shail Desai in Mint, May 7, 2017.

The great British Brexit robbery: how our democracy was hijacked by Carole Cadwalladr inThe guardian , May 7 2017.

How Machiavelli Trolled Europe's Princes by Erica Benner in The Daily Beast, May 6, 2017.

How Censorship Works by Ai Weiwei in The New York Times, May 6, 2017.

Data is giving rise to a new economy in The Economist, May 6, 2017.

Dhabas and Japanese food: Visit mini Japans in rural Haryana and Rajasthan by Manavi Kapur in Business Standard, May 6, 2017.

Supreme Test by Pratap Bhanu Mehta in Indian Express, May 6, 2017.

Antecedent Transactions: An Anomaly in the Insolvency and Bankruptcy Code, 2016 by Rahul Sibal and Deep Shah in Indiacorplaw, May 5, 2017.

A tighrope walk for Sebi by Somasekhar Sundaresan in Business Standard, May 4, 2017.

What eastern bloc dissidents can teach us about 'living in truth' by Philip Boobbyer in The Conversation , May 4 2017.

Money & Medicine: the odd couple - Complexities of health system financing by Margaret Faux on the NIPFP YouTube Channel, May 3, 2017.

For first time, Naxal heartland begins to be mapped plot by plot by Dipankar Ghose in Indian Express, May 2, 2017.

Is China the World's New Colonial Power? by Brook Larmer in The New York Times, May 2, 2017.

Moving towards a principles-based drug retail policy in India by Amey Sapre and Smriti Sharma in Ideas for India, May 2, 2017.

Highway network designs and regional economic development by Simon Alder in Ideas for India, April 3, 2017.

Land in India: Market price vs. fundamental value by Gurbachan Singh in Ideas for India, February 29, 2016.

The Nanda Devi mystery by Shamik Bag in Mint, April 18, 2015.

Wolf Reintroduction Changes Ecosystem by Brodie Farquhar.

Policy implications of the Tata-Docomo order

by Radhika Pandey and Bhargavi Zaveri.

On 28th April 2017, in a widely reported judgement, the Delhi High Court allowed the enforcement of an international arbitration award requiring the Tatas to pay damages to the tune of USD 1.17 billion to Docomo, in connection with the investment agreement under which Docomo had invested in Tata Teleservices in 2009.

In this article, we argue that the Delhi High Court judgement presents an opportunity to reform the complex regulatory framework governing foreign investment in India. The Tata-Docomo legal battle for the enforcement of undisputed contractual rights, though unfortunate, can have positive spill-overs if the regulator uses the outcome of the litigation as a feedback loop, and rationalises the regulatory framework governing exits from Indian investment, including price controls applicable to the entry and exit of foreign investment.


The much-talked about Tata-Docomo transaction dates back to 2009 when NTT Docomo of Japan bought a 26.5% stake in Tata Teleservices for for about Rs 12,740 crore at Rs 117 per share. The agreement was that if certain revenue targets were not met, the Japanese company could "put" its shares on the Tatas at a pre-determined price equivalent to roughly 50 per cent of Docomo's acquisition cost. When the Tata-Docomo agreement was signed, the law did not expressly restrict such exit mechanisms for foreign investors. However, the RBI had been implicitly objecting to the creation of put options in investment agreement without clarifying the position by a statutory instrument.

On 30th September, 2011, the Department of Industrial Policy and Promotion allowed investments in instruments with in-built options to be regulated as External Commercial Borrowings (see here). This effectively meant that the agreeements with optionality clauses would be governed by the restrictions covered under the ECB policy, including the end-use requirements and a cap on return. After a month of heavy lobbying, the DIPP withdrew the circular, and there was again a vaccum on whether such options were allowed. In 2014, after more than a year of uncertainty, the RBI issued a circular legitimising put options with a host of conditionalities. The key restriction was that the foreign investor should exit without an assured or pre-agreed return.

Timeline from the date of triggering exit mechanism

When Docomo sought to exit its investment from Tata Teleservices by exercising its put option in 2015, the Tata-Docomo agreement came under the scanner, as it sought to offer a pre-agreed fixed return to Docomo. The pre-agreed return was higher than the market value of Docomo's investment at the time of its exit. Hence, the parties applied to the RBI for a waiver from the restriction on pre-agreed returns imposed in 2014. The waiver application was rejected, and Docomo instituted international arbitration proceedings to recover its contractual dues.

In June 2016, the arbitration tribunal ruled in favour of Docomo awarding damages of USD 1.17 billion dollars. The Tatas challenged the enforcement of the award in the Delhi High Court. The RBI sought to intervene in the enforcement proceedings, objecting to the enforcement of the award, on the ground that the award and the Tata-Docomo agreement were violative of FEMA and its directive against fixed returns.

In April 2017, the Delhi High Court dismissed the RBI's intervention application on the ground that, "...there s no provision in law which permits RBI to intervene in a petition seeking enforcement of an arbitral Award to which RBI is not a party." It also held that the Tata-Docomo shareholders' agreement was not violative of the Foreign Exchange Management Act, 1999 (FEMA), as it required the Tatas to (a) procure a buyer for Docomo's shares; and (b) indemnify Docomo for the difference between the pre-determined price and the price at which Docomo's shares are actually sold. Since FEMA did not prohibit the creation of contractual obligations, the creation of the obligation could not be said to be violative of FEMA. The court concluded by upholding the validity of the arbitration award.

The timeline of events leading up to the Delhi High Court order is important as it shows the time taken to effectively exit an Indian investment. The timeline is summarised in the Table below.

Timeline of events leading up to the Delhi High Court order
Date Event
2009 Docomo picks up 26.5% stake in Tata Teleservices Ltd
September 2011 DIPP issues allowing put options to be regulated as External Commercial Borrowings.
October 2011 DIPP withdraws circular issued in September 2011.
January 2014 RBI issues a circular permitting put options in favour of non-residents, subject to the several conditions, including that the put option must not be exercisable at a pre-determined price.
July 2014 Docomo tells Tata of its decision to exercise its put option, as per its contractual arrangement.
January 2015 RBI is reportedly keen to exempt the Tata-Docomo transaction from its rule against pre-determined returns.
January 2015 Docomo begins arbitration proceedings for recovery of its contractually agreed put option price.
June 2016 Arbitration tribunal decides in favour of Docomo
September 2016 Tatas challenge the enforcement of the award before the Delhi High Court.
April 2017 Delhi High Court rules in favour of Docomo.

Controls on rupee-denominated put options

This blog has been commenting on the regulatory tangle surrounding the Tata-Docomo dispute. In January 2015, RBI was reportedly keen to exempt the Tata-Docomo transaction from its rule against put options, and allow the remittance. On this blog, we had argued that allowing ad-hoc individual exemptions, would weaken the rule of law in the administration of the regulatory framework governing capital flows into India. We made a case for rationalising the foreign investment regulatory framework, which imposes restrictions on put options that offer 'fixed returns' to foreign investors. In another article on this blog, we had argued that controls on exit mechanisms through the exercise of put options, were not supported by any economic rationale. Put options, which act as a stop-loss for any investor (foreign or Indian), must not be regulated for two reasons. First, there is no market failure involved when an Indian resident is obligated to buy and pay for Rupee-denominated instruments. A sound regulatory framework governing capital controls must address the systemic risk concerns associated with unhedged foreign currency exposure. In case of put options on Rupee-denominated instruments, no such risk arises as the liability of an Indian resident, on whom the put is exercised, to pay for the shares is in local currency. Second, put options are not akin to debt as they do not entitle the non-residents to the same remedies as a debt-default would. In most cases, put options are not secured.

Three options from a policy perspective

How should RBI, as the regulator of foreign exchange, react to the judgement of the Delhi High Court that enforced the award? There are three options:

  1. RBI may retain the status-quo and not amend the regulatory framework governing the remittance of fixed returns on Rupee-denominated instruments to foreign investors. In such cases, where foreign investors have a stop-loss provision in their contracts, the recoupment of capital by them, will continue to be shrouded in doubt. They may be encouraged by the Delhi High Court judgement to apply to the RBI seeking approval for the remittance. Like many other cases under FEMA, such applications for approval will be dealt with on a case-by-case basis. This is a sub-optimal outcome as there is no regulatory certainty on the conditions in which foreign investors may exit their Indian investment.
  2. RBI may amend the regulatory framework in response to the Delhi High Court judgement. It may dispense with the control on fixed returns on Rupee-denominated instruments, as such fixed returns are in local currency and do not give rise to any systemic risk concerns.

    Besides the two reasons explained above, the current framework needs to be re-visited for two reasons. First, as discussed above, fundamentally, put options are not akin to debt. Even if this position is accepted, the closest proxy instrument would be the onshore Rupee-denominated bonds. The regulatory framework governing foreign investment in onshore bonds does not cap the interest rate. There should similarly be no restriction on the return from the exercise of a put option. If this happens, then we will have uniform rules for investments of a similar nature.

    Second, in its current form, the regulation mandating that put options should not result in pre-determined or fixed returns to foreign investors, renders itself to multiple interpretations on intent. For instance, the judgement of the Delhi High Court records that the RBI had considered exempting cases of 'fixed return' to foreign investors, where the 'fixed return' was lesser than the original amount invested in the Indian entity. The Delhi High Court order shows that the Tatas had filed an application under the Right to Information Act, 2005 (RTI) seeking information regarding the Tata-Docomo transaction. An abstract of an internal file noting, provided by the RBI in response to the RTI application, reads thus:

    "I would take a different view. The assured return applies where the overseas investor gets his entire principal PLUS a certain return. Here both the parties agreed to protect the downside loss at 50% of the invested value. This is according to me a fair agreement/contract and we should facilitate honouring this commitment. ... Although strictly as far as wordings of the regulation this may not be allowed."

    Thus, it seems that even within the RBI, there is little consensus on whether the rule against fixed return should be applied in all cases of exit or not. It appears that the RBI intends to exempt the cases from the prohibition on fixed return where the fixed return provides downside protection to an investment.

    Apart from price controls on the exercise of put options, even ordinary entry and exits of foreign investors are subjected to controls. For instance, the current regulatory framework does not allow a foreign investor to buy shares from an Indian resident at a price that is less than the 'fair market value' (minimum price). Similarly, it does not allow foreign investors to sell their securities to an Indian resident for a price which is more than the 'fair market value' (cap on price). Protectionist price controls were originally intended to protect Indian residents from over-paying non-residents for purchasing shares of Indian companies, and to prevent mis-invoicing of capital outflows. While they may have been relevant when Indian businesses were not exposed to FDI, there seems to be no reason to continue these restrictions. India has been fully current account convertible now, open to FDI for more than 15 years now and there are multiple foreign investors actively looking for investments in Indian companies. Indian entrepreneurs/ shareholders must be free to negotiate appropriate terms of sale or purchase of their securities. The removal of restrictions will allow flexibility in structuring investments and exits. It will allow the terms of contracts to be determined by the risk appetite and commercial understanding between the parties.

  3. RBI may react aggressively and appeal against the dismissal of the intervention application by the Delhi High Court. For the reasons explained above, we believe that this will be a loss of an opportunity to rationalise our foreign exchange regulatory regime governing price controls on entry
    and exit.


The international arbitration award awarding damages to Docomo and the time and costs associated with the exit from Indian investments, shows a crying need to rationalise the Indian regulatory framework governing capital flows. The Tata-Docomo dispute made it to the news. There are numerous other instances where Indian residents have used the complex foreign investment regulatory framework to deny contractual rights to their counterparties (see here). While the Delhi High Court order may have put an end to the protracted Tata-Docomo dispute, a permanent solution to the problem calls for a simplified law governing foreign investments. The principles underlying a coherent and simplified design of capital controls framework are discussed here and here.

While transitioning towards a simplified law governing capital controls is a medium term goal, the immediate solution lies in re-thinking the restrictions on fixed returns on Rupee-denominated instruments, applying the tenets of market failure. This is necessary to ensure that the Delhi High Court judgement does not end up incentivising economic actors to either seek recourse through forced international arbitrations (as is reportedly done in China to evade the recent spate of controls on capital outflows) or resorting to a system of individual exemptions from the RBI.


Radhika Pandey is a researcher at the National Institute of Public Finance and Policy. Bhargavi Zaveri is a researcher at the Indira Gandhi Institute of Development Research. The authors would like to thank Ajay Shah and three anonymous referees for their comments and suggestions.

Monday, May 08, 2017

Understanding the recent Banking Regulation (Amendment) Ordinance, 2017

by Pratik Datta and Rajeswari Sengupta.

On 4 May, the President promulgated the Banking Regulation (Amendment) Ordinance, 2017. This adds sections 35AA and 35AB to the Banking Regulation Act, 1949 ("BRA").

The first applications of this modified law are visible. Under these new provisions, the Government has issued an order authorising RBI to give directions to the banks. RBI in turn has issued a notification imposing additional conditions on banks with regard to the JLF and corrective action plan processes.

It may be worthwhile to note at the start that the BRA already gives RBI expansive powers to issue directions to banks (see here). This begs the question as to why was it necessary to amend the BRA to give powers to the RBI that it already has.

Many commentators think that this specific amendment will help resolve the banking crisis. As examples, see here and here. In this article, we ask three questions:

  1. Will the Ordinance help solve the decision paralysis in banks?
  2. Will it help solve the ongoing NPA crisis?
  3. Will it help prevent a future NPA crisis?

The Ordinance

The Ordinance adds two new sections to BRA:

Section 35AA: The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
Explanation - For the purposes of this section, "default" has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.

Section 35AB: (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.

Ideally a new law should be released along with its rationale and background so that there is no ambiguity about its objective. This Ordinance does not have a clear rationale. It starts with a short preamble which is vague, and does not clarify the purpose of the amendment. Ideally, the full strategy for resolving the banking crisis should be visible as a single document. At present, no such document exists, and it is possible that the full picture can change in coming months. Lacking these critical documents, we are hampered in our analysis.

We conjecture that the Ordinance is aimed at solving two problems:

  1. The Insolvency and Bankruptcy Code, 2016 (IBC) has already been implemented as a law and any banker is free to trigger it if there has been a corporate default. We speculate that bankers on their own may come under pressure if they try to initiate an insolvency resolution process under the IBC against politically connected corporate defaulters. Perhaps the amendment aims to address this problem.
  2. Even as part of the resolution process, bankers may not want to take decisions for fear of investigation by investigating agencies such as as the CVC, CBI, CAG, or CIC and subsequent prosecution by the Courts. While there is anecdotal evidence of such fear of investigation and prosecution in individual restructuring deals, this could be applicable to resolution plans under the IBC also.

In the early years, recovery rates under IBC will be rather low

Before we get to the analysis of the amendment, we need to envision what is coming in the evolution of the bankruptcy process in India. We conjecture that in the early years, recovery rates will be poor, for four reasons:

  1. We must remember that the IBC is itself new. The institutional infrastructure for the IBC works poorly, as of yet. It will take time for IBC to work well (see Datta and Regy, 2017; Shah and Thomas, 2016).
  2. India is short of professional participants in the Insolvency Resolution Process of the IBC. E.g. as yet foreign capital has been largely blocked. There will be fewer participants and the highest bid will be a bargain.
  3. The IBC is best applied at an early stage in the difficulties of a company, but most existing NPAs have been ripening for many years. For those cases, there is really nothing to be done but to pick at the bones of the corpse.
  4. Inexperienced creditors' committees are likely to turn down offers that look bad, and later discover that the recoveries in liquidation are worse. It takes capability in a creditors' committee to vote correctly. Even when human skills are present, decisions may often be adversely affected by policy and regulatory constraints. It will take time for those policy and regulatory constraints to be addressed.

For these reasons, we believe that in the early years, the recovery rates will be poor. This is an important building block of the analysis ahead.

Question 1: Will this Ordinance help solve the problem of decision paralysis in banks?

When the banker has to trigger the IBC resolution process against a politically connected corporate defaulter, he is likely to face political pressure to not trigger the IBC. Even in the resolution process, the banker has to take decisions related to the restructuring of the company. The banker will sit in the creditors' committee and vote on critical issues such as how much haircut to accept and which proposed resolution plan to vote for. There could be allegations that the banker colluded with the promoter of the defaulting company for mala fide purposes such as helping the promoter buy off the company's assets at a cheaper price or approving large loan write-offs etc. More generally, there could be allegations of a corrupt nexus between banks, insolvency professionals, and bidders. Investigating agencies could get into the problem. The recent arrest of the ex-IDBI Bank CMD in connection with loans to Kingfisher Airlines has heightened the fear among bankers. Bankers have allegedly responded by refusing to take any decision on triggering the IBC or resolving the stressed assets problem.

Section 35AA of the amended BRA aspires to address the first problem. If an honest banker wants to initiate a resolution process against a corporate defaulter under IBC, but is under political pressure not to, he can turn to RBI. RBI can issue a direction to the relevant bank to trigger IBC. If RBI comes under political pressure, it can turn to the government which will authorise RBI to issue such directions. Will this work? It depends on the extent to which politically connected borrowers are able to influence RBI and the government.

Section 35AB of the amended BRA aspires to address the second element of the problem. If a banker wants to take tough decisions during the resolution process or choose a specific restructuring plan, but is afraid of the investigative agencies, then RBI can give regulatory cover to the banker by issuing specific directions under this section, requiring the banker to take the restructuring decision. The government does not have any role here. RBI on its own can issue directions to banks for resolution of stressed assets. Effectively, RBI's direction will give plausible deniability to the banker, using which he can subsequently justify his conduct and be free of the fear of investigation and prosecution.

Section 35AB is like a guarantee by one arm of the State to a firm that its commercial decisions will be protected from being questioned by another investigative arm of the State. Given the shortcomings on the rule of law in the working of the investigative agencies, it maybe relatively easier for them to go after the bankers but arguably much harder to do the same when RBI, a quasi-government body, is involved and hardest when it comes to government employees.

The protective guarantees by the State implicit in sections 35AA and 35AB should certainly provide some comfort to the bankers and help resolve the decision paralysis. However, this does not solve the underlying problems and raises some new questions: Should investigative agencies of the State be questioning the commercial decisions of banks? If investigative agencies can question commercial decisions of banks, why should they not be able to question the banking regulator if it is taking commercial decisions on behalf of the banks?

For good policy analysis, we should not just think through the optimisation of an honest banker. We should also think about what a corrupt banker will do. What will RBI do when confronted with a request from a banker? How will RBI staff determine that a request should be accepted or denied? What are the accountability mechanisms, and checks and balances, within RBI?

As argued above, in the early years of IBC, recovery rates are likely to be low. Newspaper stories will come out about sensational events where a Rs.1000 crore loan led to a recovery of Rs.100 crore. At that point, investigating agencies could come in, and the finger pointing could start.

We are reminded of the Lok Pal proposal. Advocates of the Lok Pal believe that all Indian government officials are to be mistrusted, but the Lok Pal is to be trusted. That is faith-based policy analysis. Successful policy reforms involve checks and balances, and not faith.

In short, we think more decisions about bad assets will be taken owing to the amendment, but there will be a new array of troublesome questions which will rapidly limit the extent to which it is effective.

Question 2: Will this Ordinance help solve the current NPA crisis?

Let us consider two possibilities:

  1. What happens if RBI directs banks under section 35AA to trigger IBC against the corporate defaulter?
  2. What happens if RBI not only directs the banks to trigger IBC but also passes directions under section 35AB to the banks on what specific resolution plan to approve as part of IBC or directs the banks to initiate any non-IBC restructuring mechanism?

In the first case, while triggering IBC may provide a resolution outcome faster than other restructuring mechanisms, the recoveries from such resolution are likely to result in large losses, particuliarly in the early years. Banks will then have to recognise large losses on their balance sheets, losses that have been hidden until then (see Sharma and Sengupta, 2016). The implicit equity capital crisis will morph into an explicit capital crisis. As yet, there is no sign of additional equity capital even if banks were to trigger IBC under directions from RBI.

In the second case, this Ordinance gives powers to RBI to issue directions, and even to overrule the commercial judgement of the bankers during any resolution process. Will this help? This seems unlikely. Maximising the recoveries from an NPA requires commercial decision making. Bureaucracies in banks have done this badly; it is unlikely that the bureaucracy in RBI will do better. Commercial decision making is best done in for-profit private sector environments.

What about non-IBC resolution mechanisms: Could RBI direct their use to do better than the IBC-based processes? An entire alphabet-soup of restructuring mechanisms initiated by the RBI over the last few years (CDR, 5/25, SDR, S4A) have failed (see here, here, and here). Why would we believe that RBI's directions to banks under the new section 35AB will now succeed? Over the last few years banks were able to hide the actual extent of the bad news using the cover of these mechanisms. Further use of these restructuring packages may prolong the crisis instead of solving it.

Question 3: Will this Ordinance help prevent NPAs in future?

Banking is a business and giving a loan to a borrower is a commercial decision. The corporate borrower maybe unable to repay the loan for any number of reasons. Lending decisions taken by an honest banker can also give rise to NPAs. The problem turns into a crisis when the NPAs are allowed to linger on for years and their volume become so large that banks' balance sheets become severely impaired. This eventually leads to a credit crunch in the economy and starts to affect investment and growth, as has been the case over the last few years in the Indian economy.

The job of a sound banking regulator is to prevent such possibilities through prevention (micro-prudential regulation) backed by cure (resolution). For years, RBI adopted a lax approach which helped banks hide bad news. Had RBI been more vigilant and taken appropriate actions early on, the ongoing NPA crisis could have been prevented from metastasizing. The amendment to BRA through this Ordinance further increases RBI's involvement in the commercial decisions taken by banks. However, the roots of the banking crisis lay in RBI's own internal functioning. This calls for improving the regulatory architecture, accountability mechanisms, and processes for executive/legislative/judicial functions. These are not seen in the Ordinance.


A financial regulator should be like a referee in a football match.

In a football match, typically a higher organisation (for example, IFAB) writes the rules of the game and the referee enforces the rules on the players while supervising their actions. The players are free to play the game on their own within the framework of the rules.

In the case of banking, Parliament writes the Banking Regulation Act, and RBI writes the subordinate legislation under this. After this, banks should be commercially motivated, and RBI should blow the whistle when the rules are being violated. In reality, however, the way RBI does banking regulation is akin to the referee telling the players how to give passes and when to strike the ball. This is an extraordinary power given to a banking regulator which is unique to India. Resolution of stressed assets is fundamentally a commercial decision, not a regulatory one. Is it really the RBI's job to direct the banks on how to restructure stressed assets? RBI's job is to insist that bad assets are recognised, provided for, and that banks have adequate equity capital.

Given that RBI is already empowered by the BRA to direct the banks, the Ordinance seems much ado about nothing. As we have argued, it gives rise to new troublesome questions and will do little to solve the crisis at hand.

The Indian banking crisis is a major challenge to our economic policy establishment. A full strategy for addressing the banking crisis is required. As yet, this is not visible.


Datta, Pratik and Regy, Prasanth, "Judicial Procedures will make or break the Insolvency and Bankruptcy Code", Ajay Shah's Blog, January 24, 2017.

Shah, Ajay and Thomas, Susan, "Indian bankruptcy reforms: Where we are and where we go next", Ajay Shah's Blog, May 18, 2016.

Sharma, Anjali and Sengupta, Rajeswari, "How will IBC 2016 deal with existing bank NPAs?" Ajay Shah's Blog, December 5, 2016.

Rajeswari Sengupta is a researcher at the Indira Gandhi Institute of Development Research and Pratik Datta is a researcher at the National Institute of Public Finance and Policy, New Delhi. The authors would like to thank Harsh Vardhan, Nelson Chaudhuri, Sumant Prashant and Shubho Roy for useful discussions

Friday, May 05, 2017

Grievance redress and enforcement problems in the Aadhaar legal framework

by Vrinda Bhandari and Renuka Sane.

Over the last few weeks, there has been a furore over the divulging of Aadhaar details, with the information of the pensioners in Jharkhand to that of a famous cricket player (M. S. Dhoni), being made available publicly. The UIDAI has responded swiftly by filing FIRs against 8 websites, and also shutting down several others to prevent the misuse of data. Other complaints about the Aadhaar have included instances of failure of biometric authentication, server and connectivity problems, cryptic error messages, and identity theft.

A recent paper by CIS reported that around 130-135 million Aadhaar numbers and 100 million bank account numbers were estimated to have leaked from four government portals. It is unclear whether these Aadhaar numbers had been inadvertently published by the government portals (without realising the consequences of their actions) or had been displayed as a measure of transparency. Either way, while Dhoni may be famous enough to reach out to the UIDAI, other ordinary citizens have not been so fortunate.

A key component of a system, especially one that interfaces with individuals, is its ability to provide protection to its intended users from being harassed, misled, or deceived. One way of ensuring this is to provide access to a reasonable mechanism of grievance redress, where citizens can complain and seek remedies. In this post, we focus on the lacunae in the grievance redress mechanisms and the enforcement concerns that arise in the context of Aadhaar. This is especially important, since, in the absence of an over-arching privacy or data protection law, an effective grievance redress mechanism, through the Aadhaar legal framework, remains the only remedy to Aadhaar holders.

Inadequate details about the procedure for grievance redress

When things go wrong, customers need to have access to a proper complaints mechanism. This can be a call center, a web portal, or physical offices. In the case of Aadhaar, such access is to be provided through the establishment of "contact centers" (Regulation 32 of the Aadhaar Enrolment and Update) Regulations).

The Regulations envisage that a contact centre shall provide a mechanism to log queries, ensure safety of the information received, and comply with the procedures and processes as may be specified by the Authority for this purpose. Residents are also permitted to raise grievances by visiting the UIDAI's regional offices, or through any other officers or channels as may be specified by the Authority for this purpose.

To the best of our knowledge, not much beyond Regulation 32 has yet been specified by the UIDAI. In a previous article, Is Aadhaar grounded in adequate law and regulations?, we criticised such delegation of power by the UIDAI to its future self. The same criticism applies equally in the case of grievance redress. If the process of grievance redress has not been specified in the Regulations, there remains an unjustifiable ambiguity on the remedial measures available to an Aadhaar number holder. This is worsened by the ambiguity on how the UIDAI will ensure safety of the information received.

The handling of grievance redress in the Aadhaar Regulations suffers from the following problems:

  1. The regulations leave the actual processes of redress, including the procedure for raising a grievance, the composition of the grievance redress/contact centre, and the timelines envisaged for resolving a query unspecified. They are silent on the identity/qualifications of the final decision maker, on whether the inquiry process will be administrative or quasi-judicial in nature, and whether an appellate remedy is provided for. The regulations are also silent on the binding nature of the resolution mechanism, and their relationship with the penalties and liabilities prescribed under the Act. In fact, even after reading the regulations, one is confused about whether the grievance redress mechanism is a simple contact centre or an actual authority, with some powers.

  2. Regulation 32(3) of the Enrolment and Update Regulations states that residents may raise grievances by visiting the regional offices of the UIDAI or through any other offices or channels as may be specified by the Authority. Notably, there are only 8 regional offices, namely Bangalore, Chandigarh, Delhi, Guwahati, Hyderabad, Lucknow, Mumbai, and Ranchi, which are primarily all Tier I cities. Further, these regional offices are not spread out throughout India - for instance, Western India only has one regional office in Mumbai, whereas North India has three offices in Delhi, Chandigarh, and Lucknow. The other channels remain unspecified.

  3. The efficacy and performance of these contact/call centres is hard to assess, since the regulations do not prescribe any minimum standards, or even a Code of Conduct (as in the case of Registrars, Enrolling Agencies, and other service providers) that would govern the behaviour of these centres. The Regulations are also silent on the performance standards of the grievance redress system as a whole, so that the UIDAI can be held accountable.

  4. In the case of the Aadhaar (Authentication) Regulations and the Aadhaar (Data Security) Regulations, no grievance redress mechanism has been specified, and no reference has been made to the grievance redress mechanism provided for in the Aadhaar (Enrolment and Update) and (Sharing of Information) Regulations. This suggests that there is in effect, no mechanism for redress in these two regulations at all.

These issues become particularly important when we consider that Regulation 30(2) of the Enrolment Regulations envisages the use of this grievance redress mechanism to resolve complaints relating to the omission or deactivation of an Aadhaar number. Between September 2010 and August 2016, the UIDAI had deactivated over 85.6 lakh Aadhaar numbers. The consequences of such deactivation can be huge, including the exclusion from receiving various government subsidies, and now potentially, for filing income tax returns. In this context, the silence on substantive matters of grievance redress in the regulations is disconcerting.

No power to file criminal complaints

While the Regulations provide for a contact center, Section 47 of the Aadhaar Act stipulates that only the UIDAI or its authorised officer can file a criminal complaint for violations of the Aadhaar Act. The Aadhaar Act, criminalises, among other things, the disclosure and dissemination of the identity information of an Aadhaar number holder (Section 37), unauthorised access to the Central Identities Data Repository (Section 38), and the unauthorised use of the identity information of an Aadhaar number holder by a requesting entity (Section 40). Consequently, the UIDAI has been given complete discretion in determining if, and when, to file a criminal complaint for violations of the Act, and an individual aggrieved by actions of a third person, is left to rely upon the bonafide actions of the UIDAI.

In the Dhoni case for example, the UIDAI seems to have decided to not file a criminal complaint against the enrollment agency, even though they reportedly tweeted a photo of his application form. In fact, RTI replies of the UIDAI reveal that in the six years from September 2010 to 31st October 2016, it received 1390 complaints about enrollment. However, only three FIRs were filed against the enrolling agencies, and that too, only by UIDAI's regional Bangalore office. The remaining complaints, were either 'resolved', 'dropped', or 'closed' without initiation of any criminal action. Conversely, the UIDAI's Delhi office was quick to register its first FIR in over six years, when a CNN-18 journalist ran a sting operation on security lapses in the Aadhaar enrollment centers.

Indian law, rarely, if ever, permits a third party to file a criminal complaint on behalf of an aggrieved individual, to the exclusion of that individual. Given that we have no access to any explanatory memorandum or notes on clauses, it is difficult to ascertain the reason for introducing such a provision in the Act. Not only does the Aadhaar Act introduce a new framework, it does so without specifying any accountability mechanism between the UIDAI and the aggrieved Aadhaar number holder. The scheme of the Aadhaar Act does not envisage any remedy for an aggrieved Aadhaar number holder if the UIDAI decides that her complaint is not worth pursuing. The UIDAI, thus, has unchecked discretion. It is worth noting that even the CrPC provides judicial recourse to an individual if the police fails to register an FIR.

Low clarity and emphasis on enforcement

Regulations have force, only when enforcement mechanisms leave no ambiguity about the costs of violation. The Aadhaar Regulations are largely silent on enforcement. In fact, as stated above, even the enforceability of any decision of a "contact centre", as part of the Grievance Redress Mechanism, is suspect. This is a result of the lack of power to enforce penalties in the Aadhaar Act itself.

The Regulations suggest, for example, that enrollment activities are to be monitored by the UIDAI, and any violations may result in immediate suspension and eventual cancellation of the service providers' or the concerned persons' credentials and permissions under the Act. However, apart from this penalty, there is no other prescribed liability - in terms of a monetary fine or imprisonment - as the case may warrant, for failure to comply with the code of conduct or any of the other Regulations. Even the application of this penalty is unclear, and left to the complete discretion of the UIDAI, inasmuch as Regulation 26(3) of the Enrolment Regulations only states that such cancellation will take place after 'holding due inquiry as deemed fit by the Authority'.

Similarly, Regulation 25 of the Authentication Regulation only provides that a requesting entity or authentication service agency may be burdened with 'disincentives' by the UIDAI, including suspension of their activities, in case of any contravention of the Act or the regulations. The regulations do not provide for gradation of offences and consequent punishments in terms of monetary penalties to imprisonment depending on the offence. It is also unclear whether, and which, provisions of the Act will apply.

There exists a Code of Conduct (specified in Schedule V of the Enrolment Regulations) which requires service providers to make 'best efforts' to protect the interests of the residents (Rule 1); to not divulge any confidential information about the residents, except when required by law (Rule 5); to ensure 'timely' redress of grievances (Rule 7); to abide by the Act and the regulations there-under (Rule 9); to inform the Aadhaar number holder in case of any breach or non-compliance (Rule 11); and to follow confidentiality, privacy, and security protocols 'as may be specified by the authority' (Rule 23). However, it is completely silent on the consequences of non-compliance. Thus, without proportionate penalties and clear procedures for imposing liabilities, the incentives to comply with the provisions of the Act and the regulations fall.

Inadequate power to conduct grievance redress

Finally, there is even some doubt on the UIDAI's power to regulate issues of grievance redress itself. Section 23(2)(s) of the Aadhaar Act empowers the UIDAI to set up "facilitation centers and grievance redress mechanism for redressal of grievances of individuals, Registrars, enrolling agencies and other service providers". However, Section 54 of the Act, which enumerates the UIDAI's power to make regulations does not refer to this sub-section, despite referring to other sub-sections of Section 23. This assumes importance because all the Aadhaar Regulations derive their power from Section 54. The source of the UIDAI's power to write regulations on grievance redress is thus, unclear.

Way forward

In this new world, where Aadhaar is the centerpiece of the government's agenda and is becoming a necessity to avail multiple government services and benefits, an effective accountability and enforcement mechanism is paramount. Unfortunately, the Aadhaar Act and the Regulations are inadequate and vague.

Enrollment and use is not accompanied by any adequate redress mechanism, leaving us with the problem of a legal vacuum. Seven years, and a law later, there is still no clarity on the accountability and redress frameworks in the Aadhaar Act. A large part of the problem comes from the structure and governance mechanisms of the UIDAI itself, with no separation between the regulatory functions at UIDAI and its operational functions.

These issues are ultimately derived from the poor intellectual capacity in the drafting of law in India. There is an urgent need to introduce amendments in the Aadhaar Act to address these problems. A new data protection framework is reportedly being drafted. Many elements of our research program on Aadhaar have important implications for both these strands of work.


Vrinda Bhandari is a practicing advocate in Delhi. Renuka Sane is a researcher at the National Institute of Public Finance and Policy, New Delhi.