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Friday, February 28, 2020

Income Tax Scorecard: Can there be a holistic view of the Budget proposals?

by Surya Prakash B S and Kangan Upadhye.

Is it possible to have a unified view of a legislation that pieces together its various provisions? In our paper we present a novel methodology that measures direct tax provisions of the Finance Bill, 2017 (Government of India Budget, 2017) presented by the Union Government of India to the Lok Sabha, against accepted principles of taxation and tax system design.

The Finance Bill seeks to amend many parts of the Income Tax Act and consequently impacts sections of the society differently. Popular media coverage tends to focus on impact on some sectors or a few controversial measures. This is natural given that budget making is a contentious exercise that needs to address concerns from all quarters. Our methodology avoids analysis either from the perspective of the state (revenue mobilisation) or the taxpayers (revenue minimisation). It measures each direct tax provision to see how well they perform against principles of taxation.

Our method consists of a set of “attributes” and “impacts” for which we assign scores. Attributes relate to the objective features of the provisions: we categorise provisions/amendments into compliance, substantive, procedural, exemptions, collection and recovery, anti-avoidance, penal provisions, international taxation and adjudication machinery. A total of 97 provisions in the Finance Bill 2017 are categorised under these attributes.  A single provision could have more than one attribute. For example, the amendments proposed to section 13A which is related to exemption from paying income-tax for political parties, to discourage the cash transactions and to bring transparency about funding political parties is an example of a provision categorised under more than one attribute. It is categorised not only under compliance but also recognised as substantive.

A summary of the above step is depicted below. It can be observed that the Finance Bill, 2017 contained 26 provisions relating to ‘Exemptions’, 22 that were ‘Substantive’ and 21 that made changes to ‘Computation’.

Since the provisions could have various levels of impact, we go on to score them on a seven point scale (-3 to +3) against each of the following seven principles of an ideal tax system design:

  1. Transparency: Whether there have been any prior public consultations.
  2. Simplicity: Whether the provisions makes levy and collection simpler.
  3. Stability: Whether the provisions are prospective or retrospective in nature.
  4. Discretionary power: Whether and to what extent discretionary power of tax officers have been enhanced or decreased.
  5. Tax rates: Whether and by how much have tax rates have been decreased. Lowering tax rates get higher scores.
  6. Tax base: Is the income on which tax is levied increased or decreased. As a principle when more types of income are charged, a higher score is given. As a corollary, exemptions are scored lower.
  7. Number of taxpayers: Provisions that extend the levy to more taxpayers have higher score. If a few of them are exempted it gets a lower score.

The scores are calculated in percentage terms (after converting negative scores to positive for ease of comparison) and the results are as depicted in the figure below.

The provisions in the bill score fairly well on simplicity, stability and discretion parameters with moderate scores on taxpayers, tax base and rates relative to the others. The provisions perform poorly on the transparency parameter.

Our results from the framework do support the popular thinking about the 2017 financial bill the way industry experts and practitioners have interpreted in the budget discourse (Chakrabarti et al. 2017).  For example, the amendment to section 132  which empowers relevant authorities under the Income Tax Act, 1961 to carry out a search or seizure without having to declare reason to believe such person or any authority or appellate tribunal, previously required under section 132 of the Income Tax Act, 1961 (Government of India Budget, 2017).

The earlier provisions empowered authorities to enter and search any building, person if they had a reason to believe that the person had failed to disclose material facts. As critics argue without having a reason to declare for search or seizure this power can be misused to conduct arbitrary investigations leading to harrassments and tax terrorism. This provision was rated low on all the parameters. By adopting such a systematic approach to evaluating tax amendments, this could serve as an evidence informed input to the design of taxes in our budgeting system.

To the best of our knowledge, we have not come across any similar methodology in use in any major economy. The methodology is objective, the impact parameters and the attributes categorised are transparent, and these assumptions can be revised by those that seek to view the results based on alternate views or perform a sensitivity analysis.

We are aware that scores given can be made more accurate through data based post hoc impact assessments. Further research is required on this aspect.
The practical value of the results from our approach are many. It would a) enable us to base the study of the Finance Acts against principles of a good tax system b) provide a comprehensive view of the taxation system rather than a view traditionally restricted to revenue objectives or taxpayer hardship; and c) enable a mapping of the trajectory of tax policy by allowing us to compare across years. It can be viewed as a first step towards making the budget-making process transparent, empirical, and inclusive. The methodology used in this paper can potentially also be used to study other legislation and amendments.

The authors are researchers at Daksh. The authors are thankful to Shreya Rao and Shweta Mallya for their contribution during the conceptualisation phase of this paper. This paper was presented at the APU-NIPFP workshop Strengthening the Republic #1, January 11, 2020.

Thursday, February 27, 2020

Base and superstructure: Ideological constraints affecting India’s land markets

by Anirudh Burman.

As a scarce resource, land in India has often been, and will continue to be a source of heightened contestation. This contestation has taken place on the base of the legal framework that regulates land markets. This legal framework enables the state to exercise extensive control over the market. Over the decades, state power has been used extensively in an attempt to restructure socio-economic relations in society.

This legal framework has been successful in fomenting political mobilisation, it has not increased the efficiency of the market in any meaningful manner. If the underlying premises remain unchanged, this feature of our land markets - intensive political contestation without meaningful efficiency or equity gains - is likely to continue. This is likely to become increasingly contentious given the increased dynamism of the Indian economy - rapid urbanisation, diversification of the rural economy, and industrialisation.

During colonial rule control over land was not subject to democratic power. Since 1947, the use and control over land has been under democratic control. However, in these years, the issue of control over land was a huge source of conflict. Radical laws were passed to redistribute agricultural land and to ensure equitable rights for the cultivating class. However, their success was limited. Their implementation gave rise to a spate of litigation, and also led to extreme violence.

For all the frenzied activity over the equitable distribution of agricultural land, and planned urbanisation, the outcomes have been poor. Both agricultural and urban land in India are frightfully expensive. Getting land to set up industry often becomes a political nightmare. The rural economy that is intrinsically tied to land remains woefully stagnant. Migrants to urban areas are unable to afford decent housing, sanitation and safety.

An important dimension of this field is that these outcomes are rooted in the ideological basis on which Indian markets for land rest on. This ideological framework is broadly common across different kinds of land markets in India - rural, urban, industrial. And this framework has developed over the years in a manner that has rigged the land market against those who depend on it the most.

India’s regulatory framework in the land market today resembles that of other sectors like the financial markets and the telecom sector before they were liberalised. Market liberalisation did two things - it limited the scope of government regulation, and reoriented regulation to solving problems that privately-dominated financial and telecom sectors faced. This led to the growth of both these markets, and generated unprecedented benefits for consumers and prosperity for investors.

Similarly, the regulation of rights in land has a strong connection with the size, dynamism and growth of India’s land market. Laws and regulations that impair such rights constrain the land market.

State regulation of agricultural and rural land

Today, the state regulates almost all parts of the agricultural land market extensively. It determines what is agricultural land, and what is not. It determines who can own agricultural land. Many states prohibit non-agriculturalists from buying agricultural land. Others prohibit non-residents of a state from buying agricultural land within the state.

It also places restrictions on other kinds of transfers of agricultural land. For example, land given to the dependents of deceased military personnel cannot be transferred in many states. Through land-ceiling legislation, it lays down how much agricultural land one can own based on its estimation of what constitutes a sufficient amount of land.

Many states in India do not recognise tenancies and prohibit subletting of agricultural land. Others place restrictions on the contracts tenants and owners of agricultural land can enter into. Other regulations place restrictions on leasing and subleasing of agricultural land.

State regulation of towns and cities

Just like agricultural land, state regulation of urban land markets is extensive. In urban areas, the state not only decided who will own how much, and for what purpose, its role starts at the very inception - of deciding when a town should be called a “town” and a city a “city”. While almost all countries adopt some similar framework to regulate land-use, the framework adopted by India has been criticised by many as being too stringent, and one that effectively slows down the process of providing urban facilities like sanitation to rapidly growing new towns.


This restrictive regulatory framework has failed to provide dividends. Property in major Indian cities is more expensive relative to most other major cities in the world. Rural incomes have remained stagnant and required substantial government support. It is therefore time to revisit this regulatory framework (a) by understanding why this framework has failed, and (b) what can be done to reform this framework.

The author is researcher at Carnegie India. This paper was presented at the APU-NIPFP workshop Strengthening the Republic#1, January 11, 2020.

Does synchronization of elections matter? Evidence from India

by Vimal Balasubramaniam, Apurav Yash Bhatiya and Sabyasachi Das.

Many countries across the world hold elections for multiple levels of the government on the same day. Examples include the United States, Brazil, Sweden, South Africa, Indonesia, among others. Importantly, there has been an increasing demand to synchronize elections across tiers of governance in both Europe and India. In India, the Law Commission, and other bodies, highlight that elections are expensive and find that "holding simultaneous elections would be ideal as well as desirable". The implicit assumption in these discussions is that the question of when voters make decisions about their national and state representatives may not affect how they make these choices and consequently, the election outcomes that emerge from them.

In our research, we examine whether synchronized elections in India lead to significant changes in voter behaviour. We refer to an election in India as synchronized if the national election (or general election, GE) and the state election (or, assembly election, AE) occur on the same day. Otherwise, we say that the elections are non-synchronized.

Specifically, we ask the question how the probability that the same political party wins a seat at the Lok Sabha and the Vidhan Sabha changes when elections are conducted on the same day as opposed to on different days. For this, we compare the same assembly constituency over time with synchronized elections against those that happened on different days. For non-synchronized elections, we pair a national election with state elections that occurred after it and before the next national election.

We find that synchronized elections increase the probability that the same political party wins a seat both at Lok Sabha and Vidhan Sabha by 0.089, which is about 21% of the base probability of 0.42. One concern about interpreting this estimate as an effect due to synchronization is that a long time gap between national and state elections for non-synchronized elections may confound our ability to pin down a plausible causal interpretation of this estimate. We vary the time gap between the elections in any given pair of national and state elections from 150 days to 270 days, and our estimates range from 0.15 (for 150 days) to 0.082 (for 270 days). The estimates are, however, not statistically significantly different from each other. Our preferred specification is the one that limits the time-gap to 180 days -- an estimate closer to the lower bound that we find -- to account for qualitative reasoning that provides plausible exogeneity in the scheduling of elections.

Figure 1 below highlights the approach we take to this study with heat maps for the probability of the same party winning both the parliamentary and state constituencies without (Case 1) and with (Case 2) synchronized elections. Synchronized elections increase the probability of a political party winning both the Lok Sabha and Rajya Sabha seats. We show this for the ten states that fall within our sample for our preferred estimate. With the exception of Odisha – which has an opposite pattern – all other states in our sample present an increase in the likelihood of electing the same party.

Case 1: Unsynchronized Elections

Case 2: Synchronized Elections
Figure 1: Prob (Same Party winning both PC and AC)

This significant consequence of synchronized elections may not occur in isolation. We characterize the voting environment and find that the winning margin in any given contest at a constituency is on average no different between synchronized and non-synchronized setup. However, there is an increase in turnout for national elections to level with the average turnout for state elections during non-synchronized elections. This suggests that the fraction that participates in state elections is in general much higher than in national polls.

We explore the potential channels that drive this significant effect of synchronization. We find that synchronized elections reduce split-ticket voting -- the Euclidean distance between the vector of vote shares of political parties in parliamentary and assembly constituencies is significantly lower in synchronized elections. This reduction in split-ticket voting could be both demand and supply-driven.

On the supply side, political parties could homogenize information sets and hold similar campaigns for the two elections when they happen on the same day. They could manage greater engagement with voters on the ground due to economies of scale with campaign resources during synchronized elections. Both these factors could align a voter to a single party. On the demand side, it may be that the cognitive demand to rationalize voting for two different parties in the two elections when they vote for them at the same time is high. This increase in decision complexity may give rise to voting for the same party when elections are synchronized. To explore these motives, we use national and state election survey data collected by CSDS for a representative sample of individuals compiled within two days after every election in India.

Panel A: Voters Decision

Panel B: Election Priorities

Panel C: Voting Consideration

Panel D: Election Issues
Figure 2: Micro-data Evidence

We present the evidence from micro-data in Figure 2. We find that voters spend more time deliberating on elections when they are synchronized (Panel A), voters are less clear about objective functions for electing their representative for the two governments (Panel B). Additionally, we find that voters reduce the dimensionality of their choice by looking at political parties more than individual candidates (Panel C). Lastly, we find that voters are more ambiguous about the issue that matter the most for their choice of the vote (Panel D). These observations strengthen our claim that the cognitive challenges of choosing two candidates at once may not be a trivial constraint, especially in a parliamentary democracy where the elected representative matters to how the citizens voice their concerns to the state. And the objective function for the voter for the two elections is compromised with synchronized elections. Thus, we observe a rise in a simple solution of voting for the same political party during synchronized elections.

A critical reason for support to synchronized elections is the cost of holding elections. Holding elections on different days does have high electoral costs both for the governments to organize the elections and for the political parties to participate in them. The most recent General Election in India in 2019 cost Rs.5,000 crore or about 700 million USD.

Recurring elections not just imply more monetary cost but also the loss of governance time as politicians focus their time on campaigning and bureaucrats remain occupied with election work as opposed to implementing policies and public projects. The deployment of security forces away from their primary objective for electoral purposes also imposes further costs on the state. Lastly, the model code of conduct, it is claimed, affects public policy-making.

Such costs may reduce by holding synchronized elections had there been no impact on voter choice and decisions or on the real economic outcomes in India. Our results imply that a direct consequence of synchronized elections is synchronized representation. A growing body of work on political alignment provides mixed effects on real economic outcomes. Political alignment could increase the transfer of resources from the national government to subnational governments in India (Rao and Singh, 2003; Khemani, 2003). However, more recent work highlights that patronage networks and rent-seeking by local politicians may strengthen in politically aligned areas, leading to inferior public service quality. The development consequences of synchronized elections, therefore, are far from straightforward.

Our paper documents that when voters choose their representatives for Lok Sabha and the Vidhan Sabha matter to election outcomes. The administrative gains from synchronized elections, therefore, need to be weighed against benefits from voters evaluating different tiers of government without any overlapping ambiguity.

Vimal Balasubramaniam is researcher at Queen Mary University, London; Apurav Yash Bhatiya is researcher at University of Warwick, UK; and Sabyasachi Das is researcher at Ashoka University. This paper was presented at the APU-NIPFP workshop Strengthening the Republic, January 11, 2020.

Wednesday, February 19, 2020

Executive discretion in regulating private schools in India: Evidence from Delhi

by Bhuvana Anand, Jayana Bedi, Prashant Narang, Ritika Shah and Tarini Sudhakar.

Students in India are increasingly switching to private schools. For 2017, U-DISE data shows that nearly 40% of students are enrolled in private schools. However, the growth in private schools has been sluggish; between 2012 and 2015, annual growth for private schools hovered around 3% and in 2016, dropped to 1.71% (U-DISE 2016-17).

State education departments play a critical role in the governance of private schools. They write and apply rules, recognise schools, conduct inspections, impose penalties, and resolve disputes. Despite this, there is little to no evidence on how they carry out these functions and their impact on the growth and quality of these schools.

We studied three regulatory touchpoints between the state and private schools -- licensing, inspections and fee regulation -- for Delhi, in a recent paper: Challenges of executive discretion in the regulation of private schools, by Anand et. al., in Anatomy of K-12 governance in India, Centre for Civil Society, 2019.

We used government administrative data, field observations and analysis of the regulatory framework. On close examination, we found instances of excesses in executive discretion. While necessary to an extent, the misuse of discretion can negatively affect public welfare: in this case, school, students and parents.
Discretion in state education departments vis-a-vis private schools appeared in the following forms:

  1. Overreach in the making of rules;
  2. Ad-hoc and arbitrary rule-making;
  3. Poor procedural fidelity and administrative opacity; and
  4. Opaque, inconsistent and subjective exercise of punitive measures.

For example, consider the function of inspection. The Private School Branch of the Directorate of Education is supposed to inspect all private schools every year but only 60 schools are inspected in a year. As we reviewed the approach to the few inspections that do happen, we found that the method does not fulfil the spirit of the Delhi School Education Act and Rules (DSEAR) 1973. Rule 192 states that every inspection of a private school should be “as objective as possible”. The inspection proforma, however, is populated with measures and constructs that cannot be measured objectively. One such question is: did the teacher ask “thought-provoking” and “well-distributed” questions? Not surprisingly, the interpretation of these terms and the recorded answers vary across inspectors and schools (Figure 1). Besides, it is not clear how constructs such as “proper blackboard summary” link to the quality of education.

These inspections are also not typically followed by punitive action. DSEAR 1973 allows the Director to take any action against a non-compliant school but no school has been de-recognised in the last five years in Delhi. While officials cited the fear of student displacement, schools pointed out that they often bribe officials.

What drives this subjective/opaque application of punitive measures? What are the standards of quality? Do the standards adequately measure what they intend to do? What is the consequence of this on schools and quality of education? Where does a school go for appeal? Our research raises questions on the functioning of the state department—pertinent to any debate on education reform. We argue that there is a need for administrative reform and that the coercive power of government on private action ought to be within the constraints of law, guided discretion and due process.

The authors are researchers at the Centre from Civil Society. This paper was presented at the APU-NIPFP workshop Strengthening the Republic #1, January 11, 2020.

Tuesday, February 18, 2020

Applicability of the IBC to public sector enterprises: The case of Hindustan Antibiotics Ltd

by Sudipto Banerjee, Renuka Sane and Karthik Suresh.

Since the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, the National Companies Law Tribunal (NCLT) has been admitting insolvency cases against public sector enterprises (for example, the Tamil Nadu Generation and Distribution Co. Ltd., the Northern Power Distribution Co. Ltd.). A final resolution order was passed in the case of Burn Standard and Co. Ltd. while liquidation proceedings were ordered in the case of Hindustan Paper Co.Ltd. This suggests that the IBC was being used for resolving defaults by public sector enterprises (PSEs).

The case of Hindustan Antibiotics Ltd. (HAL) has led to uncertainty regarding the applicability of the IBC to PSEs. In this case, the NCLT could not arrive at a decision on the applicability of the IBC to HAL. The dispute was referred to a third member of the NCLT. In the meanwhile, HAL filed a writ petition before the Bombay High Court challenging the constitutional validity of the IBC insofar as it applies to government companies, which was admitted by the Court. This, in effect, has stayed the proceedings before the NCLT. The High Court will now decide on the question of whether the IBC applies to government companies.

This article revisits the dispute and examines the position of PSEs within the ambit of the IBC. It argues that creditors of PSEs (or PSEs themselves) should be able to access the IBC. Removing PSEs from the IBC's purview may lead to delays in resolution, and may close an important route which the government could use for disinvestment.

The dispute

Hindustan Antibiotics Ltd. (HAL) is a central PSE in the business of supplying affordable drugs and antibiotics. The company has been incurring losses since 1993-94. In March 1997, HAL was declared a sick company and placed under the Board for Industrial and Financial Reconstruction (BIFR) which approved a restructuring package in June 2007. However, the company's financial situation continued to deteriorate. In December 2016, the Union Cabinet stated that it will look at options for conducting a strategic sale of HAL, dispose of the surplus land and structure a voluntary retirement scheme (VRS) for its employees. As of January 2020, the strategic sale has not taken place. The company has been unable to pay the salaries of its employees on time.

As a consequence, employees of HAL have filed cases against the company for non payment of salaries and other dues before various courts. Three public sector banks have sent recovery notices to the company under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). Employees have also filed cases before the Controlling Authority under the Payment of Gratuity Act, 1972 for non payment of dues. Three operational creditors including Mr. Harish Pinge, an employee of HAL, filed cases under the IBC before the NCLT.

The impugned order of the NCLT is concerned with the petition filed by Harish Pinge. The company acknowledged the portion of Mr. Pinge's retirement dues but was unable to pay due to its financial condition. When Mr. Pinge approached the NCLT, the company took the view that IBC does not contemplate handling the insolvency resolution process of PSEs and hence the petition was not maintainable.

The NCLT's order

The judicial member took the view that HAL was a central PSE and thus an 'instrumentality of the state'. He held that even if the company is loss-making and is unable to pay its dues, it cannot be closed. This is because it would be unconstitutional for a tribunal to pass an order to close a PSE which is an instrument of the state itself. The relevant paragraph is extracted as follows:.

In view of the above findings, I am of the considered view that CIRP process cannot be initiated against an instrumentality of the state. To say these words I have made an attempt to lift the corporate veil of the Corporate Debtor to see who is behind the same and I found that it is none other than Govt. of India, in the name of President of India. Initiating CIRP process against the Corporate Debtor practically amounts to initiating CIRP process against the Govt. of India which is impermissible under the Constitution/Law. The law makers while enacting the IBC appears to have not envisaged such a situation otherwise they would have exempted Govt. Companies from the CIRP process as the application of the Code on the said Govt. Companies would create a chaos and defeat the very intent for which IBC is brought into existence. At the same time there is also another way looking at it and that is, there is no reason even to expressly exempt the Govt. Companies because it is an instrumentality of the state and de-horsing the corporate character and independent entity, there is everything to say that the Govt. Companies are an instrumentality of the state or rather we can say that there an alter ego of the state itself and the result of the same is that the IBC cannot interfere with the state owned undertakings. In view of the above the point No. (i) and (ii) are answered against the Petitioner as the Petitioner can have an alternate remedy in a civil court or by way of proceeding under Article 226 or 32 of the Constitution of India in an appropriate forum if so advised. (emphasis added)

The technical member held that all PSEs are liable to be subject to the CIRP as prescribed in the IBC in case of a default. He was of the view that PSEs are instruments of the state but the instrumentality argument cannot be used to negate the statutory right of a reditor. Only financial services providers are explicitly excluded from the definition of 'corporate debtor'. He observed that there are lacunae in the government's own process for restructuring PSEs after the closure of Bureau for Reconstruction of Public Sector Enterprises (BRPSE) in 2015 and suggested that adoption of the IBC process is in the best interest of the corporate debtor.

Since the members had disagreed with each other, the President of the NCLT referred the case to a third member in accordance with the Companies Act, 2013. While the proceedings were pending before the NCLT, the company filed a writ petition before the Bombay High Court.

Proceedings before the Bombay High Court

At the Bombay High Court, the petitioner argued that the provisions regarding the definition of 'corporate debtor', 'person' and the provisions which give financial and operational creditors the right to approach the NCLT in case of default are in direct conflict with a) the statutory provisions of Companies Act, 2013 and b) Article 14 of the Constitution of India as far as 'government companies' are concerned.

The High Court held that the NCLT is not the proper forum for deciding on questions of constitutionality. The court referred to the Supreme Court's decision in Hindustan Construction Co. Ltd. v. Union of India where it has was held that that statutory bodies (like National Highway Authority of India) are not limited in liability and are hence not covered in either the definition of 'corporate person' or 'person' under the IBC. The Bombay High Court said that it would look at whether this decision of the Supreme Court has any bearing on government companies as well. Consequently, it imposed a stay on the proceedings before the NCLT.

In the subsequent paragraphs we discuss why the IBC should be applied to government companies as well.

The IBC does not exclude PSEs

The HAL case seems to depend on the interpretation of 'corporate debtor'. Under the provisions of the IBC, 'corporate debtor' means a corporate person who owes a debt to any person. The definition of 'person' includes a company. Most PSEs are registered as government companies under the Companies Act, 2013 and are generally subject to its provisions and rules.

A similar argument was made by the solicitor general in the context of Hindustan Construction Co. Ltd. v. Union of Indiasupra). He admitted (para 58) that government companies are covered in the definition of 'corporate person' under section 3(7) of the IBC. The court did not make a clear pronouncement on this specific issue since the facts of the case were not primarily concerned with it. But we can presume that the solicitor general, being the statutory lawyer of the Union government, has stated the view of the government on the law.

There are specific provisions in the Companies Act, 2013 which exempt government companies from certain requirements. It is a settled principle of statutory interpretation that legislature speaks its mind by use of correct expression and unless there is ambiguity in law, the law has to be read in its literal sense. The literal reading of the provisions does not indicate exemption of PSEs from IBC.

Inference can also be drawn from the earlier legislation like Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) where it was expressly mentioned that the definition of company did not include a government company. This was removed by an amendment in 1993. Further, the IBC substituted the provisions on revival of sick industrial companies and winding up given under the Companies Act, 2013.

The importance of the IBC to PSEs

There are several reasons that the case before the High Court is extremely important.

The IBC is a time bound process which helps preserves the value of the firm and improves recovery. The World Bank's Ease of Doing Business survey reflects this change --- the recovery rate per dollar has increased from 28.6 cents per dollar to 71.6 cents per dollar since the IBC was brought into force. The exclusion of PSEs from this process will be expensive to its creditors, which are often public sector banks. For instance, the report of the Lok Sabha Committee on Public Undertakings observed that for 2016-17, the losses of the top three loss making central PSEs i.e. Air India, BSNL and MTNL accounted for 55.66% of total losses among central PSEs. The annual reports of BSNL (2015-16), MTNL (2018-19) and Air India (2018-19) show that all of their term loans are from public sector banks, except Air India where there is only one private sector bank. Further, if a PSE defaults on its loan repayment, resolution under IBC can help in the process of disinvestment.

The Public Enterprises Survey (2017-18) showed that 71 central PSEs are loss making, out of which 56 showed negative net worth. It is likely that several PSEs may not have been able to service their debts to their financial or operational creditors. Until 2016, these companies were subject to the restructuring process under the BIFR. However, the process of closure has been far from satisfactory. For example, in 2011, the Comptroller and Auditor General of India (CAG) in its report on closure of PSEs stressed on the need of professional insolvency practitioners to ensure maximum value is obtained either from restructuring or closure of the central PSEs. The Public Enterprises Survey (2015-16) showed that BIFR had listed 18 central PSEs for winding up and closure. But as on July, 2019, only two of those companies were actually closed. In the event of a default by a sick company, the IBC can greatly expedite the process of closure.


Under the older laws governing insolvency, due to multiplicity of processes, the High Court often played the role of being the main forum for settlement of claims. We have already seen that the High Courts, acting as the company court, have demonstrated high rates of pendency. For instance, the Official Liquidator in the Bombay High Court reported that out of 1464 cases pending before the court, 739 have been pending for more than ten years. The IBC has been formulated as a complete code for insolvency laws with specified tribunals and an administrative machinery for its enforcement.

We believe that there is nothing in the IBC that precludes its use by PSEs. Using the IBC to resolve the financially insolvent and bankrupt PSEs in a time-bound manner will facilitate and may even help expedite the process of disinvestment by the government. It can also have implications for the policy concerning restructuring and closure of PSEs.


The authors are researchers at NIPFP. We thank an anonymous referee for useful comments.