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Tuesday, August 14, 2018

An annotated reading list on the Indian bankruptcy reform, 2018

by Rajeswari Sengupta and Anjali Sharma.

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted two years back and its provisions for corporate persons have been operational for over eighteen months now. In this post we put together a compilation of writings on the Indian bankruptcy reform surrounding the IBC. We have categorised the articles and papers in themes that broadly reflect the evolution of the IBC reform process from its inception to its current status.

  • Problems in the pre-IBC framework.
  • The outcomes of a weak recovery and resolution framework
  • The IBC design and institutional framework
  • From design to law, and expectations from the new law
  • Unfolding of IBC implementation
  • The way forward on the reform agenda

Problems in pre-IBC framework

Corporate Rescue in India: The Influence of the Courts by Kristin van Zweiten, July 1, 2014. The corporate rescue framework under the Sick Industrial Companies Act (SICA, 1985) was slow and costly. Its provisions were interpreted and reinterpreted by judges in attempts to rescue companies destined for liquidation, mainly to protect the interests of workmen and employees.
The evolution of the corporate bankruptcy law in India by Nimrit Kang and Nitin Nayar, 2004. Prior to IBC, there was no single, comprehensive and integrated law on corporate bankruptcy in India. Liquidation and reorganisation were costly in terms of time and resources, did not encourage optimal valuation outcomes, and created incentives in favour of private benefits at the cost of firm value.
Evolution of the insolvency framework for non-financial firms in India by Rajeswari Sengupta, Anjali Sharma and Susan Thomas, June 22, 2016. The origin of the complex and fragmented framework for resolution and recovery can be traced back to its evolution. Over the years, policy adopted a piecemeal approach to reform, solving only a part of the complex problem, one at a time. This led to inefficient outcomes on the overall objective.
Inconsistencies and forum shopping in the Indian bankruptcy process by Aparna Ravi, November 12, 2015. Also see here. Fragmentation of laws and adjudication fora was a key factor resulting in delays and poor bankruptcy outcomes. A new unified bankruptcy code is an opportunity to reverse this trend by providing a linear and time bound mechanism for collective insolvency resolution.
Concerns about RBI's 'Strategic Debt Restructuring Scheme' by Ajay Shah, June 26, 2015. Restructuring mechanisms initiated by the Reserve Bank of India lacked legal foundation and sound economic thinking.
The Scheme of Arrangement as a Debt Restructuring Tool in India: Problems and Prospects by Umakanth Varottil, March, 2017. Scheme of Arrangements under the Companies Act is used sparingly for debt restructuring in India. The mere presence of a legal provision does not lead to its utilisation. The context and the associated institutions play a role in determining how such legal provisions are used.

The outcomes of a weak recovery and resolution framework

NPAs processed by asset reconstruction companies -- where did we go wrong? by Ajay Shah, Anjali Sharma, Susan Thomas, August 23, 2014. Asset Reconstruction Companies (ARCs) were not functioning well, despite their mandate under the secured credit law. Their ability to realise value was limited by an inefficient legal framework for bankruptcy. ARCs become a tool for delaying recognition of stress in bank balance sheets.
Methods for measurement of delays in the bankruptcy process by Dhananjay Ghei and Shubho Roy, November 25, 2016. Delays in the bankruptcy process destroy commercial value. Empirical research work in this field is now being conducted using state of the art techniques.
Building a better credit market by Bhargavi Zaveri and Radhika Pandey, March 12, 2016 India lacks a deep and well functioning credit market. Secured loans given by banks dominate the credit landscape. A comprehensive bankruptcy law is an important institutional reform required to fix this problem.
Are Indian banks systematically mispricing risk? by Harsh Vardhan, January 2, 2015. There is a systematic mis-pricing of corporate credit by banks. This impacts effective allocation of capital in the economy and could be a potential reason behind the recurring non-performing assets (NPA) crisis in Indian banking.
Balance sheet problems of the firms and the banks by Ajay Shah, July 25, 2015. Also see here. The credit boom of 2003-2008 was followed by a period of economic slowdown in the aftermath of the great financial crisis. Banks and their corporate borrowers faced significant balance sheet difficulties. This twin balance sheet crisis was aggravated by undercapitalisation of public sector banks, deficiencies in banking supervision and regulation, and the lack of a working bankruptcy regime.
Selective default on corporate bonds by Ajay Shah and Bhargavi Zaveri, October 25, 2015. Fragmented creditor rights enabled firms to selectively default on the claims of creditors that had weak legal protection.

The IBC design and institutional framework

Dealing With Failure by Susan Thomas, November 13, 2015. The design of the IBC can have a likely impact on the state of credit market development and entrepreneurship in India.
Firm insolvency process: Lessons from a cross-country comparison by Anjali Sharma and Rajeswari Sengupta, December 22, 2015. A review of the UK and Singapore corporate insolvency rameworks offered valuable lessons for reform of the Indian orporate insolvency resolution regime.
Personal insolvency: Lessons from the UK and Australia by Renuka Sane, December 28, 2015. A review of the UK and Australian personal insolvency frameworks offered valuable lessons for reform of the Indian ersonal insolvency resolution regime.
Setting up the ecosystem for personal credit by Renuka Sane, November 21, 2015. Also see here. A well functioning market for personal credit requires the presence of a machinery that deals with default. The draft IBC provisions on personal credit sought to address this objective.
A better bankruptcy regulator by Pratik Datta and Rajeswari Sengupta, January 9, 2016. Also see here. IBC proposed setting up a bankruptcy regulator, the Insolvency and Bankruptcy Board of India (IBBI), who will function like a mini-state in regulating insolvency professionals (IPs), IP agencies, information utilities (IUs) and the resolution procedures.
How to make courts work? by Pratik Datta and Ajay Shah, February 22, 2015. Well functioning courts are an essential ingredient of the bankruptcy reform process. This requires a complete overhaul of the underlying judicial infrastructure and procedures and ground-up reforms.
Understanding judicial delays in India by Prasanth Regy, Shubho Roy and Renuka Sane, May 18, 2016. A better understanding of the causes of judicial delays is required in order to build judicial capacity and design better functioning courts.
Building the institution of Insolvency Practitioners in India by Anirudh Burman, December 25, 2015. Also see here and here. A new cadre of regulated insolvency professionals play a critical role in IBC proceedings. A model of 'regulated self regulation' would enable the development of a market for these professionals, while ensuring that they are effectively regulated.
Ensuring information access during financial distress by Anjali Sharma, Shivangi Tyagi and Shreya Garg, December 17, 2015. Also see here and here. Access to indisputable information about the claims on the debtor reduces information asymmetry. The IBC proposed a competitive industry of entities called Information Utilities IUs) to maintain credit records for access during IBC proceedings.
Land market reform is an important enabler of bankruptcy reform by K.P. Krishnan, Venkatesh Panchapagesan and Madalasa Venkataraman, January 31, 2016. Collateral plays an important role in the credit usiness. Land and real estate constitute a large part of this collateral in India. Improved working of the land market is therefore crucial for effective functioning of IBC.

From design to law, and expectations from the new law

BLRC hands over the draft Insolvency and Bankruptcy Bill November 4, 2015. The Ministry of Finance published the report of the Bankruptcy Law Reforms Committee (BLRC) and the draft law for public consultation.
Insolvency and Bankruptcy Bill was tabled in Parliament today December 21, 2015. The legislative process for the IBC started.
Indian bankruptcy reforms: Where we are and where we go next by Ajay Shah and Susan Thomas, May 18, 2016. When IBC was finally enacted on May 28, 2016, there were many open questions about the state of Indian bankruptcy reforms.
Bankruptcy reforms: It's not the ranking that matters by Rajeswari Sengupta, November 13, 2015. The expectation that IBC would improve India's rank in the World Bank's Ease of Doing Business Report seemed to be a key driver of the pace of reform.
How will IBC 2016 deal with existing bank NPAs? by Rajeswari Sengupta and Anjali Sharma, December 5, 2016. Also see here. By the time of its implementation in December 2016, policy discourse was positioning the IBC as a mechanism to solve the bank NPA problem. The actual scenario was much more complex than this.

Unfolding of IBC implementation

An unsettling precedent under the IBC By Gausia Shaikh and Bhargavi Zaveri, Augist 8, 2017. An early Supreme Court judgment was not aligned with the design principles of the IBC.
Understanding the recent Banking Regulation (Amendment) Ordinance, 2017 by Pratik Datta and Rajeswari Sengupta, May 8, 2017. Also see here. In May, 2017, government amended the Banking Regulation Act, enabling RBI to direct banks to refer cases to IBC.
Essar Steel v. RBI: What lies ahead? by Pratik Datta, July 6, 2017. RBI identified 12 cases for IBC referral. One of the 12 companies, Essar Steel challenged the constitutionality of RBI's actions. Supreme Court upheld constitutionality while expressing concern over the RBI process.
Jaypee: consumer angle in IBC play by Aparna Ravi and Anjali Sharma, September 18, 2017. Also see here. IBC categorised creditors into financial and operational creditors. The question about classification of home buyers as creditors came up in the Jaypee Infratech case.
Concerns about the Indian bankruptcy reform by Ajay Shah, March 25, 2018. The Binani Cements case raised concerns about the actions of resolution applicants affecting the timeliness of the resolution process under IBC.
Don't rush to ban promoters from the IBC process by Adam Feibelman and Renuka Sane, November 17, 2017. Also see here. As the cases moved along, one major concern in public discourse was about permitting the promoters to re-gain control of their insolvent firms.
Understanding the recent IBC (Amendment) Ordinance, 2017 by Rajeswari Sengupta and Anjali Sharma, December 7, 2017. The government amended the IBC in December, 2017 to introduce disqualifications for promoters and their related parties.
Sequencing issues in building jurisprudence: the problems of large bankruptcy cases by Ajay Shah, July 7, 2018. Also see here. State capacity building requires sequencing, where the ecosystem learns to deal with simple things before taking on the complex problems. The Banking Regulation Amendment Ordinance of 2017, reversed this trend, bringing the 12 largest cases to a nascent law. This may have an impact on the sustainability of the IBC reform process.
Judicial Procedures will make or break the Insolvency and Bankruptcy Code by Pratik Datta and Prasanth Regy, January 24, 2017. Also see here and here. Judicial procedure and judicial interpretation of IBC provisions in respect of specific cases has altered the design elements of the law.
A Limiting Principle for the NCLT's New Powers Under the IBC by Adam Feibelman, by August 1, 2018.
The IBC Amendment Act, 2018 gives the NCLT the power to reject a plan approved by creditors in the IBC process. This raises concerns about judicial interventions in commercial decisions.
The proper purpose of insolvency law by Pratik Datta and Rajeswari Sengupta, May 6, 2018. The use of IBC to fulfill non-bankruptcy policy objectives may impact the effectiveness of the law in fulfilling its primary objective of timely resolution based on commercial decision making.
Watching India's insolvency reforms: a new dataset of insolvency cases by Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, August 30, 2017. Also see here and here. There is a need to capture data to enable empirical analysis of the working of the IBC. The Finance research Group at IGIDR has put together a dataset of NCLT orders which helps understand the admission procedure and outcomes.
The Indian bankruptcy reform: The state of the art, 2017 by Ajay Shah and Susan Thomas, July 13, 2017. One year from the enactment of the law, several of the old questions remained unanswered and new areas of concern also cropped up. The need of the hour is the intellectual capacity to identify the problems, and come up with solutions so as to move closer to the ultimate desired outcome of IBC-high recovery rates.

The way forward on the reform agenda

Building institutional capacity

Does the NCLT Have Enough Judges? by Devendra Damle and Prasanth Regy, April 6, 2017. Adjudication capacity needs to keep pace with the growing case-load in order to meet the prescribed timelines in IBC.
Issues with the regulation of Information Utilities by Sumant Prashant, Prasanth Regy, Renuka Sane, Anjali Sharma, and Shivangi Tyagi, July 12, 2017. Also see here. IU regulations need review to ensure that a competitive industry of IUs come up. So far this is a missing piece in the institutional infrastructure.
Building State capacity for regulation in India by Shubho Roy, Ajay Shah, B. N. Srikrishna, Somasekhar Sundaresan, July 17, 2018.
This paper provides a conceptual framework for building state capacity in regulation in India which is a key institutional element in the IBC reform process.

Cohesive action on the reform agenda

Disclosure of default: The present SEBI disclosure regulation is adequate by Ajay Shah and Bhargavi Zaveri, January 11, 2018. Also see here. Disclosure of default enables early identification of stress, and prevents value destruction. The disclosure principles applicable to listed firms need to be enforced effectively to facilitate disclosure of defaults by listed companies, and of stressed assets by listed creditors.
RBI's proposal for a Public Credit Registry by Prasanth Regy, August 2, 2017. IUs, envisaged as credit information infrastructure institutions under the IBC, initially received RBI support. The RBI subsequently proposed setting up a public credit registry, which is on a parallel track to the IU concept of IBC.
Analysis of the recent proposed SARFAESI amendments: are these consistent with the Insolvency and Bankruptcy Code? by Rajeswari Sengupta and Richa Roy, May 29, 2016. The design of the newly implemented debt recovery law, which came after IBC, continues to be at variance with the IBC principle of a comprehensive law accessible to all creditors.

The missing pieces

Anticipating India's New Personal Insolvency and Bankruptcy Regime by Adam Feibelman, January 11, 2018. Also see here and here. The individual insolvency provisions of IBC are yet to be notified. The implementation of these provisions, will require significant preparation from stakeholders in terms of the design and capacity of institutional elements.
Cross Border Insolvency and the Indian Bankruptcy Code by Aparna Ravi, May 14, 2016. A framework for cross border insolvency based on the principles on international cooperation needs to be put in place.
Movement on the law for Resolution Corporation by Suyash Rai, June 19, 2017. A resolution framework for financial firms is the logical next step to the IBC, towards addressing the twin balance sheet problem.


Rajeswari Sengupta and Anjali Sharma are researchers at Indira Gandhi Institute of Development Research, Mumbai. The authors would like to thank the original authors of all the articles in this compilation.

This annotated reading list is open to collaborative development. If you have an article or paper that you think will enrich this list, please place it as a comment to this article and we will review it for inclusion.

Monday, August 06, 2018

Diagnosing and overcoming sustained food price volatility: Enabling a National Market for Food

by Anirudh Burman, Ila Patnaik, Shubho Roy, Ajay Shah.

We have a new paper, Diagnosing and overcoming sustained food price volatility: Enabling a National Market for Food, on the difficulties of Indian agriculture, and an implementation strategy for achieving a national market for food.

The problems of Indian agriculture

High food price volatility is a persistent difficulty of Indian agriculture. Policy responses have ranged from restricting or liberalising exports or imports, increasing or decreasing procurement and procurement prices. We conjecture there may be an element of Samuleson's Cobweb model at work, where high output leads to a crash in prices, that causes producers to reduce output, leading to a spike in prices.

The food market today is characterised by many small-to-medium producers, cartelisation, complicated administrative and legal structures that pre-date the economic reforms of 1991, and monopoly of, and intervention by, the State. The restrictions in the Indian agricultural economy hinder an efficient transmission of price signals from consumers to producers. Hence, the system teeters between boom and bust.

Restrictive policies and administrative bottlenecks have given a low elasticity of supply. Very high changes in prices are required to clear small gaps between supply and demand. With respect to most other goods and services, India has graduated into a normal market system, with the progressive removal of administrative and fiscal barriers to their trade within India. This allows for a normal transmission of information regarding demand and supply. This has not happened in agriculture.

The four missing elements

The solution strategy lies in four foundations of agricultural markets:

With well functioning storage, food could be transmitted from one time point to another, thus reducing the peaks and troughs of prices.
Futures markets
Well functioning futures markets can give guidance to private persons on decisions about sowing and storage.
International trade
The world market can act as a buffer stock: when there is a glut in India, food would be exported, and vice versa.
National market
A national market is required to achieve smoothing between the large number of micro-markets within the country. Food would move from areas with high output to areas with low output.

Our paper focuses on the implementation strategy for the fourth element, the national market.

Building a national market

Unlike other commodities, agricultural products cannot be transferred freely throughout the country without being subject to state-specific restrictions. Markets in agricultural food products are governed by legal requirements or restrictions which were put in place with the intention of creating markets (such as APMCs) but have had the effect of keeping markets non-competitive, segregated and localised. For most other commodities, there are no restrictions on who can purchase or sell goods. Usually, a simple registration under the shops and establishment laws allows for trade in all consumer goods. The present provisions and rules of any APMC laws enact and enforce similar rules for agricultural products.

In recent years, state governments have made gradual progress towards removing some of these barriers. A number of states including Meghalaya, Uttarakhand, Haryana, Assam and Andhra Pradesh, recently issued notifications delisting fruits and vegetables from their respective APMC laws. Bihar, Kerala, Daman and Diu, Lakshwadeep, Andaman and Nicobar islands, Manipur and Dadra and Nagar Haveli have no APMC Acts. Bihar repealed its APMC Act in 2006 and privatised its agricultural marketing infrastructure.

These reforms are, however, incremental and do nothing to remove the legally mandated monopsonies in the food market. These reforms are narrowly targeted at removing food products out of the ambit of APMCs rather than enabling a competitive national market.

While most scholars agree that a national market in food is essential, it is generally felt that this will require an agreement between all or most state governments. This is considered a difficult challenge, as the GST negotiation shows.

Our analysis shows that the process of creating competitive local markets in food markets can be done by the Union Government using its powers under the Constitution of India. By doing so, the Union Government can create the legal infrastructure for an integrated national market for food. This would override the existing framework currently in place for most states. This policy strategy requires no coordination with state governments.

Legal analysis

Article 301 of the Constitution states that trade and commerce throughout India shall be free, while being subject to reasonable restrictions imposed in the public interest. At present, the following restrictions exist in the food market:

  1. Legal restrictions placed by states: APMC laws, storage limits, and other legal requirements that promote oligopsonies with cartels of buyers.
  2. Technical barriers to trade: checks placed on APMC borders, checks placed on state borders, etc.

Achieving a national market requires removing these constraints.

Article 301 of the Constitution of India, along with entries in the Seventh Schedule of the Constitution grant the Union Government the power to do both: (a) Regulate all inter-state trade and commerce, and (b) regulate intra-state trade and commerce in, and the production, supply and distribution of "foodstuffs including edible oilseeds and oils." (List I Entry 42, List II Entries 26 and 27, and List III Entry 33) The Central Government can use these powers to create an integrated national market by removing limits and restrictions placed by APMC laws, and by creating institutional mechanisms to continuously identify and review administrative barriers to trade in the food market.

The creation of a national market in agriculture is thus something which is feasible for the Union government without requiring a complex negotiation with state governments.

The authors are researchers at NIPFP, Delhi.

Placing surveillance reforms in the data protection debate

by Rishab Bailey, Vrinda Bhandari, Smriti Parsheera and Faiza Rahman.


On July 27, 2018, the Committee of Experts constituted by the Government under the chairpersonship of (Retd.) Justice B.N. Srikrishna (Srikrishna Committee) released its report and the Personal Data Protection Bill, 2018. The Committee's recommendations make some headway in proposing legal reforms governing the use of personal data by intelligence and law enforcement agencies (LEAs), but fall short of offering a comprehensive solution (Bhandari, 2018).

Against this backdrop, our working paper on "Use of personal data by intelligence and law enforcement agencies" provides an overview of the existing framework on surveillance in India followed by an inquiry into how these laws and practices fare against the tests that were endorsed by the judges in Puttaswamy, the Supreme Court's right to privacy verdict. As we have previously noted on this blog, India currently does not have a comprehensive law regulating intelligence agencies/ LEAs, including on aspects such as the creation, composition, powers, functions and accountability of such bodies. What we have instead are separate provisions contained in the Telegraph Act, the Information Technology Act (IT Act), and the Criminal Procedure Code that enable government agencies to initiate lawful search and interception activities, based on the fulfilment of certain parameters. While assessing these laws and practices against the tests of legality, legitimate aim, proportionality and procedural safeguards identified in the Puttaswamy decision, we find the existing framework to be lacking in many respects.

The inadequacies of our current system become all the more evident when examined against the laws and practices of other jurisdictions that have worked harder to strike a balance between the civil liberties of individuals and the State's requirement to pursue legitimate surveillance activities. The general practice across jurisdictions is that privacy and data protection laws are also applicable to state intelligence and security agencies, albeit subject to certain exceptions (ICDPPC Census, 2017). It is important to keep in mind however, that exceptions are not all-encompassing or generic, and are usually to be applied in a proportionate manner.

In this post we highlight what can be regarded as legitimate and fair surveillance practices that are appropriate for the functioning of a democratic system. Based on a review of the current framework against the Puttaswamy tests and identified fair practices, we offer some recommendations on the next steps towards implementing holistic surveillance reforms in India. We also map these recommendations against the recommendations in the Srikrishna Committee report and the provisions of the draft law, and delineate how the draft law needs to be strengthened.

Principles of fair surveillance: International experience

International frameworks on surveillance have seen considerable development over the last decade. This has been due to changing technology and law enforcement needs, as well as instances such as the Snowden revelations that have led to greater global awareness about the need to adapt surveillance laws and practices to the modern communication era. Attempts have been made, at both the global and national level, to enhance the respect for privacy rights, through changes to statutes as well as through advocacy instruments such as the Necessary and Proportionate principles. Nevertheless, as observed by the UN Special Rapporteur on the right to privacy, no single surveillance related legislation perfectly complies with, and respects privacy rights (Joseph Cannataci, 2018).

The most commonly seen mechanisms used to ensure that LEAs/intelligence agencies act within their remit and with due respect to privacy rights include:

  1. Judicial oversight: As a general rule, countries such as the United States (US), the United Kingdom (UK), New Zealand, Australia, Germany and Canada require prior judicial authorisation for initiating surveillance activities. Often greater protections are put in place for the protection of rights of citizens as compared to foreign subjects, although both cases may require a certain level of judicial scrutiny. For instance, in the US designated courts under the Foreign Intelligence Surveillance Act have been created to authorise foreign surveillance activities. While this ensures a certain degree of oversight it should be kept in mind that these proceedings have been criticised for the lack of transparency and accountability.
  2. Oversight by legislature and independant bodies: Institutions such as Parliaments and Congress generally have extremely wide powers of supervision over the activities of LEAs/intelligence agencies, often through specific committees of panels charged with oversight. For instance, the US Congress has general powers of review over intelligence agencies. In Germany, the Parliament has a panel known as the Kontrollgremiumgesetz, while the UK has established an Intelligence and Security Committee. Both these countries have also established independant regulators to oversee the activities of LEAs/ intelligence agencies - the Office of the Investigatory Powers Commissioner and the G-10 Commission, respectively. Importantly, in addition to having access to the activities of agencies (which can extend to ex-ante reporting requirements), these bodies also publish regular public reports in pursuance of their oversight role. Further, the LEAs/ intelligence agencies themselves may also be subject to reporting requirements. In addition, transparency reports are often put out by intermediaries who receive information requests from these agencies.
  3. Implementation of redress mechanisms: While some countries such as Canada, Germany, Belgium and Austria, provide notice of surveillance to the subject in certain cases (thereby allowing processes to be challenged by the concerned individual), others create mechanisms to enable challenges to illegal surveillance through other means. For instance, the US, empowers electronic communications service providers to file petitions before the FISA Court to set aside directives issued by intelligence agencies under the FISA Act. In Europe however citizens may approach redress forums without concrete evidence of having been the subject of surveillance measures. (Klass v Germany, (1979-80) 2 EHRR 214).
  4. Implementation of organisational safeguards: The US, Germany and the UK have also implemented various administrative and technical safeguards to ensure adherence to privacy norms - ranging from embedding privacy/ethics officers within agencies, to implementing masking and other technical measures to ensure intrusions into privacy are minimised.

Key design principles for India

On mapping the legal framework and practices on surveillance in India against the Puttaswamy tests and globally recognised surveillance principles, we find our current framework to be lacking in many respects. The present set up is not well suited to meet the requirements of a system that guarantees the constitutional right to privacy or, for that matter, one that has limited state capacity in carrying out effective surveillance activities. We therefore need a system that is designed in a manner where the resources of the surveillance machinery can be optimally utilised without undue infringements into the right to privacy. Addressing these issues requires both a reassessment of the current legal framework as well as a re-evaluation of the philosophy that drives surveillance related activities by intelligence agencies and LEAs in India.

A risk-based approach to surveillance

The broad path towards safeguarding civil liberties in a system with limited state capacity lies in adopting a risk-based approach to surveillance. Countries such as the US and the UK have already moved in this direction by embedding certain risk management techniques within their surveillance architecture (Omand, 2010). This approach recognises that any country's resources are limited and therefore the surveillance architecture should focus on credible risks, whether they be reputational or operational. Apart from calibrating responses to the risk posed by different threats, this sort of an approach also takes into account broader risks such as the risks to privacy and other civil liberties, reduction of international trust in domestic firms and the impact of intelligence operations on relationships with other countries (Clarke et al., 2013).

We recommend that the Indian surveillance framework should also adopt systematic risk management as a key design principle to balance national security and privacy on one hand and limited state capacity issues on the other. The report of the Srikrishna Committee also endorses this recommendation, although the draft Bill, notably, is silent on this aspect.

Changes to the legal framework

India needs to build a robust legal framework governing the functioning of intelligence agencies. This requires the creation of a statutory framework governing intelligence agencies and LEAs, including their constitution, composition, powers and the accountability measures expected to be followed by them. The Srikrishna Committee's report recommends that the "Central Government carefully scrutinise the question of oversight of intelligence gathering and expeditiously bring in a law to this effect". It then goes on to state that although these recommendations are not directly made a part of the data protection law proposed by the Committee, they are important for the effective implementation of data protection principles and must be urgently considered.

While a data protection law may not be an appropriate site for pursuing a comprehensive reform of intelligence agencies and LEAs, there are several critical changes that can be adopted through the data protection law as well as amendments to existing laws that impact surveillance. We set out below specific recommendations that will help to ensure that any intrusion into an individual's right to privacy by state surveillance is in consonance with the principles in the Puttaswamy case.

  1. Prior judicial review: Present Indian laws confer wide powers on the executive in terms of deciding the scope and manner of surveillance. Intelligence agencies and LEAs initiate requests for surveillance, which are then authorised by another executive agency - the Home Secretary in the Central and State Governments). Oversight of authorisation is also done by an executive agency - the Review Committee established under the Telegraph Rules. The decision in Puttaswamy held that any intrusion by the state in an individual's privacy rights is permissible only if it is supported by a "fair, just and reasonable procedure established by law". A process that is driven solely by one arm of the state mitigates from the system of checks and balances that is necessary to satisfy this criteria. We therefore recommend that the current processes need to be amended to incorporate an element of prior judicial review (or post-facto judicial scrutiny in emergency cases). This review may be conducted through specialised courts designated for this purpose or by judicial members of an independent body, such as a Data Protection Authority. The role of this body would be to apply the principles of legality, lnecessity and proportionality in each and every case to ensure that the nature of surveillance, its duration and scope is in line with the purpose that is sought to be achieved. Further, a mechanism for filing an appeal against the decision of the judicial body must be provided. The adoption of the proposed structure would require corresponding amendments to the Telegraph Act, IT Act and the rules thereunder.
  2. Reporting and transparency by LEAs: Current laws need to be amended to ensure appropriate reporting and transparency requirements are implemented pertaining to all surveillance activities. These requirements may differ depending on the nature of information and the entity to which it is being provided (for instance, to the Parliament or the public). Reporting must be on both ex-ante and post facto basis, as may be relevant to the circumstances. Further, oversight bodies must also be required to publish periodic reports of their activities and that of LEAs/ intelligence agencies under their supervision, while service providers must be permitted to publish aggregated statistics detailing volume and nature of surveillance requests.
  3. Implementation of data retention norms, principles of fair processing: Principles of fair processing must be applicable even to data processed by intelligence bodies/LEAs. They must also ensure that as far as possible, personal data is up to date and accurate, while data retention norms need to be appropriately designed to ensure only relevant data is stored by the authorised agencies.
  4. Notice to the data subject: In order to achieve a balance between the objectives of surveillance and the rights of the data subject, the law should provide for an obligation to ensure that the affected data subjects are notified after completion of the surveillance. However, the agency may seek the approval of the judicial body to delay or avoid the requirement of notice under certain exceptional circumstances, for instance if it can be established that such a disclosure would defeat the purpose of surveillance.
  5. Right to seek redress: The requirement of notice to the data subject must be accompanied by a right to challenge and seek appropriate redress against surveillance activities. This right should extend to a person who is, or has reasonable apprehension of being, the subject of surveillance. In addition, intermediaries that are required by law to facilitate access to information by LEAs should also have the legal right to question the scope and purpose of the orders received by them.
  6. Privacy officers in LEAs: Independent officials must be appointed to the intelligence agencies and LEAs to scrutinise requests for surveillance (before they are placed before the sanctioning judicial body). Such scrutiny must be recorded in writing and available to relevant oversight bodies (if not the public).
  7. Technical measures to enhance privacy: Technical measures and privacy by design principles must be used to inform surveillance procedures and ensure proportionality and due process. This may imply for instance, the use of masking techniques to protect identities of citizens caught up in bulk surveillance of foreign intelligence, ensuring collected data is encrypted, acess controls, etc.
  8. Evidentiary value of information collected in breach of data protection law: Illegality in conducting search and surveillance activities does not lead to a bar on the admissibility of that evidence in subsequent proceedings under Indian law. Consequently, the incentives of LEAs are not fully aligned with the objective of ensuring that the legal processes governing surveillance are strictly followed. This will continue to pose a challenge even if privacy safeguards are introduced in the law. We therefore recommend that relevant laws should be amended to bar the admissibility of any information that is obtained by the agencies in breach of the proposed data protection law and other surveillance related laws.
  9. Revisiting telecom licenses: Telecom licenses contain specific provisions relating to the obligations of telecom service providers (TSPs) to facilitate lawful interception activities. We recommend that to the extent that any of the provisions contained in telecom licenses create additional restrictions on the privacy rights of individuals, these provisions need to adopted through legislative instruments. Further, we recommend that the terms of telecom licences also need to be revisited in so far as they contain restrictions on the encryption standards that can be adopted by TSPs, which in turn limits the privacy rights of their users. The Telecom Regulatory Authority of India's (TRAI) recent recommendations on data protection indicate a positive move in this direction. The regulator recommended that the Department of Telecommunication needs to reexamine the encryption standards laid down in the telecom license conditions. It noted the need for personal data of telecom consumers to be encrypted, both during storage and in motion. Further, TRAI recommended that decryption by authorised entities should be permitted on a needs basis, either with the consent of the consumer or in accordance with legal requirements.
  10. Transparency regarding standard operating procedures (SOPs): We recommend that any SOPs formulated by the Government to give effect to the provisions governing surveillance must be made publicly available and stakeholders should also be given an opportunity to contribute to their framing. To the extent that the SOPs might create any independent obligations on individuals or intermediaries, we recommend that the same should be supported by a legislative instrument.
  11. Amendments to other laws: Provisions of the Whistleblowers Protection Act, 2011 need to be revisited to ensure adequate protection is given to whistleblowers who expose mala fides or illegalities in surveillance procedures. In particular, the general exemptions granted under the statute (to matters impinging on sovereignty or strategic interests of the state, disclosures under the Official Secrets Act, 1923, etc) may need to be revisited. Similarly, revisions may be required to the generic exemptions granted under the Right to Information Act, 2005, to various LEAs.

Reviewing the Srikrishna Committee's proposals

The Srikrishna Committee's draft law proposes protections relating to the collection, processing and use of personal data of individuals (referred to as data principals) and offers remedies from related harms. The draft law defines "harms" to include (i) any restriction placed or suffered directly or indirectly on speech, movement or any other action arising out of a fear of being observed or surveilled; and (ii) any observation or surveillance that is not reasonably expected by the data principal.

Sections 42 and 43 of the draft law deal with the processing of personal data in the (i) interests of the security of the state; and (ii) for prevention, detection, investigation and prosecution of any offence or any other contravention of law, respectively. In both these cases the identified activities are exempted from the requirements under the draft law if they satisfy the requirements of legality, necessity and proportionality. The exemption, however, does not include the requirement to ensure that any personal data is processed in a fair and reasonable manner (Section 4) and in accordance with reasonable security standards, including methods such as de-identification and encryption of the data and prevention of misuse and unauthorised access (Section 31).

In drafting these provision, the Committee has reiterated the position laid down by the judges in Puttaswamy, but without addressing the related structural and procedural elements required to make these principles work. For instance, the requirement of legality is incomplete without a description on what constitutes legality in case of access by intelligence agencies/ LEAs. Should it include only legality of the means of access or also require the need for a legislative basis for the agencies to whom such access is provided? Similarly, what factors should be taken into account to judge whether a proposed intervention is "necessary and proportionate" in the facts of the case? Who should be making this determination?

In the context of discussing the exemption of measures taken to ensure "security of the state", the Committee proposes that the law should provide for ex-ante access controls by designating a district judge to hear requests for processing of personal information by intelligence agencies in closed door proceedings. It also proposes that such approvals should be time-bound and require periodic renewal, subject to the judge being satisfied that the purpose for processing remains relevant. Further, the report talks about ensuring accountability through ex-post periodic reporting and review by a parliamentary committee.

The recommendations of the Committee point in the right direction, but their effectiveness is marred by the suggestion that such measures be adopted if and when the Government decides to pursue a comprehensive law governing intelligence agencies. Given that surveillance activities are already taking place, the immediate requirement would be to make amendments to the laws that enable such access to personal information by intelligence agencies and LEAs, namely the Telegraph and IT Act and the rules thereunder. The draft law proposed by the Committee already suggests some amendments to provisions contained in the IT Act and the Right to Information Act, 2005. The logical step would have been to at least incorporate similar suggestions on amendments to existing surveillance related laws to build in the safeguards suggested in its report regarding ex-ante analysis and ex-post accountability for surveillance related activities.

In terms of our other suggestions, the draft law includes an obligation of fair and reasonable processing and ensuring security of data even when such processing takes place under the given exemptions. It, however, fails to recognise other important requirements like having data protection officers inside intelligence agencies and LEAs; (deferred) notice to the concerned individual, and the right to seek appropriate redress. Further, the draft law also fails to address the issue of the evidentiary value of information collected in breach of the proposed data protection law.


The draft law proposed by the Srikrishna Committee has tremendous scope for improvement, both in terms of strengthening the protections available to individuals who are subjected to surveillance activities as well as the structural and procedural safeguards governing such access. Having said that, we also believe that the recommendations contained in the report, particularly on ex-ante and ex-post safeguards against surveillance, are an important starting point for this discussion. To take these suggestions to their logical conclusion, it is important that corresponding amendments should be made to the draft before it shapes into a bill that can be placed before the Parliament.


Committee of Experts under the Chairmanship of Justice B.N. Srikrishna, A Free and Fair Digital Economy: Protecting Privacy, Empowering Indians, 2018.

Committee of Experts under the Chairmanship of Justice B.N. Srikrishna, Personal Data Protection Bill, 2018.

David Omand, Securing the State: A Question of Balance, Chatham House, 8 June, 2010.

International Conference of Data Protection Privacy Commissioners (ICDPPC), Counting on Commissioners: High level results of the ICDPPC Census 2017, September, 2017.

Joseph Cannataci, Working Draft Legal Instrument on Government-led Surveillance and Privacy, 2018.

Richard A. Clarke, Michael J. Morell, Geoffrey R. Stone, Cass R. Sunstein and Peter Swire, Report and Recommendations of The President's Review Group on Intelligence and Communications Technologies, Obama White House, 12 December, 2013.

TRAI, Recommendations on Privacy, Security and Ownership of the Data in the Telecom Sector, 16 July, 2018.

Vrinda Bhandari, Data Protection Bill: Missed Opportunity for Surveillance Reform, The Quint, 28 July, 2018.


Vrinda Bhandari is a practicing advocate in Delhi. Rishab Bailey, Smriti Parsheera and Faiza Rahman are researchers in the technology policy team at the National Institute of Public Finance & Policy.

Wednesday, August 01, 2018

A Limiting Principle for the NCLT's New Powers Under the IBC

by Adam Feibelman.

Last week, the NCLT in Mumbai rejected a resolution plan approved by creditors of Jyoti Structures. This comes relatively soon after the Central Government recently enacted some significant amendments to India’s new Insolvency and Bankruptcy Code. Among the most potentially important of these amendments is a requirement that the National Company Law Tribunals must determine that a debtor's insolvency resolution plan "has provisions for its effective implementation" before approving it. The purpose and scope of this new requirement are unclear, and it could be construed very narrowly or rather broadly. This essay argues that such a requirement can be a useful and valuable component of the insolvency and bankruptcy system, but only if the NCLT judges exercise careful discipline in employing it. Otherwise, it could contribute to pervasive delays and uncertainty in the resolution of insolvency cases. Therefore, this recent amendment will present yet another crucial test in the early development of the IBC system and the role of the NCLT within it. The order explaining the Tribunal's reasoning in the Jyoti Structures case has not yet been released. It is possible that the Tribunal's action was based on a finding that the plan did not provide for effective implementation, but it may have been based on some other rationale. In any event, the Tribunal’s action is likely to provide an important opportunity to assess the NCLT’s role in the insolvency process under the IBC.

Challenging the Logic of the Code

To be sure, the new requirement for approval of resolution plans in corporate insolvencies seems to implicate the core of the animating logic of the Code. One of the primary aims of the new Code is to provide a mechanism for quickly determining if a firm in financial distress would yield more value if reorganized and allowed to continue as a going concern than if it were liquidated for the benefit of its creditors. This function is a key feature of any insolvency or bankruptcy regime, and this decision can be allocated to creditors or to institutional actors or shared by both.

The IBC was designed to empower creditors to make this determination and to dramatically limit or eliminate the authority of judicial officials to do so. Under the Code, after a firm enters the insolvency system, qualified parties can submit resolution plans to a committee of creditors, which is composed of the firm's financial creditors. Most creditors and unrelated third parties are qualified to propose a resolution plan. Promoters of the insolvent firm may also be able to submit a plan unless, among other criteria, they have been a willful defaulter or have owed a loan that is formally non-performing for over one year.

As a general matter, there are very few limitations or constraints on the substantive terms of resolution plans. The Code itself requires that the plan must repay operational creditors – who are excluded from the creditors committee – at least as much as they would receive if the debtor were liquidated, must give priority status to the repayment of costs of the insolvency process, and must provide for the management of the debtor and the implementation and supervision of the plan. Regulations implementing the Code further require that a resolution plan must provide dissenting financial creditors the liquidation value of their claims with priority over the claims of creditors who voted in favor of the plan. To be approved by the committee, a plan must obtain favorable votes from 66% of the voting share of the committee. The voting share required for approval under the Code as originally enacted was 75%, and this was subsequently lowered to 66%, easing creditor coordination and reducing the power of minority creditors to thwart approval.

If a resolution plan is approved by the committee, it is then submitted to the NCLT for approval or rejection. Prior to the recent amendment, the role for the NCLT at this stage was strictly limited to determining whether the plan approved by the creditors' committee satisfied the criteria noted above. Most authorities understood this to mean that the Code did not give any authority or responsibility to the NCLT to assess the terms or substance of a plan approved by the committee or to exercise any judgement or discretion to reject or require any changes to such a plan. (See, for example, Sumant Batra, Corporate Insolvency: Law and Practice (2017), at p.432) But there was some ambiguity in the provisions of the Code, because it did expressly authorize NCLT judges to assess whether plans "provide for the management of the affairs of the Corporate debtor after approval of the resolution plan [and] the implementation and supervision of the resolution plan."

The recent amendments do not fully resolve this ambiguity, but they do now expressly give the NCLT responsibility for determining that a resolution plan can be effectively implemented before approval. It is not clear what motivated this change. Something similar, but much more limited, was recommended by the Insolvency Law Committee. The Committee’s report recommended that “specific power may be given to the NCLT to give directions regarding implementation of the resolution plan while approving it to ensure that a proper implementation strategy has been included in the resolution plan.” But this falls short of the statutory requirement recently adopted that appears to require the NCLT to reject plans that the tribunal believes do not provide for effective implementation.

The U.S. “Feasibility Test”

If the new provision might be understood as authorizing the NCLT to assess the practical or economic viability of resolution plans, a comparative analysis may be illuminating. In the U.S., a bankruptcy court can only confirm a reorganization plan approved by creditors in a Chapter 11 case if it determines that “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor ….” (See 11 U.SC. 1129(a)(11)). This is known as the feasibility test, and the proponent of a Chapter 11 plan bears the burden of establishing that its plan has a reasonable prospect for success. Significantly, courts must evaluate the feasibility of a plan, but that is limited to assessing the proponent’s supporting evidence and argument; courts generally do not conduct an independent analysis of the feasibility of Chapter 11 plans.

This requirement under U.S. law fits within a very different regime with a different underlying approach than that of the IBC system. In the U.S., the managers of firms in bankruptcy have significant control of their bankruptcy process. In most cases, debtors file for bankruptcy protection in the first place, the debtor's managers continue to run the firm, and they have an exclusive right to propose a reorganization plan for a long period after filing for bankruptcy relief. These aspects of the U.S. regime tend to favor efforts to reorganize firms if possible. Added to which, other aspects of the regime make it relatively easy to confirm a plan over the objection of a significant number of creditors. In Chapter 11, plans are voted on by classes of creditors, often grouped by secured and unsecured status as well as other commonalities. To approve a plan, a majority of members of the class holding at least two-thirds of the amount of the debt in the class must vote in favor. In a “voluntary” plan approval, all classes impaired under the plan must vote to approve, and, in any event, every creditor must receive under the plan at least the value they would receive if the firm were liquidated (the best-interests test). If a plan cannot garner approval from every class, it is possible to "cramdown" a plan on dissenting classes of creditors if just one impaired class of creditors votes to approve and the plan "does not discriminate unfairly, and is fair and equitable" to any impaired class of dissenting creditors.

In that system, the feasibility test can serve a particularly important function. Debtors will often have strong incentives to propose reorganizations that have a low probability of success. Managers and related stakeholders of an insolvent firm may have little to lose in a failed reorganization and much to gain in a successful one. The feasibility test makes it harder for a firm in bankruptcy to propose a reorganization that is unlikely to succeed and that will waste the debtor’s assets in the meantime. In a prominent case, In re Made In Detroit, which is often assigned in bankruptcy law courses the U.S. to illustrate the operation of the feasibility test, the debtor proposed a plan to raise financing for a real estate development project that had foundered for lack of necessary permits. The court found the debtor’s reorganization plan failed the feasibility test, primarily because the plan was highly contingent on uncertain financing, did "not provide a reasonable assurance of success," and was "based on ‘wishful thinking’ and ‘visionary promises’." The court instead approved a plan proposed by creditors and, pursuant to that plan, authorized the sale of the property that the debtor was trying to develop.

If the feasibility test under U.S. law is a way to place a limit on debtors seeking to reorganize under with low probability of success, it can also be understood as a means for protecting creditors from each other. In many circumstances, the interests of some creditors will align with those of the debtor’s managers – they will have little to lose from a risky reorganization plan that yields little to them and much to gain from the unlikely success of such a plan. Creditors in that position are often willing to support a debtor's plan that imposes risk on other creditors. Such inter-creditor conflict generally pits different classes of creditors against each other. For example, unsecured creditors or junior secured creditors who would receive very little or nothing in an immediate liquidation may be willing to vote for an infeasible reorganization plan that holds some distant promise of a higher return than and that exposes secured creditors to a likely decline in the value of their collateral. Some unsecured creditors, like employee and trade creditors, may have incentives more aligned with the debtor than with other unsecured creditors. Still other creditors may be protected by credit default swaps and are therefore essentially neutral to the success or failure of a reorganization. In a system that enables a single class of impaired creditors to approve a plan that is then crammed down on non-consenting classes, there is real value in a tool that helps make sure that the debtor and a potentially small group of creditors cannot advance a plan that unreasonably risks waste and loss on the other creditors.

Different Codes, Different Contexts

The new requirement that the NCLT can only approve a plans that "has provisions for its effective implementation" will operate within a very different legal landscape. Under the IBC, the mangers of debtor firms are displaced upon the appointment of an interim resolution professional. Generally, management will not propose resolution plans; in many cases, they will be prohibited from doing so. Perhaps most significantly, the voting framework for approving or rejecting plans removes many opportunities for dramatic risk-shifting in a resolution plan. Operational creditors, a significant portion of unsecured creditors, do not participate in the creditors committee and therefore cannot impose a plan on other creditors. And a because two-thirds of the voting share of the committee of creditors must vote to approve a resolution plan, financial creditors with the largest stake in the outcome of the case will determine whether the plan is approved or not. In sum, the likelihood of approving highly unrealistic resolution plans over significant creditor objection should be much lower under the IBC than under Chapter 11 in the U.S.

That said, however, inter-creditor conflicts will proliferate under any insolvency regime, and the IBC regime will not and cannot eliminate all opportunities for some creditors to impose significant financial risks on other creditors. It is certainly possible to anticipate circumstances in which two-thirds of a firm's financial creditors with relatively little to lose in the process will be willing to support a resolution plan with a very low probability of success that effectively imposes a substantial risk on a minority group of other creditors. The requirement that resolution plans must provide dissenting financial creditors priority for the liquidation value of their claims may serve to limit their risk of loss, but it does not eliminate such risk. One of the broader goals of the IBC is to promote increased use of unsecured credit, especially through the corporate bond market – as that begins to occur unsecured creditors will come to comprise a larger portion of creditors committees. Even now, junior secured creditors may represent a significant portion of value on a creditors committee and may have incentives that are adverse to their senior secureds. The basic point is that no system can fully eliminate the chance that resolution or reorganization plans will be premised on very unlikely contingencies and that some such plans will impose the risk of likely failure on non-consenting creditors. In those circumstances, a tool to police for plans that are unlikely to be successfully implemented can be a useful component of an insolvency or bankruptcy system.

To be clear, such a tool might also be used to sort out unviable resolution plans that reflect efforts by financial creditors to avoid realizing losses in liquidation but that do not "cramdown" risks on other dissenting creditors. But this particular problem is an inevitable risk of an insolvency system designed to give decisional authority to financial creditors; and, ideally, it should be addressed through prudential regulation of banks and other financial institutions.

A Limiting Principle

It is possible that the Central Government did not mean to insert something like a feasibility test into the new corporate insolvency regime; and perhaps this new amendment will be construed to refer to specific conditions that must be satisfied for a resolution plan to be implemented. If the new amendment is understood to be something more like the feasibility test in Chapter 11, however, it is certainly possible that the costs of this new requirement will outweigh its potential benefits. It could invite tribunals to assess the merits of every resolution plan approved by creditors committees; if so, the tribunals could alter the essence of the new insolvency system, undermining a key pillar of creditor control, injecting a heavy dose of judicial oversight, and likely slowing down the process considerably.

But the NCLT need not take such an aggressive approach. It could follow the approach to feasibility in the U.S., where it is a low bar, rarely utilized to block a plan, and a yet a useful tool in extreme cases for policing against gross waste and abuse of dissenting creditors. In any event, the new test should not be construed to require or authorize the NCLT to conduct an independent analysis of the likelihood of success of a resolution plan approved by creditors. It should be enough for the NCLT to assess the committee’s determination that the plan can be effectively implemented based on the resolution professional’s report on the plan. And committees will presumably insulate their decisions by conducting explicit and robust analysis of the viability of the plans put before them and ensuring that this analysis is reflected in the resolution professional’s report to the NCLT. If a dissenting creditor believes a plan cannot be effectively implemented, it should be authorized to raise an objection when the NCLT is considering whether to approve the plan. (See Batra, supra, at p.431) But such challenges can be a slippery slope into the long procedural delays that the Code was designed to eliminate if they become commonplace and trigger searching review by the NCLT.

In sum, if the new amendments to the IBC require the NCLT to determine that resolution plans can be effectively implemented before approving them, this can be a useful tool in the IBC toolkit, but perhaps only in rare circumstances where substantial risks are effectively imposed on non-consenting creditors. If so, the NCLT should view the requirement as a low bar, a rare basis for intervention, and not a general invitation to substantively review resolution plans approved by creditors committees.


Adam Feibelman is Sumter Davis Marks Professor at Tulane Law School. The author wants to thank Renuka Sane, Bhargavi Zaveri, and Pratik Datta and two anonymous referees for comments.

Monday, July 23, 2018

Discrepancies in the measurement of household saving

by Radhika Pandey and Renuka Sane.

Data on household financial saving is key to understanding how households save, and the flow of capital from households to firms. In India, households are seen to invest largely in physical assets, causing considerable concern for financial sector policy. This has generated debate on how to improve access to finance and get more households to participate in financial markets.

Accurate and precise measurement is the foundation for any work on financial saving. In the context of data on savings, a number of committees have recommended improvements in the quality of estimates. The issue, however, gets less attention than it deserves. In this article, we study the data on one of the key components of savings: the household financial saving, and highlight some instances of discrepancies between the two data sources on this.

Data on household financial saving in India

There are two sources of data for annual household financial saving in India.

  1. CSO: Data on annual household saving are published by the CSO in its end-January release titled 'First Revised Estimates (FRE) of National Income, Consumption Expenditure, Saving and Capital Formation', and revised in the subsequent annual releases. The Gross Financial Savings of Household Sector (at Current Prices) comprises of the following broad instruments: (a) Currency (b) Deposits (c) Shares and debentures (d) Claims on government - which include all the small savings schemes (e) Insurance funds (f) Provident and pension funds.

  2. RBI: Information on financial assets and liabilities of the household sector are available as part of the Flow of Funds (FoF) Accounts published by the RBI annually. FoF accounts map instrument-wise financial flows across five major institutional sectors of the Indian economy on a `from whom to whom basis'. These institutional sectors comprise (a) financial corporations (b) non-financial corporations (c) general government (d) household sector and (e) the rest of the world. RBI has been publishing the 'Flow of Funds' accounts since 1964. This table is part of the Handbook of Statistics on the Indian economy. The RBI estimates are released five months ahead of the CSO release.

    The data on changes in financial assets/liabilities of the household sector (at current prices) comprises of (a) Currency (b) Bank deposits (c) Non-banking deposits (d) Life insurance fund (e) Provident and pension fund (f) Claims on government (g) Shares and debentures (h) Units of UTI (i) (Net) Trade debt.

The data headings under the CSO and the RBI largely map to each other. The CSO provides us with one heading on deposits, while the RBI breaks it into bank and non-bank deposits. The UTI mutual fund is counted under Shares and debentures in both, while the "Units of UTI" heading in the RBI data pertain to Administrator of the Specified Undertaking of the UTI since 2005-06. Trade debt (net) is shown as part of deposits in the CSO scheme of financial instruments.

In theory, there should be similarities between the two. The CSO has been publishing the new series of national accounts with base year 2011-12 since 2015. In line with this new series of national accounts, the RBI also compiled the FoF accounts starting from 2011-12. In both the data-sets, the economy is divided into the five sectors mentioned above. Despite alignment of the sectors, there are discrepancies in the findings from the RBI FoF data and the CSO data.

Discrepancy in the CSO and RBI estimates

We first present the total household financial saving across the last three years between the two data sources in Table 1. The aggregate gross household financial saving for the year 2016-17 from the CSO is Rs 14,048.47 billion, while the RBI reports it to be Rs 18,204.68 billion. This amounts to a difference of more than Rs 4,000 billion for the year 2016-17. The differences in previous years are lower.

Table 1: Gross financial savings of the household sector (Rs.billion) (Base year 2011-12)
Gross financial savings CSO RBI
2014-15 12,572.47 12,826.33
2015-16 15,207.27 15,142.06
2016-17 14,048.47 18,204.68

We next analyse where the discrepancy for the year 2016-17 is coming from. Table 2 presents the instrument-wise share in total financial saving from the two sources in 2016-17.

Table 2: Share of instrument in financial saving 2016-17 (Base year 2011-12)
Share of instrument (%) RBI CSO
Currency -17.4 -22.5
Bank deposits 60.1 62.2
Non bank deposits 1.9 1.8
Insurance 24.2 24.9
Provident and pension funds 16.2 21.5
Claims on government 4.6 4.5
Shares and debentures 10.0 2.6
Net trade debt 0.2 0.3

The biggest source of discrepancy is seen in the share of shares and debentures in total household financial savings. According to the CSO numbers, their share is a meager 2.6% while the RBI numbers suggest that the share of `shares and debentures' is 10%. There are differences in the share of provident and pension funds. The CSO numbers report the share to be 21.5% while according to the RBI figures, provident and pension funds constitute 16% of the aggregate household financial saving. This is surprising because the CSO document explaining the changes in methodology in the new base year series shows that their key data source for estimating household financial savings in shares and debentures is the RBI.

Discrepancy in estimates depending on base year

A question that is often posed is how the share of particular instruments has been changing across time. This is especially important if the government has taken special policy initiatives to promote a specific saving instrument, and wishes to evaluate the policy impact. One such example is the category of provident and pension funds, wherein the National Pension System (NPS) has been given consistent tax breaks over the years.

Table 3 presents the share of pension and provident funds in total financial saving according to different sources. The first column comes from the RBI, Changes in Financial Assets and Liabilities of the Household Sector (RBI) at Current Prices released on September 15, 2017. The second column comes from the CSO, Changes in Financial Assets and Liabilities of the Household Sector at Current Prices : Base Year 2004-05. The CSO series for the base year 2004-05 stops at 2012-13. The third column is CSO, Gross Financial Savings of Household Sector at Current Prices: Base Year 2011-12. It would be fair to expect that for the common years, the series with different base years present comparable estimates. The CSO's document on changes in methodology in the new base year series suggest that the percentage discrepancy in household financial savings between the old and new base year series is 1.8%.

Table 3: Share of pension and provident funds in financial saving
Year RBI (2004-05) CSO (2004-05)CSO (2011-12)
2011-12 10.26 10.32 10.26
2012-13 14.71 10.99 14.71
2013-14 14.93 14.93
2014-15 14.71 15.18
2015-16 18.28 19.18
2016-17 16.26 21.50

There is a huge discrepancy in how the estimates change given the base year. For example, while the RBI data and the CSO data for base year 2011-12 suggest that the share of provident and pension funds in total saving for the year 2012-13 was 14.7%, the CSO's estimates for base year 2004-05 place this at 10.9%. In another year, however we see discrepancy between the RBI data and the CSO data for base year 2011-12. The RBI data shows a decline in the share of pension and provident funds from 18% in 2015-16 to 16% in 2016-17 while the CSO data shows an increase in the share of provident and pension funds from 19% in 2015-16 to 21.5% in 2016-17.


In the past, concerns have been raised on the quality of savings data and on the wide discrepancies visible in the RBI Flow of Funds Accounts and the CSO's data. In fact, the RBI in its August 2016 bulletin has tried to align its methodology with the CSO new base year series. However, despite their efforts, key problems in measurement remain. If there are reasons for the discrepancy, they remain inaccessible in the public domain to researchers. This is a serious concern as any analysis on household saving cannot proceed without accurate, precise and consistent data.


Since the publishing of the article, we learned that the RBI overwrites its provisional estimates (released five months ahead of the CSO's release) once the CSO releases its data on household savings. This suggests that ultimately there is only one source of data on household savings, the CSO.


Radhika Pandey and Renuka Sane are researchers at the National Institute of Public Finance and Policy.

Tuesday, July 17, 2018

Building State capacity for regulation in India

by Shubho Roy, Ajay Shah, B. N. Srikrishna, Somasekhar Sundaresan.

When India embarked on market oriented reforms in 1991, there was a desire to break with central planning; with detailed government control of entry barriers, product design and processes within firms. This is not synonymous with deregulation: there are market failures in many industries that require addressing. This led to the establishment of regulators. While the Reserve Bank of India has existed since 1934, there was a wave of establishment of new regulators after SEBI was created in 1988.

Regulators were to have legislative powers, to write subordinate legislation which would embed intricate knowledge and change rapidly with the evolution of fast-paced private industries. They were intended to have executive power in licensing and investigations. They were designed to shield transactions (licensing, investigation) from political interference. They were expected to achieve greater State capacity when compared with departments of government improving upon processes such as human resource policies.

The early optimism about shifting from central control to specialised regulators has given way to concerns about the working of regulators. Regulators have also been plagued by poor State capacity.

Regulators have too often veered into controlling as opposed to regulating, with creation of entry barriers and micro-management through regulations. Firms and groups of firms actively seek to co-opt regulators in their business objectives, which has given a return to the political economy of central planning. Entry barriers have sprung up with irrational and arbitrary decisions in licensing. Enforcement of regulations, and substantive law making, is selective and weak. This has induced large costs upon the economy. There is arbitrary power to initiate investigations and punish, and a climate of fear where private persons are afraid to criticise regulators. India of 2018 is uncomfortably similar to the India of 1991.

It is hence important to review the Indian experience, diagnose the sources of failure of existing regulators, and envision how high performance regulators can be obtained. We have a new paper, which is forthcoming in Regulation in India: Design, Capacity, Performance, edited by Devesh Kapur and Madhav Khosla, Oxford: Hart Publishing, 2019 (forthcoming). This article summarises and introduces this new paper.

There are two blind alleys in the quest for State capacity in regulators. It is possible to focus on one episode of a mistake by a regulator, and undertake analysis and advocacy about solving this problem. While a great deal of knowledge can be produced through case studies of failure, it is important to go upstream, to ask questions of incentives and information that lie at the source of repeated regulatory failure.

The second non-solution is a focus on personalities. When institutions are weak, the character of the institution is determined by its staffing. There is, then, a clamour to recruit great men, and then give them all power to do as they like (i.e. extreme regulatory independence). It is important to look deeper, to build institutions that have impersonal capability. For any change to be more than skin deep, it cannot be an idea in the minds of certain individuals; it has to be about the formal structures of governance, accountability, and processes.

Conversely, individuals working in regulators sometimes take criticism personally. However, the failures of an organisation are primarily induced by the design of the organisation. The same individuals would deliver superior outcomes if placed in a better designed organisation.

The focus must be on the incentives of the individuals who man the regulator. If regulators are merely given arbitrary power, public choice theory and the Indian experience shows that this power will be used poorly. What is required is systems of accountability, and checks and balances, through which the individuals working inside regulators have incentives to do the right things. This requires seven elements.

Clarity of purpose. Accountability for an organisation requires clarity on its goals. Every regulatory organisation must have a compact and clearly understood objective. Sprawling mandates, and particularly conflicting mandates, yield poor performance.

Role and composition of the board. The board must be dominated by non-executive members, through which the board can play the role of the Principal vis-a-vis the management which is the Agent. The board must control the organisation design, including organisation diagram, internal process manuals and the budget process. The board must control the legislative function.

Legislative process. When Parliament places law-making power upon unelected officials in a regulator, this calls for commensurate checks and balances in the process of regulation-making. The regulation-making process must start from the board. The staff must document the problem that is sought to be solved, the proposed intervention, and conduct a cost-benefit analysis. This packet must be put out for public comment. After this, the staff must address the public comments on the draft and make appropriate modifications to the draft regulation, and bring the draft back to the board for a discussion. Finally, only the board should have the power to issue a regulation.

Executive process. Sound processes are required in licensing and investigations, which protect citizens from arbitrary power. The non-award of a license causes harm for the applicant, and should use processes similar to those employed when punishing a citizen.

Judicial process An administrative law department should contain administrative law officers, who play no role in legislative or executive functions. This would yield an element of separation of powers. A hearing must take place before an administrative law officer, where the prosecution leads an argument and the defendant is given an opportunity to argue her case. This should lead to the drafting of a reasoned order as a structured document which shows the state of law, the facts of this case, demonstrates that law has been violated, or explain why this conclusion cannot be reached, and uses proper reasoning to determine the penalty. Orders should be published. There should be the possibility of efficacious appeal at a court or tribunal against the order. These three stages of due process (internally, at the administrative law officer, and externally, through publishing orders and at the appeal) create pressure upon the investigation and prosecution staff of regulator to produce high quality work, and protect citizens from arbitrary power.

Reporting and accountability. Regulators should be obliged to release statistical details about their functioning. Reporting should not concern the broader economic environment, e.g. the fluctuations of the stock market index, but should focus upon the actual work of the regulator, e.g. the win rate at the tribunal when orders are appealed. High quality reporting of all aspects of the working of the regulator will create the pressure of accountability, and feed into the budget process where targets can be set and incremental resources allocated in a way that pursues those targets.

The role of the department. Alongside the creation of well structured regulators, there is a need to clarify the role of the department of government, and create capacity in the functions that the department has to discharge.

These seven elements need to be coded into the Parliamentary law. This can be done at the level of one sector (e.g. the draft Indian Financial Code that envisages a single good governance framework for all financial regulators) or for all regulators in the Union government, as was done in the US by the Federal Administrative Procedures Act in 1946.

When compared with these seven elements of the design of a regulator which foster high performance, the present Indian landscape contains large gaps. The regulators of today are defined by skimpy laws, which give arbitrary power to the management, and lack a Principal-Agent perspective upon the working of the regulator. The present legislative framework is grounded in the notion that regulators are good people and will work towards the welfare of the people. This creates poor incentives for good behaviour by regulatory officials.

The FSLRC, chaired by one of us (Justice Srikrishna) drafted the Indian Financial Code, from 2011 to 2015. This draft law embeds the key ideas of this paper. Across the Indian landscape, many experiments are now taking place in building State capacity in regulators. This paper provides a conceptual framework, and 140 sections in the draft Indian Financial Code provides the draft law, for this journey.

Thursday, July 12, 2018

Interesting readings

Three reforms that marked C.S. Rao's Irdai term by Deepti Bhaskaran in Mint, July 10, 2018.

Economic preferences across states in India by Anirudh Tagat in Mint, July 10, 2018.

Project Sashakt: Several steps backward by Debashis Basu in Business Standard, July 9, 2018.

Formalisation of the economy is a form of coercion by Shruti Rajagopalan in Mint, July 9, 2018.

Will Trump Be Meeting With His Counterpart - Or His Handler? by Jonathan Chait in New York Magzine, July 8, 2018.

In Memoriam Peter Christoffersen by Francis X. Diebold in Francis Diebold's Blog, July 5, 2018.

Why Sebi's 'advice' to ICICI Prudential AMC is troubling by Mobis Philipose in Mint, July 5, 2018.

Informational Autocrats by Sergei M. Guriev and Daniel Treisman in SSRN, July 5, 2018.

A little bit of IDBI Bank in my LIC policy by Monika Halan in Mint, July 4, 2018.

The great firewall of China: Xi Jinping's internet shutdown by Elizabeth C Economy in The Guardian, June 29, 2018.

The study of India in the US, by Devesh Kapur, June 29, 2018. Also see.

Photo Finish on Futility Closet., June 19, 2018.

Swachh Bharat Mission: A remarkable transformation by Sudipto Mundle in Mint, June 14, 2018.

OpenStreetMap Should Be a Priority for the Open Source Community by Glyn Moody in Linux Journal, June 11, 2018. Also see.

The right age for leadership roles: How Old Are Successful Tech Entrepreneurs? by Pierre Azoulay, Benjamin F. Jones, J. Daniel Kim and Javier Miranda in Kellogg Insight, May 15, 2018.

Why replacing politicians with experts is a reckless idea by David Runciman in The Guardian, May 1, 2018.

Media censorship and stock price: Evidence from the foreign share discount in China by Rong Ding, Wenxuan Hou, Yue (Lucy)Liu and John Ziyang Zhang in Journal of International Financial Markets, Institutions and Money, March, 2018.

Persuasive Language for Language Security: Making the case for software safety by Mike Walker.

The worrying rise of militarisation in India's Central Armed Police Forces by Devesh Kapur in The Print, November 29, 2017.

The Wooden Firehouse by Andrew Myers on Wordpress, June 17, 2015.