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Thursday, October 31, 2019

Elements of the low Indian labour force participation rate: The elderly

by Subhamoy Chakraborty, Renuka Sane and Ajay Shah.

India has a remarkably low rate of labour force participation. The Periodic Labour Force Survey (PLFS) carried out under the Ministry of Statistics and Programme Implementation estimated the labour force participation rate (LFPR), for individuals of age 15 and above, at 49.8% in 2017-18. The CMIE CPHS survey, which has more recent information, has shown a decline in the LFPR by 2019. These numbers suggest that a large part of India is not in the labour market. These magnitudes of non-participation are much larger than the rates seen with unemployment. The grand question of Indian labour economics is that of understanding the low LFPR. The grand question of Indian economic policy lies in obtaining a 50 per cent gain in GDP through a 50 per cent increase in the labour force.

One big element of this LFP problem is women's LFP. The women's LFPR has been falling. In 2011-12, India was already one of the countries with the lowest female labour force participation. This has gotten worse with time. In 2017-18, the female LFPR fell to a historic low of 23.3%. A remarkable feature of the Indian women's LFPR is the comparison against countries like Pakistan (24%) or Bangladesh (36%). For those of us who believe that women's agency in India is ahead of that in Pakistan, this is a bracing fact. The examination of women's LFP is an important crossroads between labour economics and gender studies. It also emphasises the importance of gender studies in thinking about India.

The other two big elements of the LFPR problem are the young and old. In this article, we delve into labour supply of the elderly and establish some basic facts of this field. The positive and normative economics of elderly LFP is an important element of labour economics, given the large and growing share of the elderly in the population. It is also a major issue in ageing studies. High labour force participation by the elderly is well known to contribute to emotional and physical well being. It is generally better for a person to work for a wage of Rs.50 a month rather than obtain a pension of Rs.50 a month. The puzzle of the field lies in devising labour market arrangements that will harness labour supply of the elderly, and avoid the abrupt event of retirement.

The elderly are defined as those above the age of 55. The 55-64 age group is also part of the conventionally defined working age group (age 15 to 64). The 65+ age group constitutes the old elderly.


We study the Consumer Pyramids Household Survey (CPHS), a pan-India panel household survey of about 170,000 households carried out by the Centre for Monitoring Indian Economy. The survey asks about the present employment status of each member above 15 years of age. The response to the employment question is recorded as a 4 point status:

  1. Employed
  2. Unemployed, not willing and not looking for a job
  3. Unemployed, willing and looking for a job
  4. Unemployed, willing but not looking for a job

Individuals whose employment status is either Employed (1) or Unemployed, willing and looking for a job (3) are considered to be a part of the labour force. In this article, we examine the data for January - April, 2019.


Table 1 provides estimates of the labour force participation by age group. There are approximately 375 million workers in the 15-54 age group, giving a LFPR of 45%. The LFPR drops slightly to 44% for the 55-64 age group with 51 million workers. The LFPR drops dramatically to 12% for the 65+ age group with only 8.4 million workers.

Table 1: Labour Force Participation: Age Group
Age Group Population
(in millions)
(in millions)
15-54 828.3 375.0 45.3
55-64 115.6 50.8 43.9
65 and
69.1 8.4 12.1

Figure 1 presents the labour force participation rate (LFPR) of those above the age of 55. The labour force participation was a little over 55% at age 55, and fell to about 10% by age 70.

Figure 1: Labour Force Participation (55 and above)

Withdrawal by the elderly from the labour force generally happens for one of the following reasons: (a) people are required to leave their main job at a specific retirement age, (b) are unwilling to work because they value leisure more and access to pensions at a sharply defined age which makes it feasible to stop working (c) are unable to work because of health constraints or (d) the labour market is unfriendly to older workers. In the US, for example, sharp drops in participation are seen at the age of 62 and 65, when access to social security benefits becomes available.

In India, formal pension arrangements are only in place for a small part of the population. Hence, factors "(a)" and "(b)" above should not matter much in India. And yet, we see a sharp drop at age 60. This suggests that reasons such an unfriendly labour market might explain the large drops in labour force participation at older ages.

Changes over time

Figure 2 presents the labour force participation rate in 2016 and 2019. We see that there has been a small increase in the participation rate for the 55-59 age group between 2016 and 2019. However, for all other age categories, there has been a remarkable fall. For example, about 42% of the 60-61 age group participated in the labour market in 2016. This had fallen by about 10 percentage points in 2019. Similarly, in the 65 plus age group, labour force participation was at 28%. By 2019, this had fallen to 12%. This suggests that that stress in the economy has hurt the elderly more than prime-age working males. This may be part of a larger phenomenon, where prime age working males are protected in economic downturns, while all other parts of the labour force (women, the young, the old) seem to lose employment at higher rates.

Figure 2: Labour Force Participation: Over time

International comparison

It is useful to ask how these compare to the numbers in the OECD countries, where formal pension systems shape the decision to retire. Table 1 presents the elderly labour force participation rate (LFPR) in India, US and Japan.

Table 2: LFPR: Comparison with US and Japan
Age Group India (%)
(Jan-Apr 2019)
US (%)
Japan (%)
55-59 52.7 72.3 83.4
60-64 29.4 57.1 70.6
65 and
12.1 19.6 24.7

In 2018 according to the Bureau of Labor Statistics in the US, 72.3% of those in the 55-59 age group were in the labour force. The participation rate fell to 57.1% for age group 60-64 and further declined to 19.6% for those above 65. Meanwhile the labour force participation rate in Japan, as reported by Statistics Bureau of Japan, was 83.4%, 70.6% and 24.7% for age groups 55-59, 60-64 and above 65 respectively. Japan has, in fact, seen a resurgence in elderly labour force participation in recent years owing to better health and education, as well as reduced generosity of social security programs.

Japan is considered one of the best countries in terms of integrating the elderly into the labour market. Suppose we treat Japan as a frontier: the outer limit of what is possible with labour market participation by the elderly. How much would we in India gain if we moved up to this frontier?

If the LFPR of the 55-64 age group in India (which is 43.9%) were to become the same as that of Japan's (77%), then the overall working-age LFPR would go up to 49.15%. This is a 4 percentage point increase in the LFPR owing to increases in the labour force participation of the "young old", and would mean that an additional 38 million individuals would be in the labour force.

An additional 9 million people, of age 65+, would also join the labour force, by matching the Japanese LFPR for the age group of 65+.

Totally, 47 million people would enter the Indian labour force if we moved up to Japanese levels of LFP from age 55 and above. This is an economically significant number. This magnitude of impact will go up in the future as India ages.


The Indian labour market has a remarkable feature: of low labour force participation. In this article, we examine one facet of this problem: the low LFP for the elderly. Despite the prevalence of a large informal sector, and the absence of a formal age of retirement, we find that the elderly labour force participation is low, and has actually fallen between 2016 and 2019.

Withdrawal from the labour market is bad for the elderly and bad for the economy. The examination of the LFP of the elderly is an important crossroads between labour economics and ageing studies. Further research is required in identifying the causes behind the low LFPR of the elderly.


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

Thursday, October 17, 2019

Towards an administrative framework for building public trust in vaccination

by Siddhartha Srivastava.

In January 2019, the Delhi government published a notification mandating the administration of the Measles-Rubella (MR) vaccine to all children between 9 months to 15 years of age. The vaccine was meant to be delivered as a booster shot irrespective of the previous vaccination status of the child. The notification did not provide any information with respect to the manner in which the MR campaign was to be carried out. Instead, it stated that since the "Measles-Rubella (MR) campaign is a National Policy like the Pulse Polio consent is required from the beneficiaries/their parents". This led to widespread panic among parents who eventually filed a petition before the Delhi High Court challenging the notification. The notification was challenged on the grounds that the express consent of the parents was not a requirement for administering the booster shot.

In response to the challenge, the Delhi High Court ordered a stay on the administration of the MR vaccine in the city and directed the Delhi government to ensure that express parental consent was obtained before the measles vaccine could be administered to children. The court also directed the Delhi government to publish advertisements with respect to the procedure of administration of the vaccine as well as information with respect to the side-effects of the booster dose such that parents can provide their informed consent for vaccination.


The judgment comes at a time when there has been widespread opposition to the introduction of the MR campaign in several states across India. Punjab, Karnataka, Kerala, Tamil Nadu and New Delhi have all witnessed vaccine hesitancy in different forms in relation to the administration of the MR vaccine. While the judgment poses significant questions about the role of individual consent in the delivery of public health goods by the state, this article is limited in scope to proposing a streamlined administrative framework for vaccination in India, one that contains internal controls to discourage vaccine hesitancy. Using the MR campaigns conducted in three different Indian states as case studies, we offer insights into the establishment of a proposed administrative framework such that the gains from immunisation are not offset by the growing threat of vaccine hesitancy in the country.


We examine MR campaigns conducted by the state governments of Delhi, Tamil Nadu and Kerala by using primary and secondary legal sources:

  1. Notifications/circulars issued by central and state governments with respect to the implementation of the MR campaign (see, here and here).
  2. Judgments arising out of litigation against vaccination campaigns and vaccine liability (see, here and here).
  3. Legal papers and journal articles on mechanisms to deal with issues of vaccine hesitancy.
  4. News articles reporting cases of vaccine hesitancy in the chosen states.

We reviewed these materials with a view to understand the current framework of vaccine administration in these states with a specific focus on the processes present in these frameworks (or lack thereof) to deal with vaccine hesitancy. We compare India's approach to vaccine administration to that of the United Kingdom, Canada, Australia and the United States. Accordingly, we attempt to derive best practices that can contribute to a model administrative framework for vaccine delivery specific to India with inherent checks and balances to address vaccine hesitancy. (see, here, here, here and here).


A study of the MR campaigns undertaken in Delhi, Tamil Nadu and Kerala suggest that vaccine opposition in these states can be broadly attributed to the following causes:

  1. Shared beliefs about safety, efficacy, potency and manner of delivery: Parents in Delhi are apprehensive about the effects of a booster dose of the MR vaccine given that their children have already been vaccinated for measles.
  2. Difficulty in accessing and understanding credible scientific information on vaccination: With the internet having become a repository of health-related information and in the absence of a framework for regulation/monitoring of such content, South Indian states such as Tamil Nadu and Kerala have witnessed the spread of erroneous, non-scientific information regarding vaccines over the internet and other media. Widespread misinformation and rumour-mongering on the internet, especially social media, has been a common characteristic of the MR campaigns across the country.
  3. Difficulty in accessing and understanding the legal/regulatory framework governing vaccination: Parents in Delhi and Kerala have raised concerns about scattered and often incomplete rules framed by state governments to undertake the actual administration of the MR vaccine.
  4. Reliance on religious, cultural and personal beliefs rather than proven facts and evidence: Opposition to the introduction of the MR campaign in Delhi, Kerala and Tamil Nadu suggests that vaccine hesitancy is not uniform across communities in each state but tends to occur in specific clusters (such as specific religious communities or groups that believe in non-traditional medicine). The identification of vaccine hesitant subgroups is imperative to understand the causes of their hesitancy and develop targeted interventions to increase vaccine uptake.

Towards a Trust Based Framework

Keeping in mind the causes of vaccine hesitancy in India, it may be helpful to design an administrative framework to streamline vaccine delivery with built-in checks for tackling vaccine hesitancy. The presence of an administrative machinery may be useful in addressing the public trust deficit in vaccination, in terms of:

Building greater credibility around vaccines: The administrative framework must be approved by a body of public health experts including vaccination professionals in order to allay fears relating to potency, efficacy and safety of the dose being administered. The United States Advisory Committee on Immunisation Practices (ACIP) and the United Kingdom Joint Committee on Vaccination and Immunisation (JCVI) are examples of such expert committees that provide recommendations for vaccine administration and monitoring. The ACIP is subject to the Federal Open Meetings Act of the United States which requires all meetings of the ACIP to be carried out in public as a trust building measure. In India, the National Technical Advisory Group on immunization (NTAGI) advises the central government on technical issues related to vaccination. The meetings of the NTAGI are close-door and infrequent. NTAGI sub-groups and expert advisory groups are constituted on an ad-hoc basis to address specific issues, and industry representatives are invited to present data but do not participate in discussions. Therefore, there is an urgent need for the functioning of the NTAGI to be made more transparent. Moreover, in addition to advising on the technical aspects of vaccination, there is a critical need for the NTAGI to consider issues such as vaccine access and coverage, safety, and hesitancy more frequently. Measures recommended by the NTAGI to strenghten monitoring and supervision, reduce immunisation drop-out rates and improve VPD and AEFI surveillance should be more heavily advertised with a view to address the fears of the public.

Formalising an awareness/communication strategy for vaccines: The administrative framework should contain strict rules for engaging with the public. This includes provisions for ensuring frequent awareness campaigns, dialogue with members of different communities, public campaigns by doctors, vaccinators and other public health experts, media outreach through public figures etc. Rules for engagement with the public during the introduction of new vaccines, changes in immunisation schedules and experimental vaccine trials can prove useful in reducing public fear at the outset. A compelling example of the effect of a well-formulated communication strategy can be found from within India itself in it's pulse polio campaign of the late 1990s. Targeted communication played an important role in raising awareness and building trust in the polio campaign with popular media figures and sports personalities advocating the benefits of vaccination over various media such as film, television, radio and print.

Formalising the procedure for vaccine delivery: Organised and accessible rules of procedure with respect to time, place and manner of vaccination can strengthen public confidence in vaccines. Specific information with respect to vaccine description, quality, indications, contraindications, side effects, dosage, age group, manner and place of delivery, catch-up immunisations etc. can provide a measure of certainty to parents and make them more comfortable in engaging with vaccination campaigns of the government. For example, each state in the US has it's own set of immunisation laws and regulations. These laws are procedural in nature and set out the administrative mechanisms through which schools, universities, pharmacists, and health-care facilities etc. are required to administer the various vaccines prescribed by the ACIP. In India, we find that the exact mechanism/process of vaccine delivery changes constantly based on where the vaccine campaign is being carried out and the nature of the campaign itself. For example, certain states prescribe that immunisation take place only in schools while others allow for vaccination at schools, public health centres, home-visits etc. As such, there is a need for consistency in the procedures followed to administer vaccines, one which can be addressed by having a set of codified procedural rules for vaccination in each state.

Monitoring, evaluation and reporting: The administrative framework may specify reporting requirements. Requirements with respect to monitoring and reporting the incidence of vaccine preventable diseases, coverage rates and adverse effects following vaccination (AEFIs) can assist in the formulation of stronger mitigation strategies for vaccine preventable diseases. Australia has adopted a national surveillance system that reports instances of adverse events following immunisation from state and territory registries as well as data sent directly from consumers, health professionals and vaccine manufacturers. These reports are regularly reviewed by the regulator and referred as required to expert committees, such as the Advisory Committee on Vaccines, to ensure ongoing safety assessments. In India, an AEFI surveillance framework has been in place since 1998. The national AEFI guidelines provide a set of standards for undertaking the investigation and assessment of cases reported as AEFIs. All states and districts are required to constitute AEFI committees, which assist in streamlining AEFI surveillance at the local level. However, the number of serious AEFIs reported in India are still far lesser than expected numbers. A large number of AEFI committees established at the state and district level are not functional, as a consequence of which there is insufficient real-time AEFI data being generated and stored accross the country. Recent reports suggesting the presence of the polio type 2 strain in oral samples of polio vaccines expose the inadequacies in our current monitoring and evaluation systems while further making the case for a standardised administrative framework for vaccine delivery.

Establishing a mechanism for accountability: The administrative machinery should include a mechanism for empowering communities to question vaccination practices, introduction of new vaccines, reasons for the occurrence of AEFIs etc. This will be a useful departure from the current practice of placing blame on state governments, without having any recourse to an institutional/administrative mechanism for grievance redressal. In order to ensure accountability, more than 15 countries around the world have instituted compensation mechanisms for vaccine related incidents. In these countries, compensation is dispersed either through courts or a compensation scheme pay-out for individuals that have suffered injury or death following vaccination. Even in India, consumer protection forums have considered and indeed ordered compensation for vaccine-related injuries and deaths in the past. However, an institutional apparatus similar to the US (which lists the nature of vaccine-related injuries that can be compensated under the National Childhood Vaccine Injury Act and requires the claimant to show a demonstrable link between the vaccine and the injury) can help provide a platform for vaccine accountability while at the same time evading frivolous claims.

Providing positive incentives for vaccination: Various countries seek to achieve their vaccination mandates by conditioning benefits, such as access to public/private services, on compliance with state vaccination requirements. Mandatory vaccination for enrollment in public schools falls within this category. However, rather than benefits, it is viable to condition incentives on compliance. For example, The Patient Protection and Affordable Care Act (ACA) of the United States requires insurers to fully cover the cost of recommended vaccines, relieving consumers of the entire expense of vaccination. The proposed administrative framework may contain additional incentives in order to discourage vaccine hesitancy in different subgroups in India.

Given the recent declaration of the WHO that vaccine hesitancy is one of the top 10 global health threats in 2019, and amidst the resurgence of measles outbreaks in different parts of the world, it is imperative that we start developing, implementing and evaluating measures to better address the complex problem of vaccine hesitancy. A well formulated and transparent administrative machinery can be a useful starting point for addressing this problem and fully realising the gains from immunisation in India. Moreover, the presence of such a framework can also act as a foundation for engaging in separate debates around the viability of individual consent vis-a-vis mandatory compliance with respect to legal/ administrative interventions designed to deliver public health goods.


Gopichandran, Vijayprasad, Public trust in vaccination: an analytical framework, Indian Journal of Medical Ethics, 2017.

Kumar et al., Vaccine hesitancy: understanding better to address better, Israel Journal of Health Policy Research, 2016.

Nadimpally et al., An idea whose time has come: compensation for vaccine-related injuries and death in India, Indian Journal of Medical Ethics, 2017.

Jarret et al., Strategies for addressing vaccine hesitancy - a systematic review, Vaccine, 2015.


The author is a researcher at the National Institute of Public Finance and Policy. The author thanks Prof. Ajay Shah, Dr. Renuka Sane and Mr. Shubho Roy for their useful comments and guidance.

Thursday, October 03, 2019


Azim Premji University, Bangalore and the National Institute of Public Finance and Policy (NIPFP), New Delhi are pleased to announce a new collaborative initiative, a workshop “Strengthening the Republic”.

India has completed more than seven decades as an independent nation and a constitutional republic. When India set upon this path it was seen as a brave unconventional path for a new post-colonial nation. Seven decades on, most political scientists would characterize India as a 'miracle' democracy - one that has defied extant political theory on constitutional survival and democratic transitions. However, too much of this Indian exceptionalism avoids careful attention to the specifics of Indian institutional design and the granularity of Indian institutional practice.

Indian academic scholarship in law, politics, economics and the social sciences more generally must invest considerable resources and intellectual energy in unpacking the institutional grammar of India’s success as a republic. The failure to do so may result in a misdiagnosis of our success while simultaneously failing to uncover the flesh and blood that has kept our institutional scaffolding in place. This seminar is dedicated to in depth empirically rigorous investigations into public institutions - legal, political and social - that enhance our common understanding and generate keen insight into their contemporary successes and failures.

About the Workshop:

Drawing on the high quality, interdisciplinary research work carried on by Azim Premji University and NIPFP, this workshop aims to generate active, sustained conversations and academic scholarship on themes related to the law, society and public institutions in India.

The workshop is designed to be an intensive, one-day session aimed at encouraging scholarship and debate among individual researchers, academics and practitioners belonging to disciplines like law, politics, economics and sociology to engage in thoughtful discussions with peers on pressing contemporary issues under these broad themes.

The workshop is being hosted by Azim Premji University and NIPFP in New Delhi.

Format of the Workshop:

Interested applicants should submit an abstract of not more than 1000 words on topics of their interest under the broad themes. The proposals could be based on their ongoing research or new research that they would like to be engaged in. Two copies of the abstract, in word, pdf, LaTeX or any similar formats should be emailed to, with details of full name, designation and employment/institutional affiliation of the applicant.

All abstracts will be reviewed by an independent jury selected by the organisers who will shortlist the abstracts based on relevance to the theme, novelty and academic merit. Authors of selected abstracts will receive an email notification of the exact date and venue of the workshop and should submit their completed research paper to, by 15 December, 2019.

The workshop session will host five paper presentations from the shortlisted abstracts. Every paper selected for presentation will be allocated a committed discussant/ respondent.

Illustrative list of papers:

The following is an illustrative list of papers that reflect the broad topics of interest and rigour of analysis that is expected of papers in the workshop:

  1. Building State capacity for regulation in India by Shubho Roy, Ajay Shah, B.N. Srikrishna, Somasekhar Sundaresan. In Devesh Kapur and Madhav Khosla (eds.), Regulation in India: Design, Capacity, Performance. Oxford: Hart Publishing, 2019 (forthcoming).

  2. Protecting Citizens from the State post Puttaswamy: Analysing the Privacy Implications of the Justice Srikrishna Committee Report and the Data Protection Bill, 2018 by Vrinda Bhandari and Renuka Sane. Socio Legal Review 14(2), (forthcoming).

  3. How to Modernise the Working of Courts and Tribunals in India by Pratik Datta, Mehtab Hans, Mayank Mishra, Ila Patnaik, Prasanth Regy, Shubho Roy, Sanhita Sapatnekar, Ajay Shah, Ashok Pal Singh and Somasekhar Sundaresan. NIPFP Working Paper 258, March 2019.

  4. Challenges of Competition and Regulation in the Telecom Sector by Smriti Parsheera. Economic & Political Weekly, Vol. 53, Issue No. 38, September 22, 2018.

  5. Legislative strategy for setting up an independent debt management agency by Radhika Pandey and Ila Patnaik. NUJS Law Review, Volume 10, Issue 3, 2017.

  6. Misled and Mis-sold: Financial Misbehaviour in Retail Banks? by Monika Halan and Renuka Sane. Journal of Comparative Economics, 45(3), August 2017.

  7. Karnataka Crime Victimisation Survey: 2019 report by Sudhir Krishnaswamy, Asha Venugopalan and Varsha Aithala (forthcoming).

  8. Commercial Courts in India: Three Puzzles for Reformers by Sudhir Krishnaswamy and Varsha Aithala (forthcoming).

Other arrangements:

The presenter’s travel, accommodation and incidental expenses will be provided for by Azim Premji University.

We welcome proposals for research papers which are unpublished, recently published or of publishable quality in academic journals of international repute, though preference would be given to previously unpublished papers. The research papers may employ the reference and citation style used in standard social science practice, or the style used in legal periodicals. Simultaneous submission of papers to the workshop and other publications is permitted. Authors are expected to disclose any commercial or other associations that may result in a conflict of interest in connection with the research.

All submitted research papers will be published as open access working papers and available on the websites of both organisers. Organisers reserve the right to make editorial comments to the papers prior to publication.

Important dates to remember:

  • Deadline for submission of abstracts: 31 October, 2019.
  • Deadline for research paper submission: 15 December, 2019.
  • Workshop: 11 January, 2020 (Saturday).

Tuesday, August 27, 2019

Policy uncertainty in Indian e-commerce

by Megha Patnaik.

Reduced investment in India by private persons is a key part of the present growth challenge. Investment is shaped by macroeconomic uncertainty, sectoral uncertainty, and regulatory risks that firms face. In this article, we think about the risks that an E-commerce firm such as Amazon perceives in India. These include the changing FDI rules, unresolved issues of data localisation and code disclosure, the multiple reports on technology-related activities that various government agencies are releasing, and the problems of rule of law in licensing and investigation.

Economic policy uncertainty

Shrinking investment in the Indian economy is a concern. Investments in new projects fell to a 15 year low in the last quarter according to the Centre for Monitoring the Indian Economy (CMIE) Capex data which tracks large investment projects.

Firms are deterred from investing by policy uncertainty (Bloom, 2009). When firms are unclear about the future economic environment, they hold back on investing till uncertainty declines. This delays the pickup of the investment cycle, where firms generates jobs and business for linked firms, fueling aggregate economic activity. Uncertainty particularly affects long-term investments that are irreversible in nature, and for which horizons for cost recovery run into years. These can be investments in new technologies or market segments, or investments in infrastructure. Such investments are particularly important, as they can benefit other firms in the economy, fueling productivity and long-term growth in addition to their business cycle effects.

Private sector investment is adversely affected by three kinds of policy uncertainty - macroeconomic uncertainty, sectoral policy uncertainty, and regulatory risk. The role of Economic Policy Uncertainty at the macroeconomic level has been measured globally (Baker et al, 2016). In the original measure, an index is created by quantifying newspaper coverage of policy-related economic uncertainty mentions in the national newspapers, through combinations of keywords related to policy and uncertainty. Macroeconomic policy uncertainty has been applied to understand global events. Brexit-driven policy uncertainty in the UK moved closely with the GBP Real Exchange Rate in recent times, and the uncertainty surrounding US trade policy affected importing firms. This measure of macroeconomic policy uncertainty correlates strongly with stock market volatility.

Firms face much more than macroeconomic uncertainty. They also face uncertainty at sectoral, geographical and individual levels. Sectoral-level policy uncertainty can be measured through surveying firms sampled across sectors, asking them about expectations about future growth and costs at various horizons (Altig et al, 2019). For example, firms can report not just their expectations about future profits, but the distribution across the possible profit outcomes that they can expect.

An additional source of uncertainty that firms operating in India face is regulatory risk. Even when regulations are formulated, there is a lack of predictability, and excessive executive discretion, in how a stated regulation will be enforced. For example, the licensing by the RBI of 11 payment banks from 41 applicants who wanted to start payment systems was a non-transparent process inconsistent with the rule of law (Roy and Shah, 2015). Another example is the Copyright Board order of 2010 on statutory licensing fees paid by Radio stations. This order arose out of nine one-on-one disputes between radio stations and music producers, but was applied as an in rem order rather than an in personem order. Thus, music producers who weren't part of the original disputes also became governed by the order, despite the appeals by T-Series and SIMCA against the Copyright Board order applying to them. Aggarwal and Zaveri (2019) show the uncertainty induced for private persons through executive discretion in enforcement at SEBI.

Drivers of uncertainty in the E-commerce sector

In the recent Q2 earnings announcement, the Amazon CFO Brian Olsavsky mentioned uncertainty in India's e-commerce policy. He expressed hope for `stable' and `predictable' policy, for the company to continue with its investments in technology and infrastructure in India. This explicit mention about policy uncertainty in India is a unusual moment, and requires attention by policy thinkers. What is the uncertainty associated with investing in India, as seen by Amazon?

  1. India's draft e-commerce policy rules earlier this year preventing firms from influencing prices or selling products in which they hold stakes disrupted business plans for e-commerce companies. It bring companies back to the drawing board to ensure they can comply with the current regulations while limiting losses that rose from lack of clear direction from the start. The final e-commerce policy has been held back for another year, putting existing investments of firms in this sector at risk during the interim months, and deterring further investments.
  2. The uncertainty around data localisation is another deterrent. The recent announcement by a high-level government panel to do away data localisation for non-critical data, and the upcoming announcement of the position of the Prime Minister's Office on data localisation are policy announcements that drive sentiments on this debate, though none are legal instruments. Under data localisation requirements, companies would need to redesign internal algorithms to access data locally, pay up for new servers, and face costs to protect data in less-secure environments. The predictive power of firms' algorithms would weaken with fewer data points to train models on. The due process of discussions with various government bodies and stakeholders on this issue is still in process. The RBI's requirement for financial data localisation despite existing provisions (Bailey and Parsheera, 2018) for access under the Payments and Settlements Act (2007) suggest that any Indian regulator can step in with special requirements at unforeseen times.
  3. A related issue is the disclosure requirement of source code under the draft e-commerce policy. E-commerce firms depend on data-driven marketing and use of collaborative filtering for customer recommendations. A code submission requirement is a coercive technique aimed at achieving `the transfer of technology and local needs' described under the proposed e-commerce policy. Technology transfers cannot and should not be coerced: they happen in an organic and legitimate manner through managers and employees developing skills and passing them onward in data communities or by workers moving across companies (Bloom et al, 2019). It is also doubtful how technological transfers can be achieved with segments of code without underlying data. Will code disclosure requirement be combined with data localisation to pass on core business value to competitors? Will companies need to invest in staff and technologies to find workarounds to be able to mask their key assets? Whether such a code disclosure requirement will come into effect remains unresolved. In mid-2020 the final e-commerce policy will describe the stand of the government on this issue, but this is not definitive either.

Multiple guidelines on the same subject can cause delays in the resolution of uncertainty. The RBI Report of the Working Group on FinTech and Digital Banking includes E-aggregators, Robo advisors and Big Data all under Fintech. E-commerce firms, which are data intensive and provide multiple services, will be included under this description. The fintech steering committee report of the Ministry of Finance is still pending. Each of these reports is a statement about how government agencies are likely to move in the future but these are not legal instruments. Government reports can only suggest but not surely state how future laws will change.

Infirmities of the regulatory processes in India also exacerbates uncertainty. As an example, data localisation requirements by RBI for payments firms were translated from an early idea into an enforced law within a matter of days. There was no due process surrounding how officials could change the law.

The last leg of the legal system -- how laws are enforced -- also suffers from concerns about non-equal application of law, as shown in the examples from RBI (Roy and Shah, 2015) and SEBI (Aggarwal and Zaveri, 2019). For a prospective investor, the risk of investing in India lies in how the law might change in the future through an undemocratic process, and in how the law will be applied to her.


For India to have a stable investment environment, we need to provide firms a stable and predictable policy environment. Investments from firms in various sectors will boost the investment cycle for India. Resolving policy uncertainty both at the macroeconomic level as well as in different sectors, and reducing regulatory risk through better rule of law is critical for India in the current investment scenario as well as for long term growth.


Aggarwal, Nidhi and Zaveri, Bhargavi. Problems with evidentiary standards for proving securities fraud in India, The Leap Blog, 23 August 2019.

Altig, David, Jose Maria Barrero, Nicholas Bloom, Steven J. Davis, Brent H. Meyer and Nicholas Parker. Surveying Business Uncertainty University of Chicago Working Paper (2009)

Bloom, Nicholas. The impact of uncertainty shocks. Econometrica (2009)

Bloom, Nicholas, Erik Brynjolfsson, Lucia Foster, Ron Jarmin, Megha Patnaik, Itay Saporta-Eksten, and John Van Reenen. What Drives Differences in Management Practices? American Economic Review (2019)

Baker, Scott R., Nicholas Bloom and Steven J. Davis. Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics (2016)

Bailey, Rishab, and Smriti Parsheera. Data localisation in India: Questioning the means and ends, The Leap Blog, 22 February 2018.

Roy, Shubho, and Ajay Shah Payment bank entry process considered inconsistent with the rule of law, The Leap Blog, 1 September 2015.

Megha Patnaik is faculty at the Indian Statistical Institute, Delhi and Fellow at the Esya Centre. The author thanks Radhika Pandey and Ajay Shah for useful inputs.

Friday, August 23, 2019

Problems with evidentiary standards for proving securities fraud in India

by Nidhi Aggarwal and Bhargavi Zaveri.


Did O.J. Simpson kill his wife? A criminal jury said no, a civil jury said yes. The standard of proof applied by the two juries made all the difference to the outcome of the case (Vars 2010).

In India, the securities regulator adopts a very low standard of proof for cases involving wrongdoing in the securities market. For many people, standard of proof related questions are procedural and semantic exercises in the dispensation of justice. However, the standard of proof adopted by a judge has direct impact on the outcome of the case and over time, the quality of the investigation conducted by the investigative agency. When the standard of proof is low, there is a high chance that initiating an investigation will induce an adverse order. This creates substantial discretion in the hands of the investigator, to choose the persons against whom State power will be directed. This runs against a basic theme of liberal democracy, of containing executive discretion. The ability of the executive to direct punishment upon chosen ones is inconsistent with the rule of law. It creates policy risk for persons who may consider participating in the Indian financial markets, and creates a bias in favour of participation by politically connected persons.

There are three reasons why the standard of proof in securities fraud cases in India are low. First, the Supreme Court has held that the standard of proof which SEBI must meet to establish securities fraud is the 'preponderance of probability' standard. This is lower than the standard of proof required to establish a crime under criminal law. In civil proceedings, there are usually two versions of the facts. The court, on the basis of the evidence before it, chooses that version which it thinks is 'more probable', that is, it will accept a version which a prudent man will act upon the supposition that it exists. On the other hand, in criminal cases, the prosecutors must satisfy the court that the existence of a fact is not only probable, but that its existence is beyond reasonable doubt. Simply put, the prosecution must satisfy the court that 'a reasonable alternative version is not possible' (185th Report of the Law Commission). Courts have explicitly acknowledged that it is not possible to mathematically define the degree of probability for meeting a certain standard of proof and there is an inherent subjective element within each of these standards. (State of UP v. Krishna Gopal and Anr.)

The other two reasons are inter-connected. SEBI exercises regulation-making, executive and quasi-judicial powers in connection with the securities market. It defines what conduct would constitute fraud for the purpose of exercising its enforcement powers. The concept of fraud under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations) - a regulation that defines fraudulent conduct in the securities market - is wider than what is understood as fraud in common law and the codified law applicable to fraud in India. It dispenses with critical elements such as intent, deceit and damages. A wider definition of fraud sets the bar very low for establishing securities fraud before a court or tribunal. SEBI is also responsible for conducting investigations of suspected fraud and makes decisions on whether the conduct investigated meets its definition of fraud. This violates the constitutional scheme of the separation of powers that applies to areas of public administration which are not governed by a technocratic regulatory agency. As an example, the Indian Penal Code defines what constitutes theft, the investigation is conducted by the executive agencies and the decision on whether the investigated conduct amounts to theft (as defined in Parliamentary law) is made by the judiciary.

The concentration of all three powers in a single body creates scope for bias towards a lower standard of proof. Empirical work done on the cases investigated by the Securities Exchange Commission, the securities regulator in the United States, is indicative of such bias. The SEC is empowered to choose whether to pursue a proceeding before one of its own internal administrative law judges or an independent federal court. Reportedly, while the SEC enjoyed a 90% success rate in its own hearings, it had only a 69% success rate against defendants in federal court. (here and a perma link here)

In February 2018, a judgement of the Supreme Court further diluted the standard of proof for securities fraud in India in a case involving synchronised and reverse trades executed on the exchange. The Supreme Court reversed the decision of the Securities Appellate Tribunal which had held that although the trades in question might have been synchronised, they were not manipulative and "market manipulation of whatever kind, must be in evidence before any charge of violating these Regulations could be upheld." The Supreme Court dispensed with the need to show manipulation and relied on the notion of "market integrity" as a standard for adjudging the conduct of market participants. SEBI has extensive powers to sanction wrongdoing in the securities markets, such as the power to bar access to the market, suspend professional licenses and impose hefty monetary penalties. The Supreme Court's ruling has serious implications for the manner in which these powers are exercised as it effectively introduces a new standard of proof of 'market integrity' to be met by persons accused of securities market fraud.

What is market integrity?

The notion of market integrity is both un-defined and hard to measure. World over, there is considerable debate on its meaning in the context of financial regulation (Austin, 2016). Given the subjectivity of the concept, using market integrity as a standard of proof is equivalent to using 'public interest' or 'public good' as a standard for establishing wrongdoing. It leaves tremendous scope for discretion and creates the potential for differential standards of enforcement across a range of practices, depending on the adjudicator's view of whether or not a particular trading practice affects market integrity. This creates uncertainty in the manner in which the law will be applied and enforced and has adverse implications for the rule of law. Ambiguity in the grounds of enforcement and the standard of conduct that could invite legal sanctions, is detrimental to the development of the market as well.

In this article, we advocate the use of empirical approaches for establishing wrongful conduct in the securities markets. We do this by demonstrating the empirical evidence that should have been used to support a claim of fraud in the very same case where the Supreme Court lowered the standard of proof by relying on the vague and problematic ground of market integrity. In a world of electronic trading, empirical evidence of fraud and its impact on the market is not hard to collect and investigators and courts must rely on such evidence instead of holding market participants to a vague and subjective notion of market integrity and unfairness, which the world at large is struggling to define.

Judgement of the Supreme Court in Rakhi Trading

In February 2018, the Supreme Court in the case of Securities and Exchange Board of India v. Rakhi Trading Private Ltd. upheld an order passed by the Securities and Exchange Board of India (SEBI) that levied a penalty on some traders who had synchronised their trades off the exchange before placing them on the exchange. The trades in question were a series of orders placed on the F&O segment of the Nifty index. The modus operandi was to place an order for Nifty options, which matched with a particular party and subsequently reverse the position taken by placing an opposite order, which also matched with the same party. SEBI penalised the party placing such orders on the ground that these "transactions were in the nature of fictitious transactions resulting in creation of misleading appearance of trading in these options." The SEBI order did not elaborate the manner in which the synchronised trades sought to manipulate the price of either the option itself or the underlying securities, which in this case, was the basket of securities included in the Nifty index.

The parties against whom this order was passed appealed against the order before the Securities Appellate Tribunal (SAT). SAT confined its review to whether the synchronised trades in the F&O segment of the Nifty index artificially manipulated the underlying cash segment, which in this case is the Nifty index itself. It observed that:

"To say that some manipulative trades in Nifty options in the F&O segment could influence the Nifty index is too farfetched to be accepted. The only way Nifty index could be influenced is through manipulation of the prices of all or majority of the scrips in the cash segment that constitute Nifty."

This in line with precedent case-law laid down by SAT on the requirement to show manipulative conduct to demonstrate that the synchronised trades constituted fraud under the PFUTP Regulations. On an appeal by SEBI against this order of the SAT, the Supreme Court reversed the order of the SAT without explaining how the synchronised trades in question affected the price discovery system or created a misleading impression of volumes, but emphasised the notion of market integrity as under:

"According to SAT, only if there is market impact on account of sham transactions, could there be violation of the PFUTP regulations. We find it extremely difficult to agree with the proposition...SAT has missed the crucial factors affecting the market integrity, which may be direct or indirect (emphasis supplied) ...By synchronization and rapid reverse trade, as has been carried out by the traders in the instant case, the price discovery system itself is affected."

The problem with synchronised trades

Synchronised trading involves pre-negotiating the trade off the exchange and subsequently placing the order on the exchange such that it matches with the counterparty with whom the trade was pre-negotiated. To synchronise trades on an exchange platform, the buyer and seller of the pre-negotiated trade will enter their respective orders at the same time (with same price and quantity) to maximise the chance of matching their orders against each other. To ensure that the order does not match against another counterparty, the first order may be placed away from the touch, that is, at a price significantly different from the ongoing bid / ask price.

By itself, synchronised trading is not a harmful practice. In fact, block trades for which exchanges have a block trading window are synchronised trades. It is difficult to synchronise trades on liquid securities on the exchange because such orders run the risk of matching against other counterparty(ies). However, even on relatively illiquid securities, synchronised trading is not risk-free. The probability of getting hit by another order (especially a market order) on the opposite side of the book is low, but not zero.

How can synchronised orders be used to manipulate the market? Synchronised trades could create misleading, artificial trading interest in a security. High volumes and significant price changes on an otherwise illiquid security may cause participants to believe that there is some news on the security. This may induce them to buy those securities based on unexplained changes in prices and volumes. This is especially possible in an illiquid scrip, which may be perceived to be suddenly liquid if a series of transactions are executed on such a scrip. While the SEBI order levying the penalty does not specify exactly what was manipulated, evidence of manipulation could be demonstrated in either or all of the following ways:

  1. Manipulation of Nifty index: One way of determining manipulation in the Rakhi Trading case is by analysing the changes in the value of the underlying security, the Nifty index. The SAT order almost exclusively focused on the possibility of the synchronised trades having manipulated the value of the Nifty index. The order rightly concludes that price manipulation on the index can happen only if an equivalent position is taken on the spot market on all the 50 constituent stocks of the index. Neither the SEBI order nor the Supreme Court order show any evidence of a position by Rakhi Trading on the spot market. This leaves the scope of manipulation on the Nifty index value to the price transmission from derivatives market to the spot market. Empirical evidence on price transmission from derivatives market to spot market suggests that such transmission is subject to the liquidity of the derivatives instrument (see Fleming et al, 1996, Aggarwal and Thomas, 2019). We examine the liquidity of the relevant Nifty options and also examine if the volumes traded by Rakhi Trading in the options segment were significant enough to impact the value of the underlying Nifty index.
  2. Volatility in option premium: Manipulation of stock price increases the volatility in returns on such stocks (Aggarwal and Wu, 2006). If the synchronised trades on the Nifty options were manipulative, we would expect that the real price discovery process on option premium would be hampered, resulting in higher volatility in the premium of the Nifty options in question. This manipulation can be established by examining the volatility of the premium on the Nifty options on which the synchronised trades were executed.
  3. Jump in traded volumes: Similar to price efficiency, manipulative trades on a security create a misleading impression and induce other market participants to buy the security. This misleading impression will manifest itself through higher traded volumes on that security on the days of such trades. We examine if this was the case by examining the traded volumes of the Nifty options traded by Rakhi Trading around the dates on which such trading occurred.

Size of the market for the relevant Nifty options

Rakhi Trading executed synchronised trades on 13 specific Nifty option contracts (hereafter referred to as "the relevant Nifty options") on four days of the year 2007, namely, on March 21, March 22, March 23 and March 30 (hereafter,"the event days").

We begin by a simple comparison of the liquidity and volatility of the relevant Nifty options on the event days and compare it with other days between March 15, 2007 and March 31, 2007 (hereafter, "non-event days"). Such a comparison should be the beginning of the court's enquiry when dealing with an order punishing a market participant for securities market fraud. Table 1 provides basic summary statistics on the traded volumes (a measure of liquidity) and volatility of the relevant Nifty options.

Table 1: Volumes and volatility of the relevant Nifty options on event days and non event days
Event days Non Event days
Total Volumes Volatility
Rakhi Trading Volumes Total Volumes Volatility
(%) (%)

9,550 0.97
2,000 50 0.10
26,142 6.19
10,015 7,712

Max 38,600 14.85 11,900 50,050 17.62
SD 7,752 3.86 2,477 10,718 4.39

The key observations from Table 1 are as follows:

  1. First, the traded volumes of the relevant Nifty options fluctuated significantly on a daily basis on the event and non-event days, ranging from 9,550 to 38,600 on the event days, and 50 to 50,050 on the non-event days.
  2. Second, in comparison to the average daily traded volumes on a liquid Nifty option, Table 1 shows that the relevant Nifty options were relatively illiquid. For a frame of reference, the maximum traded volumes on one single Nifty option in March 2007 was 9.2 million.
  3. Third, the volatility (measured by the Parkinson's range measure) of the relevant Nifty options was in the range of 1-15% on the event days, while it was in the range of 0-18% on the non-event days.

Did the synchronised trades manipulate the Nifty index?

Table 2 gives a picture of the size of the overall Nifty options market on the event days and compares it for non-event days based on traded volumes. It also shows the traded volumes of the stocks which constitute the Nifty index for these dates. The last column of the table shows the volumes and contracts traded by Rakhi Trading on the event days to provide a perspective on the possible influence of its trades on the overall options and underlying spot market.

Table 2: Size of overall Nifty options market and proportion of synchronised trades
Event days Rakhi Trading volumes
All Nifty Options Traded volumes (in
Rs. millions)
49,978 61,041 277
(in `000s)
Nifty stocks Traded
volumes (in Rs. millions)
36,228 37,932 NA

The key observation from Table 2 is that on the event days, the volumes traded by Rakhi Trading on the Nifty options were less than one percent of the average traded volumes on the stocks that constitute the Nifty index on the spot market. The minuscule proportion of the volumes traded by Rakhi Trading in the Nifty options market relative to the total traded volumes on the stocks constituting the Nifty index on the spot market, re-affirms the finding of the SAT that the synchronised trades executed by Rakhi Trading could not have possibly manipulated the underlying Nifty index.

However, Table 2 also shows that the volumes and number of contracts on the Nifty options segment on the event days were higher than on non-event days. This might or might not have been due to the synchronised trades executed by Rakhi Trading. In the next few paragraphs, we zoom in our analysis on the specific Nifty options which were involved in the synchronised trades executed by Rakhi Trading and examine if those trades did manipulate the individual options traded by Rakhi Trading.

Did the synchronised trades manipulate the option premium?

To test the claim of manipulation of option premium, we examine the volatility of the premium of the relevant Nifty options, and compare it with the volatility of the premium of other Nifty options with similar liquidity. We call the former as the treated set, and latter as the control set. We identify the control set as the options on which the traded volumes were in the same range as that on the ``treated" set, to ensure comparability across the two sets. If there was indeed manipulation on the treated options, we expect the volatility of the treated set to be higher than that of the control set.

We obtain a total of 50 unique options in the control set which we compare with data on the treated set on the event days. Table 3 presents summary statistics on the volatility of the premium for the options in the treated set and control set for our period of analysis.

Table 3: Summary statistics on volatility of options premium on the treated and control sets (in %)
Treated Control
Min 0.97 0.25
Mean 6.19 4.78
Median 5.08 2.91
Max 14.85 35.17
SD 3.86 5.09

We observe that the average volatility of the treated set was slightly higher than that of the control set. However, a simple t-test of comparison of means of the treated and control set volatility shows that the difference between the volatility of the two sets is not statistically significant. In a regression analysis (not shown here), we also control for other factors that affect volatility of the option premium of the treated and control sets. We do not find any evidence of significant difference across the two sets even after controlling for other factors such as strike price, days to expiry, value and volatility of the underlying. The analysis finds that the price range in which the option premium varied for the treated set was similar to that of the control set. Thus, we find that the option premium on the Nifty options that were traded by Rakhi Trading was not manipulated.

Did the synchronised trades manipulate the volumes?

We also examine the question whether the synchronised trades in the relevant Nifty options led to higher volumes in these options thereby creating a possibly misleading impression of volumes. For this, we analyse the traded volumes on the relevant Nifty options, after excluding the volumes arising out of synchronised trades themselves. We compare the traded volumes of the relevant Nifty options on the event and non-event days (Table 4). If the synchronised trades did result in higher trading activity from other market participants, we expect to see significant difference in the traded volumes on the event and non-event days.

Table 4: Summary statistics on traded volumes of options traded by Rakhi Trading
Event days Non-event days
Min 0 50
Mean 5,342 5,170
Median 4,500 2,450
Max 15,400 21,350
SD 5,736 5,762

Table 4 shows that the traded volumes on the Nifty options involved in the Rakhi Trading case were, on an average and on a median scale, slightly higher on the event days compared to the non-event days. However, a statistical test (t-test) of the comparison of means finds no significant difference across the two sets. A regression analysis on the event and non-event set confirms this finding. This indicates that Rakhi trading trades did not lead to any jump in volumes in the options so traded.

Trading for tax evasion or tax planning

An ancillary concern expressed by the Supreme Court was that Rakhi Trading conducted the trades in question for tax planning or avoidance. While this may or may not be true, the securities markets regulatory framework should not be used for punishing tax evasion. Cases of trades that SEBI has reason to believe were meant for tax avoidance, must be reported to the tax authorities, which is the appropriate forum for addressing questions of tax evasion. The objective of the securities market regulatory regime is not to deal with tax evasion, but to protect investors and develop the securities markets. More importantly, a regulator has scarce resources and dedicating investigative and adjudicatory capacity for dealing with tax evasion cases is not the best use of these resources.


Our empirical analysis finds that the synchronised trades did not manipulate the underlying Nifty index, the premium on the relevant Nifty options or the traded volumes of the relevant Nifty options. However, we recognise that our analysis is limited to daily data. An analysis of this kind must be underpinned by examining the intra-day data around the time of synchronised trades. By using such data, the regulator can further make a case for whether the trades in question were indeed manipulative.

The objective of this article is not to establish the guilt or innocence of any specific market participant. By using publicly available inter-day trading data on the security involved in the Rakhi Trading case, we make a case for using empirical strategies to establish fraudulent conduct under the Indian securities regulatory regime. As demonstrated above, the advanced nature of the securities market infrastructure in India and the availability of data ensures that this is not difficult. The use of empirical evidence to substantiate charges of fraudulent conduct will ensure that enforcement orders pass the muster of the appellate forums without having to compromise on evidentiary standards for establishing guilty conduct. More importantly, backing enforcement with robust underlying evidence will help the regulator build the trust of the regulated and testify to the high standards of proof that our society should place for the deprivation of liberty.


Stock market manipulations by Aggarwal R and Wu G, The Journal of Business, 2006.

When stock futures dominate price discovery by Aggarwal N and Thomas S, Journal of Futures Markets, 2019.

What exactly is market integrity? An Analysis of One of the Core Objectives of Securities Regulation by Austin J, William and Mary Business Law Review, Vol.8(2), 2017.

Trading costs and the relative rates of price discovery in stock, futures, and option markets by Fleming J, Ostdiek B and Whaley R, Journal of Futures Markets, 1996.

State Of U.P vs Krishna Gopal & Anr 1988 AIR 2154.

185th Report of the Law Commission of India on a Review of the Indian Evidence Act, 1872.

Toward a General Theory of Standards of Proof, Frederick E. Vars, Catholic University Law Review, Vol. 60(1) (Fall 2010).


Nidhi is faculty at IIM-Udaipur and Bhargavi is a researcher at IGIDR.

Wednesday, August 07, 2019

IBC (Amendment) Bill, 2019: Implications for judicial review of resolution plans

by Pratik Datta and Varun Marwah.

Shroff and Misha (2019) had earlier highlighted that excessive judicial discretion in corporate insolvency resolution is contrary to the express provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Indian policymakers have now recognized this problem. Accordingly, the IBC (Amendment) Bill, 2019 (“2019 Bill”) has been passed by the Parliament.

The immediate trigger for this reform was the National Company Law Appellate Tribunal (“NCLAT”) judgment dated July 4, 2019, in the resolution of Essar Steel Ltd. (“Essar judgment”). In this case, the NCLAT found ArcelorMittal’s resolution plan to be discriminatory. Accordingly, it went on to modify the plan such that the financial and operational creditors enjoy the same recovery rate. In the process, it obliterated the distinction between secured and unsecured creditors. Moreover, the NCLAT also held that the statutory waterfall under section 53 of IBC does not apply to distribution under a resolution plan. By disrupting the basic fundamentals of banking, this decision caused much concern in the Indian financial sector. Among others, the 2019 Bill seeks to address these concerns as well.

In this backdrop, we contextualize the amendments proposed by the 2019 Bill within a hypothetical theoretical framework to analyse their implications on the scope of judicial review of resolution plans under IBC.

Theoretical framework

An insolvency law should have two broad objectives. First, it must achieve the most efficient economic outcome for the insolvent company. This outcome could be going concern sale, restructuring, liquidation or a combination of these outcomes. Second, the value (cash/non-cash) received from the outcome must be distributed among the claimants of the company according to the waterfall provided in the insolvency law.

In a going concern sale, the business of the insolvent company is marketed for price discovery, that is, auctioned. Potential buyers submit their price bids in their respective resolution plans. Once the best price is discovered, the price signifies the precise value of the business. The successful buyer deposits this value in cash or its equivalent in an escrow account and takes over the business, immediately putting the assets to their best use. The resolution plan need not deal with how the deposited value would be distributed among the insolvent company's claimants.

The value deposited in the escrow could be separately distributed by the resolution professional among the claimants of the insolvent company as per the statutory waterfall. This scheme of distribution cannot be altered unless a claimant(s) affected by such alteration specifically consent to it. However, the resolution plan need not deal with any of these distribution issues. Therefore, the resolution plan cannot in any way unfairly discriminate against any claimant. Consequently, there is no need for judicial review of resolution plans to ensure fair and equitable distribution in a going concern sale for cash or its equivalent. The same logic applies to distribution in liquidation involving sale of assets for cash or its equivalent.

However, going concern sales are not always possible or desirable. For instance, during a recession, there could be no buyers in the market. Or even if there are buyers, there could be an oversupply of similar assets in the market due to industry wide factors, pushing down the price for such assets. In such circumstances, instead of a going concern sale to a new buyer, the claimants of the insolvent business may be better off by “selling” the business to some or all of the existing claimants themselves. Such “hypothetical sale” is commonly referred to as restructuring.

In such a restructuring, there is no auctioning of the insolvent business to potential outside buyers. As a result there is no price discovery and the precise value of the insolvent business in cash or its equivalent is not evident. Therefore, the notional distribution of rights (that is, securities in the restructured company) among the claimants is conceptually very different from the distribution of value in cash or its equivalent in a going concern sale.

Unlike a going concern sale, the notional distribution of rights in a restructuring has to be determined by the resolution plan. This creates two unique problems. First, given the uncertainty regarding the value of the restructured business itself, there could be ambiguity about how much value should each claimant receive under the waterfall. Second, even if the value payable to each claimant is agreed upon, there could be ambiguity regarding the value of the rights (that is, securities of the restructured company) allocated to each claimant by the resolution plan. These unique problems create a peculiar risk in restructuring - the rights distributed by the resolution plan may give one or more classes of claimants a value lesser than what they are entitled to under the statutory waterfall. This is often referred to as “unfair discrimination”. To prevent such unfair discrimination, judicial review of resolution plans in non-cash restructuring transactions is necessary.

This conceptual distinction between sale (cash) and restructuring (non-cash) transactions is critical. Minority creditor protection mechanisms including judicial review is necessary primarily for restructuring (non-cash) transactions; not so much for sale (cash) transactions. For example, Chapter 11 of the US Bankruptcy Code deals with restructuring. Section 1129 in this chapter requires a restructuring plan to provide every creditor at least the liquidation value. This safeguard is not applicable to sale transactions (for cash) under Section 363 of Chapter 3 of the US Bankruptcy Code. Evidently, the US law clearly recognises the difference between sale (cash) and restructuring (non-cash) transactions.

So far we have only dealt with neat categories of going concern sale and restructuring. However, in reality, resolution plans could propose transactions that may not squarely fall within these simple categories. For instance, some new investors may pay up cash to buy some equity or take on some debt of the restructured company, while existing lenders may swap some of their debt into equity of the restructured company. Such transactions would then be a hybrid
exhibiting features of both a going concern sale for cash as well as that of restructuring for non-cash considerations. It is important to recognise that such transactions effectively help preserve the going concern value of the insolvent business. Therefore, in such transactions, each claimant of the insolvent company must get at least the amount of value (cash, non-cash or both) that it would have received had the company been sold off as a going concern for cash or its equivalent. In other words, even in such transactions, the distribution of value must follow the statutory waterfall. And this distribution function has to be performed by the resolution plan itself. Consequently, the risk of unfair discrimination may arise even in such transactions, rendering judicial review of resolution plans necessary for minority creditor protection.

Shortcomings in IBC and the proposed solutions

The IBC, as initially envisaged, differed from this ideal theoretical framework on two counts.

First, the statutory waterfall under section 53 of the IBC was initially envisaged only for distribution in liquidation. The Essar judgment held that section 53 cannot apply to distribution proposed by a Resolution Applicant. Consequently, in sale (cash) or restructuring (non-cash) transactions, a resolution plan would have to follow a scheme of distribution different from the statutory waterfall, opening up flood-gates of unfair discrimination allegations.

The 2019 Bill attempts to address this problem. Section 30(2)(b) is proposed to be amended to make the statutory waterfall under section 53 applicable to distribution in resolution as well. This clarity should reduce allegations of unfair discrimination in resolutions and help cut down on unnecessary judicial review in going concern sales.

Second, the IBC does not clearly recognise the conceptual difference between cash and non-cash transactions. Unlike US Bankruptcy Code, section 30(2) of IBC applies minority creditor protection mechanisms, meant primarily for restructuring (non-cash) transactions, to even sale (cash or its equivalent) transactions. This provision has been liberally interpreted by the NCLAT in Binani Industries to hold that every resolution plan must be fair and equitable – a vague judicially determined standard. Consequently, every resolution plan is now open to judicial review without any clear purpose. This has unnecessarily delayed many corporate insolvency resolutions. For example, the Essar resolution has been ongoing for almost 2 years, even after approval of a resolution plan by the CoC.

The 2019 Bill attempts to address this problem too. The proposed Explanation 1 to section 30(2)(b) explicitly clarifies that if a resolution plan follows the order of priority under section 53, it will satisfy the ‘fair and equitable’ standard. This explanation should narrow down the focus of judicial review to ensure distribution as per the statutory waterfall.


Judicial review under IBC should be focused to ensure that distribution of value is as per the statutory waterfall under section 53. In going concern sales for cash or its equivalent, distribution of value among claimants based on the waterfall would be relatively unambiguous and should not require judicial review of resolution plans. In restructuring or other hybrid transactions involving non-cash consideration, notional distribution of non-cash value in form of rights to the restructured business (that is, its securities) is likely to be contentious, given that distribution will be provided by the resolution plan and/or issues relating to price discovery and valuation. This could create opportunities for value extraction from minority to majority claimants through resolution plans in such restructuring or hybrid transactions. Judicial review of resolution plans may be necessary only to prevent such unfair value extractions in violation of the statutory waterfall. But once distribution among claimants as per the statutory waterfall is achieved, there is nothing further to be gained by subjecting each and every resolution plan to judicial review. The 2019 Bill has now modified the law to achieve this optimal outcome. Whether this outcome is achieved in practice will depend largely on how the judiciary interprets and implements these new provisions.


Shroff, S. and Misha, A question of balance, via the code or otherwise, Asia Business Law Journal, May 13, 2019.

Datta, P, Value Destruction and Wealth Transfer under the Insolvency and Bankruptcy Code, 2016, NIPFP Working Paper No. 247, Dec. 2018.


Pratik Datta is a Senior Research Fellow, and Varun Marwah is a Research Fellow at Shardul Amarchand Mangaldas & Co. We thank Mr. Shardul S. Shroff and four anonymous referees for useful discussions and comments.

Monday, July 15, 2019

How land laws create dead capital: A case study of Maharashtra

by Diya Uday.

Land is an important form of capital. In India, for most households, it is the dominant element of the household portfolio. About eighty per cent of all household assets in India, are in the form of real estate (land, buildings and other constructions owned by households, for residential, commercial or vacation purposes) (Ramadorai Committee Report, 2017, pg. 12). In the CMIE 'Consumer Pyramids' household surveys, almost all households own some land or real estate.

As with other factors of production, an efficient economy requires full utilisation of the resources in the country, efficient mechanisms for discovering its price, and frictionless transactions. This is not taking place well in India. For example, unsecured debt still accounts for two-thirds of the total liabilities for the very poor and one-third of the rich in India (Ramadorai Committee Report, 2017, pg. 6). Similarly, despite landlessness in rural areas, only fourteen per cent of all households reported leasing-in land (NSSO Report, 2013, pg. 30). In many states such as Maharashtra, the proportion of households leasing-out land is well below ten per cent (NSSO Report, 2013, pg. 30).

In the study of land economics in India, a key question that has to be pursued is: Why, despite the seizable presence of land as an asset in household balance sheets, is there poor capitalisation of land in India? What obstructs harnessing the full productive capacity of land in India?

The idea of land as dead capital was made prominent by Hernando de Soto, who used the term to refer to something that could not be easily bought, sold or used for an investment. He showed that the poor possess far more capital than is evident, but institutional failures hinder utilisation of the land as wealth. For example, he found that in Egypt a person who wants to acquire and legally register a lot on either state-owned desert land or former agricultural land has to navigate a plethora of bureaucratic procedures, estimated to take anywhere between five to fourteen years. As a consequence, a large number of people chose to build dwellings illegally (de Soto 2000, pg. 20). This means that these properties cannot be used to access formal credit or be legally sold or rented.

There is a need for a comparable literature on India. How does the land market work? What are the impediments to translating land into value added? How can wealth in the form of land impact upon the life of the owner to a greater extent than is presently the case?

In this article, three questions are studied, treating Maharashtra as the environment under examination:

  1. Do regulations on land hinder the effective utilisation of land as an asset in India?
  2. What are the restrictions imposed?
  3. What are the less visible effects of these restrictions?

Three pathways to harnessing land wealth

The value of land is unlocked in three ways:

  1. A mortgage, whereby land is used as a security to access credit.
  2. A sale, where the owner of the land transfers it to a buyer.
  3. A license or lease on the land in exchange for regular payments.

There has been a considerable focus on mortgage transfers as a means of capitalising the value of land. Land titles and access to credit are now intricately connected in policy discourse on financial inclusion and access to finance. For example, the RBI has recognised the role of land titles in access to credit and consequently to financial inclusion (Mohanty Committee Report, 2015, pg. 26). Some court interventions too, have given creditor rights precedence over transfer restrictions on land.

The other two methods -- sale and lease -- have received less attention, but are no less important. The owner of an asset must be given the freedom to choose the method by which the asset is to be capitalised. Directing policy attention only towards land as a means of accessing credit, and ignoring reforms in sale and rental markets, reduces the choices available for a land owner.

A case study of land laws in Maharashtra

We now turn to identifying provisions of law that affect the transferability of land in Maharashtra.

Methodology. A list of laws was obtained from the website of the Bombay High Court. This list was examined to identify the laws that potentially affect transfers of both agricultural and non-agricultural land and real estate, by reading the names of the laws. The long titles of these short-listed laws were examined to assess the applicability of the law for this case study. This yielded the following list of laws that impact upon land transfers:

  1. Maharashtra Land Revenue Code, 1966
  2. Maharashtra Tenancy and Agricultural Lands Act, 1948
  3. Maharashtra (Prevention of Fragmentation and Consolidation of Holdings) Act, 1947
  4. Maharashtra Stamp Act, 1958
  5. Registration Act, 1908
  6. Maharashtra Rent Control Act, 1999

The analysis of these laws yields the following results:

  • Restrictions on the transfer of agricultural land: There are two kinds of restrictions on the transfer of agricultural land. The first kind of restriction is that under the Maharashtra Tenancy and Agricultural Lands Act, 1948, agricultural land can only be transferred to a resident agriculturist. An agriculturist is defined as a person who cultivates land personally. A non-agriculturist can only buy agricultural land after obtaining the permission of the Collector, unless the property is specifically allocated to residential, commercial or industrial uses or is to be used for a bona fide industrial purpose. In all other cases, the restrictions on transfers continue to exist. These restrictions apply to subsequent transfers as well. Similarly, mortgages to lenders other than co-operative societies, also require permission of the Collector. In each case, the Collector may grant permission subject to conditions.

    These restrictions induce three problems. First, they increase the cost of transacting on such land. Second, the law does not prescribe a time limit for granting such approvals. Neither are these permissions covered under the Maharashtra Right to Public Services Act, 2015. Without statutory timelines, the procedure for transfer could be time-consuming and tedious. Discretion in delay creates the possibility of corruption. Third, since these restrictions continue to apply even after the land the purchased, they also handicap future purchasers.

    A second class of restrictions kicks in after the sale is completed. Where the law has done away with the requirement for permission, the land must be put to the intended and permitted use within five years from the date of transfer. Failure to do so incurs a penalty of two per cent of the market value and even forfeiture. Further, when a purchaser of this land wants to sell it without utilising the land for a non-agricultural purpose, she can do so only with the permission of the Collector and after payment of a transfer fee of twenty five per cent of the market value of the property. If sold within ten years, these restrictions continue to apply to the transferee as well. There are further restrictions placed on certain classes of agricultural land, such as the payment of fifty per cent of the purchase price to the Collector. In case of a delay in the payment of price, this amount increases to seventy five per cent of the purchase price.

  • Restrictions on the transfer of tribal land: The Maharashtra Land Revenue Code, 1966, places three types of restrictions on the transfer of tribal land. First, for sale of tribal land to a non-tribal, the permission of the Collector with the previous approval of the State Government has to be obtained. Before the grant of this approval, the Collector has to first offer the land to tribal persons residing in the village of the transferor or within five kilometres of the land. In scheduled areas, the additional sanction of the Gram Sabha has to be taken, unless it is for a 'vital government project' such as for highways, canals, etc. In all cases, the Collector is permitted to grant approval for transfer, with conditions. These restrictions would apply upon a lender, who might repossess land, also.

    The second type of restriction relates to the mortgage of such land. In case the mortgage is below five years, the permission of the Collector has to be taken for transfer. In the event that the mortgage is above five years, the permission of the Collector with the previous approval of the State Government has to be obtained. In case of a mortgage to a non-tribal, the same procedure of offering it first to a tribal person within the village or within a five kilometre distance from the land is undertaken. Further, the law permits the Collector to restore possession of the land to the tribal person at the end of the mortgage period, regardless of any court order or law. This means that if a tribal person defaults on a loan where land is taken as collateral, at the end of the term of loan, regardless of a court order to the contrary, the land can be restored to the mortgagee at the discretion of the Collector. These restrictions hamper lending against such land. In a field study conducted across twenty villages in Maharashtra, respondents were unanimous in stating that if they defaulted on a loan for which land was collateral, nothing would happen and that when land is used as collateral it was rarely enforceable if there was a default (Narayanan et. al, 2019). Court rulings on this subject have been conflicting, sending mixed signals to lenders (Zaveri, 2017). Poor transferability also hampers the establishment of a credit history and thus access to credit.

    The third type of restriction relates to lease of such land. The provisions requiring permission of the Collector and State Government and the requirement of offering the land to a tribal person within the village or within a five kilometre distance from the land, also apply to lease transactions. These provisions make leasing of such land to anyone but tribals, a lengthy and expensive procedure. Where there are no takers from among the tribal community, the owner of such land is effectively left with one less tool for capitalising the value of her asset.

  • Restrictions on the transfer of notified fragments: A fragment of land is defined as a plot of land which measures less than the notified standard area. The Maharashtra (Prevention of Fragmentation and Consolidation of Holdings) Act, 1947 imposes two types of prohibitions and restrictions on such land. First, any land which is notified as a fragment, can only be sold to the owner of a contiguous parcel of land. In addition to limiting the owner's access to the land market, as in the case of tribal land, these sale restrictions also inhibit recoveries of lenders.

    Any land which is notified as a fragment can only be leased to the cultivator of a contiguous parcel of land. This provision is problematic in that it operates within an already restrictive lease market, where incentives to lease are few. Further in the event that the cultivator of a contagious parcel is not interested in leasing-in the land, the owner is either forced to cultivate the land herself or to let it lie fallow, effectively making it a dead asset.

The following laws do not place direct restrictions on sale, lease or mortgage transfers, but have provisions that affect these transactions (Category 2 provisions):

  • Rental market restrictions: There are two main laws that govern rental markets in Maharashtra, one for agricultural land and one for constructed property. While these laws, unlike those in some other states, do not prohibit leasing of land, they do impose other restrictions. First, the Maharashtra Tenancy and Agricultural Lands Act, 1948, which applies to agricultural land, prescribes rent ceilings. The prescribed formula for determining the maximum amount of rent payable is that the rent must not exceed five times the assessment or twenty rupees per acre, whichever is lower. Similarly, the Maharashtra Rent Control Act, 1999 controls rents in specified properties by imposing a statutory maximum rent which is below the equilibrium rent (determined on the basis of the market value of the property). The law also limits the percentage of yearly escalation in rent chargeable to tenants.

    Rent ceilings reduce the rental revenues of owners. In addition to prescribing the value of the agreements, these laws also prescribe other terms such as the grounds of termination exhaustively. This means that the parties have little or no freedom to contract grounds of termination beyond those prescribed in the law. Further, the recovery of possession of the premises is a difficult process which will most likely require administrative or court intervention, which means additional costs to the owner. These features coupled with rent ceilings, leave no incentive to owners who wish to capitalise their asset by means of a lease. In fact, anecdotal data from land-owner farmers in Palghar and Mulshi Districts in Maharashtra suggests that the fear of non-recovery of leased out land is a key reason for not leasing out of land.

  • Registration of transfers and stamp duties: The Registration Act, 1908 requires certain deeds used to effect transactions in immovable property, to be registered with the office of the registrar or sub-registrar. A document has to be registered by payment of a registration fee. In Mumbai, this amount is thirty thousand rupees. The biggest problem with this system is that while registering this deed, the registrar is not under any obligation to confirm the veracity of the contents of the deed or the marketability of title. The registration of fraudulent documents of transfer thus is possible. For example, in a recent episode, an examination of property documents revealed forged signatures and non-existent parties to the transaction. This system therefore adds to the cost of the transaction, without any real benefit to the parties. A purchaser, borrower or lessee is incurring the cost of registration without actually having the assurance of marketability of the land or identity of the parties.

    Stamp duty is incurred before the registration. Like other taxes upon transactions, stamp duty is a `bad tax' in public finance parlance. The Maharashtra Stamp Act, 1958 imposes a stamp duty of five per cent on the market value of the property in a sale transaction. Recently, a surcharge was introduced which has further increased the applicable stamp duty.

  • Presumptive titles: The Maharashtra Land Revenue Code, 1966 requires the updation of land records each time a transfer takes place. For this, the transferee has to make an application for updation of the record. The concerned officer will invite objections. If there are no objections, the record is updated. If there are objections, the dispute will be adjudicated before updating the record. Despite this lengthy procedure, land records do not have any value in terms of proof of title. The Supreme Court recently reiterated that entries of transactions in revenue records, do not create title to land.

    Purchasers demand the issue of a certificate of marketability of title from the seller. This involves a process of legal due diligence or examination of title by legal experts. In most cases, the purchaser also conducts their own diligence in addition to demanding this certificate, adding further costs to the transaction.

  • Form of land records: There are two types of textual records in the state of Maharashtra: the 7/12 extract for agricultural/rural land, and the Property Rights Card in urban areas. A study on urban records in Mumbai reveals that the fields of information required to be recorded under the rules of Maharashtra Land Revenue Code, 1966, only serve the purpose of collection of revenue (Sheikh et. al., 2018). These records are therefore fiscal cadastres and information contained in these records is limited. Vital information such as easementary rights, restrictive covenants on the land, litigation and encumbrances are not recorded.

    Insufficient information in land records increases the cost to and risk borne by the buyer. In case of a mortgage, the cost of lending is also likely to increase as it will take into account these risks, making borrowing more expensive for land owners.

Thus, we have a depiction of how the landscape of laws in Maharashtra interferes with the translation of land into value added. There are three limitations of this work. First, the list of laws is not exhaustive. There are other laws, regulations, government orders, which affect the transferability of the property, which do not find mention in this case study. For example, there are a number of transfer restrictions in urban areas, such as restrictions on change of land use and development under the Maharashtra Regional and Town Planning Act, 1966, the Development Control Regulations, the imposition of transfer fees payable by apartment owners to co-operative societies and transfer fees paid on Collector's land. Second, at present, there is no empirical evidence, that links these provisions to the impact on land economics. Third, this study is theoretical and does not analyse how these provisions will play out on-ground. Depending on the administrative processes, these provisions may have either a large or small impact in obstructing transactions.


The aim of this study was to examine the regulatory restrictions imposed on land transfers and their potential role in creating dead capital. This study documents two classes of restrictions: Category 1 provisions, which directly restrict transfers in the land market and Category 2 provisions, which affect the ease of doing transactions. Both these categories of provisions create a complex web of conditions for transfer, which may contribute to create dead capital in land markets, with varying effects. For example, a land owner may not be able to capitalise land by transfers on account of Category 1 provisions for two reasons. First she may be outright prohibited from undertaking a transaction, or second, the provision generates an unseen restriction of some kind, which operates to effectively disallow her from capitalising her asset. Category 2 provisions, again may affect the effective capitalisation of land by transfers in two ways. First, by creating disincentives to capitalisation in some manner; rent ceilings are a classic example of this. Second, these restrictions impose costs which reduce the benefits from capitalisation.

Furthermore, this study highlights the unseen consequences of economic policies and the regulations made to implement them. There is a need for policy makers to think about the secondary consequences of any regulation. Each instance listed above is a case of the proverbial coin with two sides, one of which has been overlooked. In the area of land markets in particular, it appears that policies have been unidirectional; predominantly discounting the impact of these policies on capitalisation of land. Recent amendments to the law too reflect this fallacy. For example, the 2016 amendment to the Maharashtra Land Revenue, 1966, introduced the requirement of additional permission Gram Sabha for transfers in scheduled areas. While the argument for this was that it would would lend more accountability to the transfer process, one must also recognise that this increases the complexity and cost of the transfer process which might reduce demand for such land, leading to a situation where even a willing owner, is left with no market for capitalisations.

The effects of these restrictions will be greater in states which have more restrictive regimes. In solving these problems, therefore, the first step is a comprehensive study, at the level of each state, which documents these restrictions. As an example, for Maharashtra, this would be a more complete version of this article. The impeding provisions must be categorised in the manner described by this case study. The reason for this is that different categories of restrictions will require different action points. The second step is to determine empirically if each category of these restrictions affect the capitalisation of land as an asset. Field studies are required which determine the on-ground effects of these provisions on aspects such as (i) the costs of lending, (ii) the cost to the owners of the land and (iii) the transaction frequency.


Narayanan et. al., 2019, Land as collateral in India, Sudha Narayanan and Judhajit Chakraborty, Indira Gandhi Institute of Development Research, February 2019.

Sheikh et. al., 2018, Rethinking urban land records: A case study of Mumbai, Gausia Sheikh and Diya Uday, The Leap Blog, November 1, 2018.

Zaveri, 2017, Distortions in the Indian land collateral market, Bhargavi Zaveri, The Leap Blog, February 1, 2017.

Ramadorai Committee Report, 2017, Report of the Household Finance Committee, Reserve Bank of India, July 2017.

Mohanty Committee Report, 2015, Report of the Committee on Medium-term Path on Financial Inclusion, Reserve Bank of India, December 2015.

NSSO Report, 2013, Household Ownership and Operational Holdings in India, National Sample Survey Office, December-January 2013.

de Soto, 2000, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Hernando de Soto, Basic Books, 2000.


Diya Uday is a researcher at the Indira Gandhi Institute of Development Research, Mumbai and visiting faculty at the Tata Institute of Social Science, Mumbai. The author would like to thank the three anonymous referees for their comments and suggestions.