by Aneesha Chitgupi, Ajay Shah, Manish Kumar Singh, Susan Thomas and Harsh Vardhan.
Public finance researchers in India have paid great attention to debt and deficits. By now, the main messages of the field have started sinking into common knowledge: that it is good to run primary deficits in most years, so as to create space to surge the deficit once in a while when faced with a crisis. There is an adjacent field of public debt management that is equally important. Here, the strategic question is: How should the government borrow? From whom? Debt management strategy has not received the required level of interest.
A sound public debt management strategy must cater to three objectives:
There are four main pathways to choose from in debt issuance:
As with many other countries, we started out in India with the first method (monetisation of the deficit). This induces an economic distortion: the loss of monetary policy autonomy. A long journey of monetary policy reform took place, from the Ways and means agreement of 1993, to the Monetary policy framework agreement in 2015 that ushered in inflation targeting. This freed up monetary policy from the limitations imposed by debt management. In 2015, there was an attempt at institutional reform, in the form of the establishment of the Public Debt Management Agency (freeing up the Reserve Bank of India of the responsibility of issuing public debt), but this did not come to pass.
From 1993 onward, the main strategy for public debt management in India has involved method 2 in the list: a system of `financial repression’ where the government borrows from coerced financial firms. This is a tax upon financial intermediation. The interest rates discovered through government borrowing are important prices that impinge upon the economy. But these rates are distorted owing to the presence of coerced buyers of government debt. The lack of voluntary lenders creates the lack of strategic depth. The government is limited in how it can expand its borrowing when faced with special situations.
From the late 1990s onwards, economists and thinkers have sought to enhance fiscal prudence in India through the mechanism of fiscal responsibility law. It is increasingly clear that this does not work. In recent work, Datta et. al. 2023 show that the Indian constitutional arrangements frustrate the possibility of Parliamentary law imposing fiscal discipline upon the union government. Once this idea is internalised, there is one main path towards fiscal responsibility: market discipline. This requires removing the system of financial repression.
In this context, the question Who lends to the Indian state? attains importance. A recent paper by Aneesha Chitgupi, Ajay Shah, Manish Singh, Susan Thomas and Harsh Vardhan examines this question. For a period of 10 years, we assemble information from multiple sources, which were all available in the public domain, to examine the nature of lenders to the Indian state. Some discoveries that we make are:
This field is target rich with interesting questions, some of which are:
The field of public finance in India has studied deficits and debt. There has been work on the institutional arrangements for debt management (i.e. the establishment of the Public Debt Management Agency). There has been relatively little work on the economic reasoning, the strategic thinking for debt management. In this paper, we offer novel insights and facts for this journey. More research is required, at the interfaces between public finance, finance and public administration, to grow knowledge on the important field of debt management strategy.
by Renuka Sane and Manish Kumar Singh.
Gold plays a significant role in the portfolio of Indian households. Several explanations have been offered: gold is an important source of credit, it matters for socio-cultural and political reasons, provides women with agency as women are likely to have more control over the gold they own relative to financial assets. Research has, however, not paid adequate attention to the performance of gold as an asset class. Investment in gold is often brushed aside as irrational based on the evidence that gold has delivered near zero real returns (in USD) over a 100 year period (Siegel, 2014). In a new working paper, Sane and Singh (2022): "Does financial and macro policy explain household investment in gold?" We argue that investments in gold have to be seen in the context of Indian financial markets. Gold is a a far more sensible investment that international research would suggest.
Household saving is a function of the financial environment within which the household operates. The following characteristics of Indian markets are worth noting:
High inflation: India adopted a formal inflation target of 4 per cent within a band of +/- 2 per cent in August 2016. Before this, high levels and volatility of inflation had been a persistent problem in India. The average inflation in the four years prior to inflation targeting was around 7.26% - this dropped to 4.19% after the adoption of the framework (Patnaik & Pandey, 2020). When there is such high and persistent inflation, households will naturally look for instruments which are able to, at the very least, beat inflation, even if not provide a complete hedge.
Interest rate management: India has consistently followed a policy of managing long-term interest rates on government borrowings. This has led to an environment of low interest rates for government borrowing, and has prevented long-term yields from rising. Interest rates on fixed deposits which are benchmarked to long-term government yield is also relatively low and have been consistently falling over the 1999-2021 period from an interest of 9-10% to about 4%.
Volatility in equity markets: Emerging markets are generally more volatile than markets in OECD countries. The annualised 10 year standard deviation on the MSCI Emerging Markets Index was around 17%, while that of the MSCI World Index (based on large and mid cap representation across 23 Developed Markets (DM)) was around 13%. An asset that serves as a hedge assumes greater importance in emerging markets relative to developed markets.
Capital controls: One way to hedge a portfolio is to diversify across different markets. However, this has been difficult in India, owing to a complex framework of restrictions on the current and capital account till the year 2000. In 2000, the current account was made fully convertible, and a modified framework for capital controls was put in place (Patnaik & Shah, 2012). There continue to be restrictions, on both the current and capital account, which differ depending on the type of investor, and the assets in question.
Currency interventions: Patnaik & Sengupta (2021) study RBI interventions and find that when there has been pressure on the rupee to appreciate, the RBI has responded by intervening in the forex market and buying dollars. When, in the aftermath of the 2008 global financial crisis, there was pressure on the rupee to depreciate, the RBI allowed the rupee to fluctuate in this period. Indian investors, therefore, benefit from a larger depreciation of the rupee for those assets where the price is determined in international markets.
High inflation levels and volatility, low interest rates on account of financial repression, inability to invest in international markets until very recently, depreciation of the rupee have a bearing on the choices that are available to households. Financial repression changes the risk-return trade-off between fixed deposits and gold. Similarly in an environment where individuals are restricted from investing in overseas markets, gold offers a way for doing international diversification. These become important considerations as we evaluate the performance of gold vis-a-vis the Indian equity market.
We use data from June 1999-March 2021 and find that:
In the last 20 years, real returns on gold have always been positive.
Apart from a few years around 2018, gold has consistently beaten returns on fixed deposits.
RBI interventions in the currency market changes the dynamics of gold return for Indian households. Our regression estimates suggest that if the Indian rupee depreciated against the U.S. dollar by 10% in a month, then the gold price in Indian rupees increased on average about 3.63%. While the exchange rate pass-through is far from complete, it implies that currency interventions by the Reserve Bank of India have implications for the gold price that is seen by Indian investors.
Gold and NIFTY seem to have moved together till about 2008, after which NIFTY saw a sharp fall, while gold continued with its upward trajectory. The two asset classes moved together again till about 2014, and then from 2015 till early 2020. There seems to be a divergence in the series around 2014, when NIFTY was rising steadily while gold prices fell before rising again. Gold is a strong hedge against the NIFTY when measured in daily frequency. In the last 10 years, this relationship had become stronger.
The global minimum variance portfolio which only includes gold and NIFTY suggests a 63% weight to gold for target annual return of about 13%. As the target return increases, we see that the weight allocated to gold drops to about 3%. When one does a similar optimisation exercise including the S&P 500 returns, the global minimum variance portfolio suggests a weight of 46.5% for gold, 31.3% for NIFTY and 22.2% for SPX. Once international diversification is possible, the weight of gold has fallen by almost 16 percentage points. The confidence intervals, however, on these estimates are wide given the paucity of longer time-series data on returns.
Gold has provided the means to Indian households to overcome the difficulties associated with high inflation in a financially repressed macroeconomic environment with capital controls. Given the performance of gold, fixed deposits and NIFTY, and the difficulties of international diversification households have not been entirely unreasonable to hold gold in their portfolios. If policy has to channel household savings to more productive uses, it has to confront the underlying issues in the macroeconomic environment which make gold a preferred investment choice.
Patnaik, I. & Pandey, R. (2020). Four years of the inflation targeting framework. NIPFP Working Paper Series, No 325.
Patnaik, I. & Sengupta, R. (2021). Analysing India's exchange rate regime. India Policy Forum (forthcoming).
Patnaik, I. & Shah, A. (2012). Did the Indian capital controls work as a tool of macroeconomic policy? IMF Economic Review, 60, 439-464.
Sane, R. & Singh, M. (2022). Does financial and macro policy explain household investment in gold?, Dvara Research Working Paper Series No. WP-2022-01.
Siegel, J. J. (2014). Stocks for the long run: The definitive guide to financial market returns and long-term investment strategies. McGraw Hill.
Renuka Sane is a researcher at NIPFP, New Delhi. Manish Kumar Singh is a researcher at IIT Roorkee.
by Tapishnu Samanta and Manish Kumar Singh.
Stockholm syndrome is a state of the mind where a captive develops a psychological alliance towards his or her captors to the extent of defending them (Smith, 2009; Fabrique et al 2007). The term was coined in 1973 by Swedish psychiatrist Nils Bejerot during the Kreditbanken Bank robbery investigation in Stockholm, where four employees, taken hostages, defended their captors and refused to testify against them (Bejerot 1974). At the heart of Stockholm syndrome lies a person who implicitly or explicitly exerts power, control and influence over another person without him noticing that his behaviour is almost to the degree of blind loyalty. This label has been used to define circumstances of incest victims (Carver 2007), prisoners of war (Hunter 1988), political prisoners (Wardlaw 1982), suicidal terrorists (Speckhard 2005), victims of home violence (Walker 2016), rape trauma (Burgess & Holmstrom 1974), sex trafficking (Canada Department of Justice 2012), prostitutes (Karan 2018; Kathleen 1984; Farley 2003), and cases of elder abuse (Scaletta 2006). Several authors have also used Stockholm syndrome to define the relationship between the state and the society, where the citizens tend to be loyal despite the several instances of the country trying to exploit their fundamental human rights (Hudson 2014; Chu 1999).
This concept has been extended to organisational culture, also known as the Corporate Stockholm syndrome where employees of a company start to identify with, and are exceedingly loyal to, an employer who is manifestly hostile to their self-interest (Adorjan et al 2012; Ullrich 2014; Logan 2018). This has become an area of interest in health and labour economics because of the severe health ramifications. India has been consistently ranked among the worst countries for workers' rights (see the ITUC Global Rights Index). A fragmented society, massive unorganized sector, and weak state capacity can be a breeding ground for labour force exploitation (Harriss-White & Gooptu 2009). In this article, we present evidence of Stockholm syndrome in Indian corporate culture from a small pilot study. This study should be seen as a precursor to more rigourous research that may be conducted in the future.
In-depth interviews were conducted with ten white-collar employees with at least one year of work experience. They were first introduced to questions such as ideal working hours, proper working conditions, and ethics of overtime work. They unanimously agreed that eight hours of working shift should be suitable in an organization and that all overtime duties must be sanctioned only for extreme situations and compensated. They were then asked personal questions related to their corporate experience.
When asked about their working hours, they worked from Monday to Friday for a minimum of nine hours and were frequently burdened with overtime duties. They were occasionally verbally and mentally abused by their managers, especially when there were tight deadlines and tremendous work pressure. Most of them had even stayed up the entire night on a few occasions. It was quite evident from the in-depth interviews that their managers mistreated all the subjects through verbal abuse, long working hours, overtime, and negligence towards their mental and emotional wellbeing. However, they also agreed that they were happy with their work-life as it offered excellent learning opportunity and displayed great loyalty towards their organizations. All the candidates accepted that not being compensated for overtime work made them annoyed and occasionally frustrated, but argued that those conditions were necessary for the success of the organization.
A detailed survey questionnaire was developed based on this data for further qualitative analysis. A pilot survey was conducted with a sample representing the top 5% of the Indian white-collar employees in terms of salary. Fifty-one respondents with at least six months of work experience and employed with organizations in India participated in the survey. The respondents consisted of 76% male and 24% female participants. 86% of the participants represented the service sector, while the remaining 14% represented the manufacturing sector. The group represented 90% of people in the age group of 21-30 years, 6% in the age group of 31-40 years, and 4% in the age group of 41-50 years. Culturally, the participants were from diverse languages and different Tier-1 cities.
The first part of the survey contained personal questions mostly aimed to identify the perceived level of abuse that the employees face in their respective organizations. The corporate abuse was classified into six categories, viz. verbal abuse, financial abuse, mental abuse, physical abuse, sexual abuse, and abuse of work-life balance. Each of these abuses was further classified into five levels viz. not at all, slightly, somewhat, moderately, and extremely. A Likert scale was used in the survey to capture the levels of each of the reported abuses. The second part of the survey asked whether they would recommend their organizations to their friends and relatives.
Table 1 shows the level and extent of abuse prevalent in Indian organizations based on the responses. Participants who responded "extremely", "moderately", "somewhat" or "slightly" for any of the six abuse categories were cosidered victims of corporate abuse in that category. Over 50% of the respondents (27 out of 51) reported financial and mental abuse in their organization. Further, around 40% of the participants (20 out of 51) reported verbal abuse. While less than 10% reported physical abuse, none of the employees reported sexual abuse in their organizations. It must be noted that the companies represented by the respondents are all corporate-level jobs, and yet physical abuse was reported by the employees.
| Verbal abuse | Financial abuse | Mental abuse | Physical abuse | Abuse on Work-life balance | |
|---|---|---|---|---|---|
| Extremely | 2 | 4 | 1 | 0 | 6 |
| Moderately | 4 | 1 | 3 | 0 | 8 |
| Somewhat | 3 | 8 | 11 | 3 | 13 |
| Slightly | 11 | 14 | 12 | 1 | 13 |
| Not at all | 31 | 24 | 24 | 47 | 11 |
| Grand Total | 51 | 51 | 51 | 51 | 51 |
Moreover, the level of financial and mental abuse reported by the employees is also quite high, with 4 out of the 51 participants reporting extreme financial abuse. Since the numbers are self reported, this may be due to fault in the appraisal system, career stagnation in the current organization, or the participants overrating themselves as high-performing employees. The recorded abuse on work-life balance is also exceptionally high, with around 78% of the employees reporting so.
One would believe that the amount of time an employee spends with an employer is inversely proportional to the level of abuse, which means that if an individual is treated well in an organization, he continues to work loyally in the firm and vice versa.
Figure 1 shows the relation between the work experiences of the abused employees with their latest employer against the degree of various abuses. Except for verbal abuse, in all other cases, we found a positive relationship between the level of abuse and the time spent with the employer. The positive slopes observed here suggest that employees stay longer with an abusive employer and the magnitude of the correlation varies from 0.09 for financial abuse to 0.35 for work-life balance abuse, as shown in Table 2.
| Verbal abuse degree | Financial abuse degree | Mental abuse degree | Work-life balance abuse degree | |
|---|---|---|---|---|
| Work experience with last/current employer | -0.0102 | 0.0903 | 0.1132 | 0.3460 |
Based on Table 2, we can also infer the abuse categories which go undetected in an individual's decision to leave a particular job. Correlation analysis suggests the following order: Verbal abuse > Financial abuse > Mental abuse > Abuse on work-life balance. Near zero correlations (-0.01) between verbal abuse and work experience suggest people are almost indifferent to verbal abuse. Financial and mental abuse show small positive correlations (0.09 and 0.11 respectively) suggesting the presence of mild Stockholm syndrome. People are aware of it but instead of acting upon it, people are actually staying a little longer with the job. Abuse of work-life balance stands out with a positive correlation of 0.35. This also suggests how mental abuse and abuse of work-life balance might get undetected. A possibility that better employees leave the organization early and those who stay longer find it difficult to get placed in better jobs elsewhere may also partially explain this result.
Here we analyze if there exists any pattern between recommendations made by employees to their relatives or friends to join the organization and the different types of abuse that they face in their jobs. The results obtained from the responses are shown in Table 3. Note that we have assumed that the participants who responded "Maybe" are considering recommending their organizations to others because any employee who is tormented by the abuse in his organization would respond with a clear "No". Hence, "Maybe" as a response has been recognized as an affirmative or a "Yes."
| Recommendation to Join | Verbal abuse | Financial abuse | Mental abuse | Physical abuse | Abuse on Work-life balance | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Yes | No | Yes | No | Yes | No | Yes | No | Yes | No | |
| 20 | 31 | 27 | 24 | 27 | 24 | 4 | 47 | 40 | 11 | |
| Yes (in %) | 90.00 | 87.10 | 92.59 | 83.33 | 92.59 | 83.33 | 100.00 | 87.23 | 85.00 | 100.00 |
| No (in %) | 10.00 | 12.90 | 7.41 | 16.67 | 7.41 | 16.67 | 0.00 | 12.77 | 15.00 | 0.00 |
The table highlights that under the verbal abuse category, we have 20 people who underwent verbal abuse while 31 said there was none. Of the 20 people who reported verbal abuse, 90% would recommend relatives and friends to join the firm. Similarly, under the financial abuse category, we have 27 people who reported financial abuse while 24 said there was none. Of these 27 people who said yes to financial abuse, 92.59% would recommend relatives and friends to join the firm.
Table 3 suggests that most of the employees (over 90% on average) recommend the current organization to their friends and family members. Employees reporting abuse in their organizations are also supporting their employers to friends and families, even more than the non-abused individuals. The fact that a higher proportion of the abused individuals are recommending their organization to friends and family (except for the abuse on work-life balance) than the non-abused ones is even more surprising. For example, in the case of financial abuse, 92.59% of individuals who feel financially abused at work would recommend the organization to their friends and family, while only 83.33% of non-abused individuals would recommend it further. Similarly, 100% of the employees reporting physical abuse in their organization would recommend their employers in comparison to 87.23% of those who haven't expressed physical abuse. Although, the only exception to this pattern is observed in abuse on work-life balance, yet as much as 85% abused individuals have supported their employers further. This gives us a clear indication that despite being exploited by their employers, the majority of employees are recommending their firms to others.We provide suggestive evidence that corporate Stockholm syndrome is quite prevalent in Indian organizational culture. Searching for a rationale, for most people, due to the immense value that work holds, the threat of losing one's job is a powerful motivation to comply at the beginning. However, with time the employees get emotionally attached to the workplace and develop loyalty towards it. Camaraderie and moral suasion - the view that it was the organization that offered them a monthly salary and the little sacrifice they made was for the good of the organization - helps them justify the abuse. They also believe that it was inevitable while working in a project and was sometimes necessary for the success of the project. This deep loyalty leads them to rationalize the poor treatment of the employer as a necessity for the good of the organization. Some of the employees may even develop a belief that some form of abuse is a norm across the industry irrespective of the company they work for.
It must also be noted that the respondents represent the upper segments of Indian employees in terms of salary, who have not only argumentative power but also the capability of switching jobs. We are of the opinion that if this is prevalent at the very top, then significant concerns would lie in the unorganized industrial sectors. With that being said, since people suffering from corporate Stockholm syndrome most often do not realize about the plight they are already in, no easy solution can be found.
Some employees have created websites/blogs with the provision for others to anonymously rate and review their organizations, and have become immensely popular in a quick time (see glassdoor.com, greatplacetowork.in). If more and more firms become concerned about their social image, online content related to employee concerns may likely cause a considerable impact.
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The authors are researchers at IIT Delhi. We are thankful to two anonymous referees.
by Surbhi Bhatia, Manish Kumar Singh, and Bhargavi Zaveri.
Since the enactment of the Insolvency and Bankruptcy Code (IBC) 2016, studies undertaken to estimate the insolvency resolution time have provided varying estimates. As part of the World Bank's 'Ease of Doing Business' outcomes 2018, the estimate for time taken to resolve insolvencies in India is approximately 4.3 years. Felman et al. (2018) survey the 12 large cases referred for resolution under the IBC by the Reserve Bank of India in 2017, and find that while the larger cases have been in resolution for more than 500 days, the smaller cases are also taking up to 350 days from the date of admission by the National Company Law Tribunal (NCLT). Shah and Thomas (2018) present a survivor function on the cases admitted at the NCLT and find that at the end of 270 days, there is an 80% probability of a case still ongoing. We build on this approach to estimate the time taken in insolvency resolution processes triggered by different kinds of litigants and before different benches of the NCLT.
Our findings have three direct implications. First, estimation of survival function using case level data provides an empirical methodology for measuring time taken to resolve cases. Second, the probability of case completion within a given timeframe, thus computed, allows stakeholders to plan their affairs and resources appropriately. For example, a probability estimate of an insolvency case seeing an outcome within a certain timeframe offers valuable information to a creditor on making a strategic choice of settlement or pursuing resolution. Third, for policymakers, our findings offer insights into the manner in which the eco-system of stakeholders under the IBC, is evolving over time.
We find that the probability of seeing an outcome within 180 days from the date of admission is less than 5%. However, it picks up once the 180 day deadline is passed. Within 270 days, the chances of case closure are between 10 to 30% depending on the bench and case characteristics (e.g., creditor type). We observe high closure rate just past the 270 day period. Within 360 days of admission, the probability of seeing an outcome is significantly higher (30 to 70%). Quicker outcomes (liquidation or resolution) are observed for resolution proceedings triggered by the debtors themselves. Similarly, proceedings triggered before some benches result in resolutions speedier than those before some others.
The IBC provides for a linear process for corporate insolvency resolution beginning with the filing of an insolvency petition before the NCLT. Once a petition is filed, the tribunal can admit or reject it. If it is admitted, a creditors' committee is constituted and a timeline of 180 days is provided for the submission of a resolution plan. If no resolution plan is submitted, the NCLT is required to pass an order for the liquidation of the firm. The timeline of 180 days is extendable to 270 days (in exceptional circumstances), with the approval of the NCLT. These two sets of timelines provide a natural setting for conducting the analysis. We track all the cases that are admitted by the NCLT from the date of their admission until the date of the order of the NCLT either approving a resolution plan or directing the liquidation of the debtor.
For our analysis, we use the Finance Research Group Insolvency Dataset on cases filed before the NCLT. We combine this with data on outcomes of cases published by the Insolvency and Bankruptcy Board of India (IBBI) for admitted insolvency petitions. The result is a dataset of all the insolvency petitions admitted by the NCLT. Our study period extends from December 1, 2016, until June 30, 2018. The data provides information on case ID, the bench at which the case was filed, who filed, type of creditor, the date on which the insolvency petition was admitted, and the date on which the final order was passed (resolution or liquidation). We compile this data for eight out of the nine benches (Ahmedabad, Bangalore, Chandigarh, Chennai, Hyderabad, Mumbai, New Delhi and Kolkata) of the NCLT that were functioning during the study period. Information on Guwahati bench is not recorded in the dataset.
Our final sample consists of 761 admitted cases. Table 1 shows the time taken by the closed cases, as on June 30, 2018. It is observed that 24 cases across all benches were closed within the first 180 days of their admission. 73 additional cases got closed between 180 and 270 days of their admission. If we extend the timeline by another 90 days, 62 more cases get closed. As on 30th June 2018, we find 76 cases which are ongoing for more than a year.
| Time taken (in days) | Cases closed | Cases ongoing |
|---|---|---|
| < 180 | 24 | 314 |
| 181-270 | 73 | 199 |
| 271-360 | 62 | 76 |
| > 360 | 9 | - |
Table 2 shows details of the cases admitted during the study period, across the four benches of NCLT with the highest workload. It outlines the number of cases admitted together with the outcome (whether liquidated or resolved). To reduce the upward bias, for the closed cases, we also show the median time taken to reach the final outcome. We find that the median time varies between 200 and 280 days depending on the bench. While summary statistics of this nature are useful, they do not offer any insight on the probability of a case having an outcome within a given timeframe.
| Bench | No. of insolvency petitions admitted | Resolution (a) | Liquidation (b) | Closed (a+b) | Median time to reach outcome |
|---|---|---|---|---|---|
| Mumbai | 204 | 8 | 32 | 40 | 279 |
| New Delhi | 181 | 4 | 10 | 14 | 267 |
| Chennai | 94 | 4 | 27 | 31 | 213 |
| Ahmedabad | 77 | 1 | 19 | 20 | 203 |
In the past, survival analyses have been used to understand judicial delays in tribunals (Datta et al. (2017)). While the same principle could potentially be applied to understand judicial delays for cases under IBC, there is a critical difference between cases before the NCLT under the IBC and cases before other quasi-judicial tribunals. This distinction stems from the resolution process being led entirely by the creditors and other stakeholders with limited touchpoints with the judiciary. For this reason, case completion within the timeline of 180 or 270 days, cannot be attributed to judicial delays alone. In the absence of more data on the time spent in litigation during the different phases in a resolution process, a survival model cannot be directly applied to analyse judicial delays under the IBC. Therefore, applying the survival model contextually to the IBC will yield findings on the duration that the entire resolution process takes.
From the date on which an insolvency petition is admitted, we track the case up until 30th June 2018. For the purpose of this study, we define the event as case completion, resulting in resolution or liquidation. The event variable is equal to 1 if the case got closed within the study period and 0 otherwise (still ongoing). The dependent variable is the duration for which a case remains open. For cases which saw a definite outcome, the duration is calculated as the difference between the admission and the outcome date. For ongoing cases, the duration is the difference between admission and analysis date (30th June 2018).
We assume that the dependent variable duration follows a continuous probability distribution d(t). In this case, the probability that the duration will be less than t days will be:where "T" denotes the duration of the insolvency petition. To estimate how long the cases stay unresolved in our sample,
we calculate the survival probability S(t) using non-parametric (Kaplan-Meier) estimation:
Figure 1 shows the probability of survival (case ongoing) for the top four benches of the NCLT (based on the number of admitted cases). The X-axis shows the number of days that a case takes from the date of admission until the outcome. The Y-axis shows the probability of the case continuing up to a given number of days. The black line, based on all observations, indicates that on average:
Comparing across benches, we see that the survival curves for Mumbai and Delhi lie above the national average, thereby indicating a much lower probability of a case closing at either of the benches. At the end of 270 days, the probability of case closure at Ahmedabad and Chennai bench moves upto 30% while it stays at 14% and 8% for Mumbai and Delhi respectively. Within a year's time, the outcome probability is 60%, 41%, 36%, and 21% for Chennai, Ahmedabad, Mumbai, and Delhi respectively.
Table 3 shows the estimated survival probability (with 95% confidence interval) at various reference points (180, 270 and 360 days). A narrow confidence interval suggests that the observed survival probability is very close to the estimated one with minor deviations. For 180 days, confidence intervals are narrow for all benches, suggesting near zero probability of case completion. Moving to 270 days, the variations widen. The survival probability drops considerably for Chennai and Ahmedabad, but the confidence intervals widen. This points towards increased fluctuations in the duration of completed cases. We find a similar trend across all benches as we move to 360 days.
| Full sample | Mumbai | New Delhi | Chennai | Ahmedabad | |
|---|---|---|---|---|---|
| T > 180 days | 0.9530 | 0.9856 | 0.9892 | 0.9405 | 0.9191 |
| (0.9347-0.9716) | (0.9659-1) | (0.9685-1) | (0.8913-0.9925) | (0.8536-0.9898) | |
| T > 270 days | 0.7818 | 0.8567 | 0.9161 | 0.7211 | 0.6981 |
| (0.7437-0.8218) | (0.7956-0.9225) | (0.8577-0.9784) | (0.6221-0.8359) | (0.5828-0.8362) | |
| T > 360 days | 0.5627 | 0.6410 | 0.7961 | 0.3983 | 0.5943 |
| (0.5096-0.6214) | (0.5483-0.7494) | (0.6979-0.9080) | (0.265-0.5986) | (0.4666-0.7569) |
For the reasons explained above, the probability estimation cannot be attributed to the judiciary alone as the resolution process is driven by the creditors' committees. The actual time until the outcome will depend on various factors such as the complexity of the case, the size of the debtor, the composition and number of creditors on the creditors' committees, and the propensity of the creditors or the debtor to litigate. Firm characteristics also differ across jurisdictions. So variation in duration across benches should not be interpreted as the lack of judicial capacity. The lower probability of a faster outcome before the Delhi and Mumbai benches of the NCLT may be related to the complexity of the cases handled by these benches.
The inference made above is corroborated by Figure 2 and Table 4, which depicts the probability of case outcomes for different type of litigants. Cases which are filed by corporate debtors are more likely to see earlier outcomes, relative to cases filed by creditors. The probability of insolvency triggered by a debtor seeing an outcome within a year of admission of the petition is 70%. On the other hand, where the petition is filed by an operational or financial creditor, this probability drops to 40%.
| Full sample | Corporate debtor | Financial creditor | Operational Creditor | |
|---|---|---|---|---|
| T > 180 days | 0.9530 | 0.9469 | 0.9655 | 0.9421 |
| (0.9347-0.9716) | (0.9063-0.9892) | (0.9406-0.9910) | (0.9092-0.9761) | |
| T > 270 days | 0.7818 | 0.6874 | 0.8341 | 0.7869 |
| (0.7437-0.8218) | (0.6038-0.7825) | (0.7797-0.8923) | (0.7257-0.8532) | |
| T > 360 days | 0.5627 | 0.3470 | 0.6343 | 0.6330 |
| (0.5096-0.6214) | (0.2573-0.4678) | (0.5428-0.7412) | (0.5546-0.7225) |
By analysing the data relating to cases that have undergone the IBC process in its entirety, we put forward a new approach to understand time to insolvency resolution. Using survival analysis, we estimate the probability of a case ongoing across different reference points. The methodology is robust to censoring. Case dropouts on account of reasons such as settlement or withdrawal will simply modify the probability distribution of duration. Since we don't have censored observations at the time, our point-in-time estimate is just the empirical distribution of the duration.
This analysis can also be extended. With a more detailed break-up of case-level data, it is possible to use this framework to estimate the time taken across different phases of the resolution process. This will be suggestive in bringing into focus the bottlenecks in the process. A time-varying analysis can also be used to evaluate institutional performance. If the probability of timely resolution consistently increases, this implies that the institutional eco-system is evolving in the right direction. This measure will be especially important for tribunals which are set-up with a speedy disposal in mind.
The RBI-12 cases under the IBC by Felman J, Marwah V and Sharma A, Working paper on file with the authors, 2018.
The Indian bankruptcy reform: The state of the art, 2018 by Shah A and Thomas S, 22 December 2018, The LEAP blog.
Understanding judicial delay at the income tax appellate tribunal in India by Datta P, B.S. Prakash S and Sane R, Working Paper 208. National Institute of Public Finance and Policy, 2017.
The authors are researchers at Finance Research Group at IGIDR. They acknowledge useful discussions with Ajay Shah, Susan Thomas and Anjali Sharma.
by S. Ramann and Manish Kumar Singh.
An issue on the front burner for the Government today is how to raise financing for the trillion dollars of infrastructure investment required in India. The banking system is facing significant stress, and cannot finance the second wave of investment in infrastructure as it did with the first wave from 2002 to 2012. In this discourse, so far, the main strategy that has been emphasised is the development of the corporate bond market, which includes setting up trading infrastructure, removing capital controls, removing taxation of non-residents, removing barriers against currency derivatives, etc.
We would like to propose one additional element that could help infrastructure financing. We go back to infrastructure financing in the US in late 19th century, where future consumers of train trips became investors in railroad projects. This was done using a form of adebt instrument called User Rights (UR). In a recent paper, User right as a mezzanine capital investment: Innovations in infrastructure debt financing, we analyse this approach to infrastructure financing. In modern terminology, this is crowd-funding for infrastructure from potential consumers. The key insight is to harness users as financiers with a high yield, tradable debt instrument. For a price paid at the time of financing the project, the UR entitles the holder to a rebate on user charges for that project.
As one example, in the paper we analyse a UR that offers a 45\% rebate on fares for one-way journeys on Mumbai Metro Phase I, Line I, for a period of 30 years from the commencement of its operation.
The UR gives the holder the right to receive a fixed rebate for a fixed period of time when using a well-identified infrastructure facility. What is the fair value of such a right? The price is calculated as the Net Present Value (NPV) of the future stream of rebates. The discount factor would include a risk tolerance parameter based on the probability that the facility will become operational and on the probability distribution of the future price of the facility.
We calculate that it is possible to design a Mumbai Metro UR, priced at Rs.13,978, which gives a saving for the user that starts at Rs.1,381 in the first year, and steadily increases up to Rs.2,825 in the final year. The implied rate of return works out to 10.5 percent, which is higher than the return from investment in tax free PSU bonds at 8.7 percent. The tax free status is not mandated by the government: since no interest is paid to UR holders, there is no tax. The gain is solely from savings on ticket cost.
Since the UR holder is entitled to a rebate, the UR becomes like an insurance contract for the UR holder compared to non-UR holders who use the operational facility. In the paper, we demonstrate other situtations under which the URs can be used strategically to better manage the risk of future increases in the ticket price. The more the final price varies from the scheduled increase in ticket price, the larger is the benefit received by the holder of user rights.
We use a simulation to estimate savings to the project by financing using URs. The simulation is calibrated using the financial information of other metro projects in India. The simulation shows that when the project collects money against sale of user rights at the start of the construction period, the saving in interest payments is high enough to improve project viability. In the Reliance Metro example, substituting a part of debt (which is loans at 11.25 percent) by the issue of user rights, improves the NPV by about 9 percent. The cost of servicing user rights is postponed to the revenue generating phase thereby reducing the required working capital.
Infrastructure financing through URs also has many other economic advantages:
Higher standardisation and simplicity - Unlike loans and bonds, URs are standardised and comprehensible, and lend themselves to be traded at exchanges. Easy entry and exit can facilitate wider investor interest, leading to a more heterogeneous participant base which can likely lead to more liquid markets compared to traditional bondsinstruments.
Better accountability - As UR-holders, consumers would have higher incentives to monitor infrastructure projects compared to traditional financial intermediaries. Consumers interests are better aligned with better monitoring of the project, which could impose better project governance, compared with banks and asset management companies who suffer from agency problems. Further, users as financiers to infrastructure projects may inject direct pressure on elected governments, and hold them to a higher standard of accountability on such projects.
Scalability across projects -- The UR as a financing instrument can span across any infrastructure project -- by the government, under a public-private partnership or even as a purely private initiative -- that produces a service that could be consumed by individuals. Examples include hospital services, community solar power plant or water and sewerage services. The degrees of assurance to the investing public may vary with the type of operator and arguably the degree of confidence in the operator.
Augment existing credit sources -- The government is hard pressed to turn to traditional sources of infrastructure financing in India. Commercial banks face high asset-liability mismatch from financing long term infrastructure projects. Bond-based financing is constrained by the lack of resolution when projects fail. Structural constraints of infrastructure projects lead to low ratings by credit rating agencies. This, in turn, poses a barrier for these new projects accessing debt financing from institutions with long term liabilities such as insurance and pension funds. Foreign currency denominated borrowing imposes forces additional mismatch of currency risk. URs avoid all these problems and could hence become one interesting component of infrastructure financing for some projects.
URs are of course not the panacea for all ills associated with infrastructure financing. Large initial investments, long gestation periods, unanticipated construction delays leading to incorrect projections, collection risk of payables and reneging of contracts are major risks in infrastructure projects. These factors also lead to higher uncertainty in assessing the discount rate used in the NPV calculation to price these instruments, and can lead to high price volatility. The advantage that URs have over the traditional credit instruments are that the risks are spread over a much larger audience, and that re-pricing of risk is transparent.
A key concern would be on protecting the rights of the UR holders if the project were to fail, and the facility failed to materialise. One approach could be to invoke an insurance mechanism or debt reserve ratio to repay the principal amount of the investors. Such a mechanism would not come for free and would be incorporated into the cost of the project, which in turn would be borne by the URs holders. This might have marginal price impact if such costs are priced across millions of URs issued. Another alternative that we may visualise is for agencies such IIFCL or LIC to provide a guarantee as part of the UR. This could be financed from an independent source.
In a country that faces multiple challenges in raising capital to support an escalating infrastructure financing requirement, URs can be a useful and innovative debt instrument to tap new funds. URs raise capital based on legitimate expectations of urban residents for consuming infrastructure services. More importantly, it empowers the consumer as a stakeholder which could lead to better governance of long term public goods projects compared to the traditional financial intermediaries as their agents.
