Issues with the regulation of Information Utilities

by Sumant Prashant, Prasanth Regy, Renuka Sane, Anjali Sharma, and Shivangi Tyagi.

The Insolvency and Bankruptcy Code, 2016 (IBC) provides for the speedy resolution of insolvency. The process described in IBC hinges on the assumption that information will be easily accessible to the parties involved. It is for this purpose that IBC provides for the establishment of Information Utilities (IUs). As envisaged in IBC, as well as the Bankruptcy Law Reform Committee Report, IUs are repositories of information regarding debt and default, and are required to be able to produce this information quickly. This information can then be used for many purposes. For instance, the Courts can use it to decide whether to send a debtor company into a resolution process. But for this information to be widely used, it is essential that Judges, Insolvency Professionals, and other parties must be able to trust this information implicitly.

The timelines specified by IBC are quite strict. They can be met only if IUs stand ready to provide all requisite information quickly. IBC provides little guidance on how IUs are to function, leaving the details to subordinate regulation. A Working Group on IUs was set up by the Ministry of Corporate Affairs to draft the regulations governing IUs. The Working Group's suggestions (Draft Regulations) were put up for public comments. Subsequently, an Advisory Committee discussed the public comments, and the final regulations (IU Regulations) were notified on 31st March, 2017.

However, the regulations have some fundamental problems which are likely to impede the efficient and transparent functioning of IUs. In this article, we highlight some of these problems.

Core Services

IBC defines "core services" to be a set of services every IU has to provide. This includes accepting information, authenticating and verifying it, storing it, and providing access to it. There are several issues with how the current regulations treat the provision of core services:

1. Authorising representatives: Regulation 18(5) of the IU Regulations says:
   

   An information utility shall provide a registered user a functionality to enable its authorised representatives to carry on the activities in sub-regulation (1) on its behalf.

   This can be very dangerous, because of the possibility of misuse. For instance, can a bank be a registered representative of its borrower? Imagine a situation where an individual takes a loan from a lender, and one of the signatures among the many he signs in the paperwork authorises the lender to be his representative for filing information with an IU. The lender can now declare, on behalf of the borrower, that the borrower has defaulted. This is a clear conflict of interest.
   

   This provision lends itself to misuse by the borrower, too. A borrower may borrow money and confirm this debt in an IU, but he could later claim that some authorised representative committed fraud.
   

   If the functionality of enabling authorised representatives is desired, appropriate safeguards need to be added to the IU Regulations.
   

2. Registering users: According to section 214(e) of IBC, IUs are supposed to get the financial information authenticated before storing. But 18(1) of the IU Regulations suggests registration only for submitting and accessing information. Does this mean that unregistered parties can authenticate information? If yes, it can lead to the danger that IU records will have little sanctity in court.
   

3. Accessing information from other IUs: Regulation 19(3) of the IU Regulations states that a user can access information stored with an IU through any IU. There are several issues here:
   
   • This is commercially sensitive information. We are asking IUs to share information they have with all other IUs. Can the destination IU store this information or use it in any way?
   • If incomplete information is provided at the time of financial information retrieval, it will not be clear whose fault it is: the primary IU's or some more distant IU's.
   • How is this to work? How are the other IUs to provide this info "directly" to the user? Presumably the intent is to avoid routing the financial information through the destination IU, but this is contradictory and unclear.

   The Draft Regulations expect that the user (or software deployed by him) would be able to query multiple IUs inexpensively and in parallel, as happens every day in online air-ticket booking. This is a simple and straightforward architecture that avoids the problems above.
   

4. Acknowledgement: Regulation 20 of the IU Regulations mandates that the IU should provide an acknowledgement. The acknowledgement is important to ensure that the IU has not manipulated or lost information. For this reason, the acknowledgement must be irrepudiable. In the Draft Regulations, this is achieved by ensuring that:
   
   • The acknowledgement should echo the information submitted, along with the identities of the persons submitting and authenticating the financial information;
   • It should be digitally signed by the IU.

   The IU Regulations do not contain these requirements. Without them, it is difficult to detect if the IU loses data or manipulates it in connivance with parties to the debt. The information in the IU loses its sanctity, so that judges can no longer trust it.
   

5. Accepting documents as part of information submission: Regulation 20(1) of the IU Regulations says:
   

   An information utility shall accept information submitted by a user in Form C of the Schedule.

   Items 37, 50 and 56 of Form C lay down the documents to be attached as proof. This suggests that an IU has to accept documentary proof of the financial information being submitted.
   

   This is a clear problem. The design of IBC intended IUs to be an electronic repository of financial information, and not a document management system. That is why the requirement of authentication and verification of information submitted to an IU was envisaged. While it may be possible for IUs to accept documents in electronic form, even this process creates two challenges. First, storing documents will add to the cost of the IU infrastructure, which will then be passed on to users. This may make storing credit contracts in an IU expensive and may disincentivise users from doing so. This in turn will pose fundamental viability challenges for the IU business model. Second, if an IU stores financial information as well as documents, its not clear whether both will need to be matched, and if so on whom the responsibility of doing so will fall upon.
   

6. Information of default: Regulation 21(2)(a) of the IU Regulations places an obligation on the IU to communicate information of default to all creditors. The question arises, which creditors: the creditors on the same IU or the creditors of that debtor on other IUs as well? The IU that has learnt of default does not know of the creditors of that debtor on other IUs, but IBC clearly intends that all creditors of a debtor should learn of default, whichever IU they are on.
   

   The Working Group Report thinks this through properly: an obligation is placed on each IU to inform all IUs about default, and also on each IU to inform all creditors of a defaulting debtor.
   

7. Marking records as erroneous: Regulation 25(2) suggests that a user can unilaterally mark any information as erroneous. This is very dangerous. A process needs to be specified for correcting errors, and it should involve confirmation by the counterparties, just like any other information that gets to the IU.
   

8. Outsourcing: Regulation 30(2)(a) of the IU Regulations says:
   

   An information utility shall not outsource the provision of core services to a third part service provider.

   This clause is problematic, as it can create operating inflexibility for IUs. It is unclear how broad this clause is. For example: does this mean that the IU platform cannot be outsourced, or does this outsourcing ban apply to data center and related services, technology maintenance contracts, technology support personnel, physical security including guards, etc?
   

   Technically, it can be read as an IU having to create every component of its core services delivery entirely on its own. This will increase the time taken for an IU to be set up, as well as add to the costs of service delivery by an IU.
   

   Due to this problem, the Working Group Report suggested that outsourcing of core services could be possible, subject to approval by the IBBI. Alternately, instead of a blanket ban on outsourcing, the IBBI may consider a two stage outsourcing structure. First, a narrow list of services, such as authentication and verification, may be classified as those that cannot be outsourced. For the remaining, an outsourcing model similar to the one that the RBI follows for its regulated entities may be followed. Under this model, two elements are taken into consideration by the regulator when allowing outsourcing: (1) that the standards of service for the user remain the same, whether the components of service delivery are in-house or outsourced; (2) the primary liability, even in case of outsourced services, lies with the regulated entity.
   

9. Portability of records from one IU to another: Since IUs have pricing freedom, if they charge for storage, there is a danger that they may increase the fees substantially if users whose data is with them cannot move their data to another IU. To prevent such price-gouging, the Draft Regulations provide that any user may migrate his information from one IU to another IU, and the source IU is prohibited from charging for this facility. The manner in which the IU Regulations seeks to avoid this problem is through its declaration that fees should be a reasonable reflection of the service provided. But this requires the Board to form a view as to what is a reasonable fee. The solution suggested by the Working Group uses the market to achieve the same outcome in a less intrusive manner.
   

IU Records as Evidence

1. IU records admissible as evidence: Regulation 30 mandates that an IU shall adopt "secure systems" (as defined in the Information and Technology Act, 2000) for information flows. However, this alone does not ensure that the information stored in IUs will be admissible as evidence.
   

   The Draft Regulations provided the information stored in an IU should conform to requirements laid down in section 65B of the Indian Evidence Act, 1872 (Evidence Act). This section of the Evidence Act lays down the standards for storage and maintenance of electronic records so that they are admissible as evidence.
   

2. Authentication and Verification: The manner in which the terms "authentication" and "verification" have been used in the IU Regulations creates confusion. It is not clear when authentication and verification will take place, after or before the information is submitted.
   

   As per Regulation 20(2)(ii), on receipt of information by an IU, the submitter of information will be provided with terms and conditions of authentication and verification of information. It is not clear why the terms and conditions should be provided once the information has been submitted. The user should be aware of these terms before the information is submitted to an IU.
   

   Regulation 21(1) states that on receipt of information about a default the IU shall expeditiously start the process of authentication and verification. This raises following questions:
   

   • Why is an IU is required to act expeditiously once information of default is received? The process of authentication and verification should be followed in case of any information received and not just for default.
   • What is meant by 'expeditious'? IUs should act expeditiously whenever any information is submitted and not just in case of default.

   Regulation 23(2)(b) and (c) states that an IU shall enable the user to view the status of authentication and verification. It is not clear why the status of authentication is required after information has been submitted. IBC mandates that information should be stored only after authentication, so an IU should never store any unauthenticated information in the first place.
   

   The Draft Regulations addressed the above issues by obligating an IU to do the following:
   

   • Once information is submitted, the IU should make the information available to concerned parties for authentication.
   • An IU should verify the identity of the concerned party before allowing it to authenticate the information, so that there is no unauthorised access.
   • Once information is authenticated, the IU should store the information in such a manner that it cannot be lost or tampered with.

Obligations on IBBI

1. Access to IU records by IBBI: Regulation 23(1)(e) provides that the IBBI will be allowed to access any information from any IU. It doesn't impose any restrictions or conditions for accessing this information.
   

   Since the information submitted to an IU is highly confidential and commercially sensitive, it is essential that there should be some accountability for the access of information by the IBBI. The Draft Regulations provided that in order to access information stored in an IU, the IBBI must pass a written order.
   

2. Exit management plan: Regulation 39 mandates all IUs to have an exit management plan. Clause 1(a) of this regulation requires the IU to have mechanisms in place so the users can transfer information to other IUs, in case there is a shut down of one or more IUs. This regulation places the onus of transferring information on the users of IUs instead of the IBBI or the IUs themselves. This onus is inappropriately placed, since an IU will probably have a large number of users, many of whom may not have the ability to ensure the transfer of their information.
   

   The Draft Regulations put the onus of making sure information is transferred from one IU to another on IBBI and the IU. This ensures smooth transfer of information since they will be better equipped with resources to perform this task.
   

Miscellaneous

1. Entry Barriers: Regulation 3 of the IU Regulations requires that IUs have a net worth of at least Rs 50 crores, and prevents foreign control of IUs. Regulation 8 prevents any single shareholder from holding more than 10 percent of the equity share capital of an IU. Together, these have a chilling effect on the entry of firms into this industry.
   

2. Annual fees: Regulation 6(2)(e) provides that an IU must pay a fee of fifty lakh rupees to the Board annually. This is a large sum of money, especially given that the business model is unproven. This will discourage entry, limit competition, and increase the fees charged to the users.
   

3. In-principle vs regular registration: Regulation 7 is unclear on the difference between a regular approval and an in-principle approval. It is also unclear as to why an applicant would choose one form of application over the other. In the Draft Regulations, the idea was that in-principle registrations would be granted faster than regular registration.
   

4. Non-discrimination: Regulation 29 makes a broad provision:
   

   An IU shall provide services without discrimination in any manner.

   An explanation follows that mentions specific kinds of discrimination. It is not clear whether the explanation is indicative or if it is exhaustive. If exhaustive, there is no need for the broad prohibition of all discrimination above. This creates confusion for potential IUs.
   

5. Fees: Regulation 32(1)(a) provides that IUs shall charge a uniform fee for providing the same service to different users. Does this mean that an IU has to charge the same to an individual lender who wants to submit information about one loan, and a large bank such as SBI, which might want to submit information about thousands of loans everyday, on the basis that the service is the same?
   

   Regulation 32(2)(a) provides that the fee charged for providing services shall be a reasonable reflection of the service provided. This is a very broad statement in the absence of any test of what a "reasonable reflection" is.
   

Conclusion

Many of the issues mentioned above can create serious problems for the new (and as yet unborn) industry of IUs. High entry barriers will lead to a monopolistic industry with high prices and poor service. If courts are not convinced of the accuracy of the records stored in IUs, the parties will get stuck in lengthy litigation to establish even the basic facts about the debt. IUs established under these regulations might not serve their basic purpose — the creation of an information-rich environment which would bolster speedy resolution in the country.

References

Government of India, The Report of the Bankruptcy Law Reforms Committee, chaired by Dr T K Vishwanathan, 4 November 2015.

Government of India, The Insolvency and Bankruptcy Code, 2016

Ministry of Corporate Affairs, The Report Working Group on Information Utilities, chaired by K V R Murty, 11 January 2017.

Insolvency and Bankruptcy Board of India, Insolvency and Bankruptcy Board of India( Information Utilities) Regulations, 2017

Sumant Prashant, Prasanth Regy, Renuka Sane, and Shivangi Tyagi are researchers at the National Institute of Public Finance and Policy, New Delhi. Anjali Sharma is a researcher at Indira Gandhi Institute of Development Research, Mumbai.

Interesting readings

The buy side in the bankruptcy process by Ajay Shah in Business Standard, July 10, 2017.

Why doesn't anybody know if Swachh Bharat Mission is succeeding? by Diane Coffey and Dean Spears in Ideas for India, July 10, 2017.

Internal insecurity by Prakash Singh in The Indian Express, July 10, 2017.

The fires of Bengal by Pratap Bhanu Mehta in The Indian Express, July 8, 2017.

Why Hindutva hates Aryan Invasion Theory by Devangshu Datta in Business Standard, July 7, 2017.

Gorkhaland protest: Darjeeling brew costs $1,800 a kg to European buyers by Reuters in Business Standard, July 6, 2017.

Opioid Prescriptions Falling but Remain Too High, CDC Says by Rob Stein in NPR, July 6, 2017.

Who's conducting India's wars? by Aakar Patel in Business Standard, July 6, 2017.

Why no 'paan' stains in our Metro stations? by Biju Dominic in Mint, July 6, 2017.

Should we have gone ahead with the GST, warts and all? by Rahul Khullar in The Indian Express, July 6, 2017.

Leaks, Lies, and Chinese Politics by Rush Doshi and George Yin in Foreign Affairs, July 5, 2017. When the domestic media is stifled, the overseas media becomes more important.

Lessons from milk for agriculture by Ashok K Lahiri in Business Standard, July 4, 2017.

A Little Piece of Hell by Don North in The New York Times, July 4, 2017.

Are robots taking over the world's finance jobs? by Nafis Alam, and Graham Kendall in Business Standard, July 3, 2017.

Homophobia is back - it's no accident that nationalism is too by Zoe Williams in The Guardian, July 2, 2017.

GST rollout: Get Set for Turbulence by P Chidambaram in The Indian Express, July 2, 2017.

A tiny Indian publisher is translating hidden gems of world literature for global readers by Maria Thomas in Quartz, June 30, 2017.

After Air India, What About PSUs Bleeding Taxpayer Crores? by Shankkar Aiyar in Bloomberg, June 30, 2017.

Farm Prices After A Bumper Crop: Managing A Problem Of Plenty by Amey Sapre and Smriti Sharma in Bloomberg, June 29, 2017.

Essar Steel v. RBI: What lies ahead?

by Pratik Datta.

The Banking Regulation (Amendment) Ordinance, 2017 recently empowered RBI to issue directions to banks for resolution of stressed assets. After this, RBI issued a Press Release dated June 13, 2017 explaining the process it is following to direct banks to refer certain accounts for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). Essar Steel has challenged this process before the Gujarat High Court.

A single judge of the Gujarat High Court admitted the challenge at a preliminary level since it found two legal issues in the RBI Press Release. The first stems from poor legal drafting of the press release, and the second issue stems from the retrospective criteria of classification of accounts.

Poor drafting

One of the fundamental features of the Indian constitution is separation of the judicial wing of the State from the executive wing. The judiciary, i.e. courts and tribunals, is supposed to be independent from the executive (government and regulators). When NCLT was being set up, its constitutionality was challenged for violating this basic principle. After a decade-long court battle, and consequent modifications to NCLT's structure, the Supreme Court was finally satisfied with the independence of NCLT from the executive wing.

RBI's Press Release dated June 13, 2017 walked into this delicate situation. While identifying certain accounts for reference by banks under the Insolvency and Bankruptcy Code, 2016 (IBC), the RBI mentioned:

Such cases will be accorded priority by the National Company Law Tribunal (NCLT).

In this, RBI, which is part of the executive wing, is directing NCLT, which is part of the judicial wing, on how it should list and allocate cases before itself. This direction concerns a core judicial function. This is beyond the powers of RBI. The newly inserted section 35AB(1) of the Banking Regulation Act, 1949 empowers RBI to issue directions to banks only.

In addition, a press release is not a legal instrument, and it appears overbearing to put this direction into a press release.

Hence, the Gujarat High Court found this direction 'quite shocking'.

Retrospective criteria of classification

RBI constituted an Internal Advisory Committee (IAC) to advise it regarding which cases should be considered for reference for resolution under the IBC. The Press Release dated June 13, 2017 says that the classification criteria developed by the IAC is as follows:

In particular, the IAC recommended for IBC reference all accounts with fund and non-fund based outstanding amount greater than Rs 5000 crore, with 60% or more classified as non-performing by banks as of March 31, 2016.

Essar argued that after March 31, 2016, it has taken various measures to ameliorate its financial stress. It was submitted that RBI's Press Release dated June 13, 2017 did not take these developments into account since it chose March 31, 2016 as the cut-off. RBI did not explain the reason for this retrospective criteria of classification - why did RBI in June 2017 choose to classify accounts based on their non-performing status as on March 31, 2016? This lack of explanation in RBI's Press Release gave Essar the opportunity to argue that RBI is acting arbitrarily.

Interpreting the order of the Gujarat HC

The order by the Gujarat HC clearly explains the legal concerns about RBI's Press Release. Their action is mild: they have listed the matter for July 7, 2017, so that RBI gets an opportunity to present its version before the court. Till then, if Essar's matter comes up before the NCLT, it is required to be adjourned.

Standard Chartered Bank, one of the respondents in the case, appealled against the order of the single judge before a division bench of the Gujarat High Court. Reportedly, this matter was heard and then adjourned to July 11, 2017.

Conclusion

RBI suffers from low capacity in legal drafting. In this case, however, it is unlikely to lead to a serious legal problem. RBI's lawyer should ideally request the court to permit it to expunge that one line from the RBI's Press Release. That should allay the court's concern about separation of powers.

The second issue is more serious. RBI's Press Release does not explain why the IAC chose to use the non-performing status of the accounts as on March 31, 2016 for classifying the accounts in June 2017. However, if RBI's lawyers can provide the court with a clear rationale for choosing that particular date, the court may dismiss Essar's challenge. If RBI's lawyers fail to do so, the matter could drag on, causing much uncertainty in the stressed asset resolution regime.

 

Pratik Datta is a researcher at the National Institute of Public Finance and Policy, New Delhi.

Bankruptcy process and the utilisation of assets

by Ajay Shah.

The capital cost per day of a plane

An Airbus that's typically used in India costs roughly \$100 million and works for roughly 25 years. The pure capital cost is roughly \$4 million a year for the depreciation and \$9 million a year for interest (assuming the borrower pays 9% in USD). This adds up to \$13 million a year for the privilege of owning the plane for 365 days. This maps to \$35,616 per day.

In other words, each day of down time by the plane is a cost of \$35,616 or roughly Rs.2.3 million.

Efficient use of planes by a dictator

If you were a dictator and ran the economy efficiently, you would be very focused on down time. The most important thing is to keep a plane working every day. You would try to ensure that the plane flies on every single day.

The economic inefficiency in airline failure

Airlines are vulnerable to fluctuations of fuel prices and fluctuations in traffic. The world over, private airlines fail a lot.

If an airline fails, and if the planes that belong to it sit idle on the tarmac, that is a substantial cost. Each day of down time for a plane is a cost of capital of Rs.2.3 million. As an example, it appears that 40 planes belonging to Kingfisher sat idle for a year. Going by our rough calculation, that's an opportunity cost of capital of Rs.33.8 billion. For a moment, let's not think about who paid this cost. A cost is a cost. Someone paid the cost; it was a cost to society. A plane that does not fly is capital that is wasted. The dictator would be laughing at our inefficiency - he would say that he would never waste capital like this.

In addition, airline bankruptcies can also be extremely disruptive if people have purchased tickets for flights, well ahead of time, and if the bankruptcy leads to flights being cancelled.

A market with multiple competing private airlines is better than a dictator as there is competition and innovation. But the efficiency of capital use is degraded if there are repeated bankruptcies, and if each airline failure gives a protracted patch of wastage of planes that are idle. The efficiency of the economy is hampered if people show up at the airport and find that the flight was cancelled.

A well functioning bankruptcy process

If the bankruptcy process works well, the airline should be protected as a going concern.

No planes should be grounded. No flights should be cancelled.

Efficiency for the economy is about the physical planes performing their scheduled flights. Nothing should change on this.

The airline is an ephemeral legal person that owns the planes. The bankruptcy process should rip up the structure of liabilities of the airline, impose losses upon the previous holders of equity and debt, and replace them with a new configuration of equity and debt. A great churning would take place in the financial structure of the firm. The fact that this drama is taking place should not interfere with the efficient use of planes on the scheduled flights.

Capitalism is messy. A well functioning bankruptcy process protects the efficiency of capital use while the messy events play out.

Conclusion

A good bankruptcy process is one where fluctuations in the firm and its financing structure do not interfere with the core business of planes that fly continuously. Customers should never see a disruption of service, and the planes should never sit idle.

For a country to harness the efficiency and innovation that comes from multiple private competing airlines, a sound bankruptcy process is the secret sauce that achieves the normative ideal for the efficiency of capital utilisation -- the use of planes by a dictator.

Interesting readings

RBI move to double award may not reduce mis-selling by Sanjay Kumar Singh in Business Standard, June 28, 2017. The two-part solution is prevention (IFC consumer protection) and cure (Financial Redress Agency).

Hacks Raise Fear Over N.S.A.s Hold on Cyberweapons by Nicole Perlroth and David E. Sanger in The New York Times, June 28, 2017.

Took a decade for RBI to even accept that banks mis-sell by Monika Halan in Mint, June 28, 2017.

Is the staggeringly profitable business of scientific publishing bad for science? by Stephen Buranyi in The Guardian, June 27, 2017.

Why are Indian news channels so disappointing? by Ashok Malik in Hindustan Times, June 27, 2017.

Beware of premature load bearing by Ajay Shah in Business Standard, June 26, 2017.

Lessons to learn from the Emergency by Manu S. Pillai in Mint, June 24, 2017.

Officers have been made scapegoat for political failure, says P C Parakh by Aditi Phadnis in Business Standard, June 24, 2017.

This is what foreign spies see when they read President Trump's tweets by Nada Bakos in The Washington Post, June 23, 2017.

The Language Genie: Put It Back Into The Bottle For The Sake Of National Unity by Vikram Sampath in Swarajya, June 23, 2017.

The future of journalism: The secret lives of young IS fighters by Quentin Sommerville & Riam Dalati in BBC, June 23, 2017.

How Just 14 People Make 500,000 Tons of Steel a Year in Austria by Thomas Biesheuvel in Bloomberg, June 21, 2017.

Uber Cant Be Fixed Its Time for Regulators to Shut It Down by Benjamin Edelman in Harvard Business Review, June 21, 2017.

Reversal on rupee-denominated debt by Bhargavi Zaveri & Radhika Pandey in Business Standard, June 19, 2017.

The Man Who Knew Too Much by By Jane Bradley, Jason Leopold, Richard Holmes, Tom Warren, Heidi Blake and Alex Campbell in BuzzFeed, June 19, 2017.

Robert Mueller Chooses His Investigatory Dream Team by Garrett M. Graff in Wired, June 14, 2017.

Trump, Putin, and the New Cold War by Evan Osnos, David Remnick, and Joshua Yaffa in The New Yorker, March 6, 2017.

Using the bankruptcy code for privatisation of state owned firms that have a negative value

by Ajay Shah

In the past, we have seen privatisation as a sale of equity shares. As an example, consider the VSNL privatisation. Everything else about VSNL was held intact; there was just a change in the owner of the equity shares.

This works for a firm like VSNL, where there is positive value after paying off all the liabilities. What about a firm that is so far gone that there is no bidder if we put up the shares for sale? What about the situation where the prospective cashflows from the firm don't pay for the liabilities that are in place.

As an example, consider a firm that has Rs.100 of equity that is all owned by the government, the firm has Rs.200 of debt, and the firm is worth Rs.50 if it is sold as an all-equity firm. If we simply try to sell this firm, buyers will worry about having to take responsibility for Rs.200 of debt.

India has not done a privatisation in such a situation so far. There are two ways out, one that was always possible, and one that is now possible using the Insolvency and Bankruptcy Code of 2016.

One way is to permit negative bids

As an example, in Germany, in 1990 a government agency was created which was put in charge of all the property of the previous German Democratic Republic (GDR). It led the privatisation of 8,500 state owned firms with over 4 million employees. Many of those firms were in deep trouble. A key ingredient which made the privatisation strategy work was that negative bids were permitted.

In our example, the auction will reveal a price of -150. The government will pay the buyer Rs.150, who will augment it with Rs.50 of his own, and pay off the debt of Rs.200. At the end of this, he is holding an all-equity firm which has cashflows worth Rs.50.

In this case, the lenders get Rs.200, and the government gets Rs.-150. The payment of Rs.150 is an ordinary fiscal expenditure for the government.

The other possibility is to utilise the bankruptcy code

1. The firm defaults on one payment.
2. One creditor initiates the Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016.
3. The creditors committee is formed.
4. The bidder comes in with a plan which offers Rs.50 for control of the company.
5. The creditors committee agrees to wipe out the debt, take the Rs.50 in the bargain, and walk away.
6. In the end, the bidder gets a clean all-equity firm for the price of Rs.50.

This is a method for privatisation that can now be used in India, when we face firms which have a negative net worth and the creditors will cooperate with the government.

In this case, the lenders  get Rs.50, and the government gets 0.

Conclusion

Financial engineering cannot create value. The fact, in our example, is that the NPV of the cashflows of the company are worth Rs.50. The two solutions address this problem in two different ways. If we do a pure transaction involving equity shares only, then the government has to pay Rs.150, and the lenders are fully protected. If we put the firm into the bankruptcy process, the government (i.e. the equity shareholders) walks away with nothing, and the lenders walk away with Rs.50.

Concerns about how the Medical Council of India thinks about medical malpractice

by Shyama Nagarajan and Shubho Roy.

India has approximately 5.2 million medical negligence cases annually. A study for Mumbai showed that medico-legal cases, in courts, against doctors rose from 910 in the period from 1998 and 2006, to 150-200 cases every year.

The responsibility to regulate the medical profession lies with the Medical Council of India: a statutory regulator. However, we get little information about whether or when the Medical Council of India (MCI) disciplines doctors. MCI seems to follow a moralistic approach to regulation rather than a legalistic approach.

Morals v. Laws

A legal system differs from a moral system in three important ways:

1. Specificity: Moral standards are usually generic, and rarely provide clear direction for action, in individual situations. In contrast, legal standards strive to be specific and are cognisant of exceptions to the rule. For example, a moral standard may be a generic statement like: Thou shalt not kill. Law, on the other hand, recognises that killing may be justified under many conditions, like defending oneself from a murderous attack, soldiers killing the enemy, an executioner killing the condemned. All of this is codified in various laws justifying killing of another human being in specific circumstances. These have been extensively thought through and developed through legislation and jurisprudence.
2. Consequences: Morals statements may prohibit some actions, but rarely have provisions to deal with the consequences of violating them. In contrast, laws focus on consequences of violating proscriptions. For example, a moral principle may be drafted as: Thou shalt not kill. The Indian Penal Code, on the other hand, has no statement prohibiting people from committing murder. It states simply: Whoever commits murder shall be punished with death, or imprisonment for life...
3. Enforcement Mechanism: Modern states do not enforce moral principles. For example, there is no enforcement mechanism for people who violate the commandment:"Thou shalt not kill". In contrast, laws are backed by the requisite vast machinery enforcing them. This includes police, judiciary and other supporting laws like law governing trials (Cr.P.C.), evidence, etc.

Medical Code of Ethics

MCI drafted the The Medical Code of Ethics, 2002 ("the Code") to govern medical practitioners. By using the term `ethics', it appeals to a moral principle. However, all aspects of the MCI constitute a legal system under the authority of Parliamentary law (the Medical Council of India Act, 1956). An analysis of a few provisions of the Code shows that while the MCI seems to claim moral authority: It drafts standards in the moral style. Even if it had systems and procedures in place to enforce these standards; the language of the standards would prevent them from being enforced in a legal system.

Let us apply these ideas to reviewing review three parts of the Code, pertaining to medical records, generic drugs and commissions.

Medical Records:

Section 1.3.1: of the Code states:

Every physician shall maintain the medical records (sic) pertaining to his/ her indoor patients for a period of 3 years...... in a standard proforma... attached as Appendix 3.

Appendix 3 expects the doctor to mention: Name of the patient, age, sex, address, occupation, date of 1st visit, clinical note (summary) of the case provisional diagnosis, investigations advised, observations, signature in full, and name of treating physician, etc. The record-keeping obligation on physicians is limited to ``indoor patients'' only. Indoor patients refer to patients in medical establishments (hospitals, nursing homes etc.) for 24 hours or more.

This provision suffers from three defects:

1. Incomplete coverage: This provision covers a very small proportion of patients that a doctor examines. It completely excludes the vast majority of interactions (such as, chronic case management and procedures) between doctors and patients, i.e. outpatient visits. There is no obligation to keep records or even record prescriptions in any standard manner for those interactions.
2. It duplicates work: Medical establishments (hospital, nursing homes, etc.) are already required to keep records for indoor patients. It makes no sense for individual doctors to duplicate the effort. Doctors admit patients in different hospitals and offer consultations, and make clinical rounds in hospitals seeing scores of patients. Maintaining records for each patient/prescription in person with the doctor (not the medical establishment) is irrational.

The code does not specify how MCI will identify and enforce against non-compliance. Neither through legal instruments associated with the MCI, nor through any other enactments, is there an enforcement apparatus which involves issues such as accepting complaints, carrying out inspections, requiring the submission of operational data, etc.
Section 1.3.4 of the code reads:

Efforts shall be made to computerize (sic) medical records for quick retrieval

This is an exhortation and cannot be enforced.

Generic names of drugs:

This provision is designed to prevent doctors from prescribing brands in return for kickbacks from pharma companies. This problem is so endemic that the government proposes to bring a new law to tackle it. The Code has a provision governing this, in Section 1.5:

Every physician should prescribe drugs with generic names legibly and preferably in capital letters, and he/she shall ensure that there is a rational prescription and use of drugs.

This obligation does state a penalty for violation. The code expects that there should be a rational prescription without any form to verify it. Since there are no standards for how prescriptions have to be written for patients, it is impossible to test compliance. A doctor is not required under the Code to write down the diagnosis. Consequently, it is impossible to verify whether the prescription was rational. There are medical texts and standards in training which specify how a prescription is written. However, the code makes no obligation on doctors to follow them.

Commissions

Kickbacks from pharma companies to doctors have become a major problem in India. In February 2016, the MCI amended the Code to insert a new provision governing payments received by doctors from pharma and medical technology firms: clause 6.8.1 of the MCI code. This provision is very different from the other provisions in the Code. It clearly leans towards a more legal system rather than a moral system:

1. Instead of a general prohibition, commissions have been divided into eight headings: Gifts, travel facilities, hospitality, cash or monetary grants, medical research, maintaining professional autonomy, affiliation, and endorsement.
2. Each heading has a definition of what constitutes violation. An example of this is the heading: cash or monetary benefits. While this prohibits receiving money from pharma companies, research grants have been exempted, which could be given to an arm of a hospital.
3. For each type of violation there is a specific penalty. For some, it has been graded depending on the magnitude of the violation. For example, if a doctor receives cash above Rs.1000 and up to Rs.5000 he is liable for censure. However, for receiving cash more than Rs.50,000 but up to Rs.100,000, the penalty is removal of the name from the medical register, i.e. barring from practice, for one year.

As with the other areas, these rules are ineffectual as the MCI has no system of tracking such gratification or the administrative machinery required to investigate and penalise violators.

There are grave problems in India about corruption of doctors in prescribing drugs. We need to do much more in defining and enforcing against these practices. One novel mechanism is found in the US. The government requires doctors and pharma companies to disclose any payments from pharma companies to doctors. There is a website where you can look up your doctor and see what payments he/she has received from the pharmaceutical sector (including medical device manufacturers): Open Payments Data. This has spawned other websites which allow users to analyse the data. Dollars for Docs have used the data to rank doctors and pharma companies.

The way forward

The regulation of medical profession requires a clear understanding of general principles of regulation. There have been many attempts to reform the medical profession, the latest being the Niti Aayog draft bill. However, legislative provisions which drive a sound regulatory process under MCI are missing.

Most drafting of law in India is done by amateurs and lawyers. Drafting laws is, however, not trivial. It requires sound thinking in public administration, law, and economics. There is an entire life cycle of a regulatory system which has to be designed in the law. The typical lawyer, who can support a private person on the legal ramifications of a transaction given a certain section of law, is unable to think about what the law ought to be.

Every regulatory system must be animated by a clarity of objective. The parent law must provide the objectives that should drive the government apparatus that it constructs. Too often we draft Parliamentary law which lacks objective. For example the objective of the Payments and Settlement Systems Act is:

An Act to provide for the regulation and supervision of payment systems in India...

The lack of objective induces a government apparatus that only pursues political objectives and bureaucratic self-interest. The authors of the law need to write down why the law gives powers to regulate: issues such as safety of transactions, safe payment system, competition, innovation and consumer protection.

After regulations are made through a sound regulation-making process, powers and systems have to be put in place to check for compliance with those regulations. This requires powers to obtain information, inspect and in some cases investigate. This requires procedural laws to govern inspections and investigations. It also requires thinking about the State capacity in the regulator. Should a regulator make a law where it has no capacity to check compliance? In health, this problem is compounded by the concept of doctor patient confidentiality. As in banking, we need to develop systems by which regulators can check for compliance without breaching the privacy of customers.

There is great value in using statistical analysis rather than case by case analysis. For example, if the incidence of cesarean operations in one hospital is substantially more than another hospital serving a similar population, the regulator should ask questions. Even for individual doctors, complaint rates rather than individual complaints may help the regulator identify the problem doctors. Such systems require careful recording and classifying complaints, even when they are not investigated.

Every regulatory system needs a quasi-judicial system to penalise or acquit the accused. Penalties should be imposed only after following principles of natural justice and due process. Both patients and the regulator itself should be able to bring complaints and results of investigation before a judicial authority, which is not involved in the investigation. Such an entity should apply some standard of evidence and impose penalties. This requires additional regulations specifying penalties for different types of violations. Penalties have to be proportional to elicit the right response from the regulated. As was known many years ago:

Whoever imposes severe punishment becomes repulsive to the people; while he who awards mild punishment becomes contemptible. But whoever imposes punishment as deserved becomes respectable.  -- Chanakya ("Arthashastra", I. "Concerning Discipline", Chapter 4).

All these functions require additional provisions governing accountability and transparency expected of the regulator. Regulatory governance in any field requires substantial amount of legal drafting and two levels: the governing parliamentary law and the subordinate regulations made by the regulator. An example of this is the draft Indian Financial Code. While the code covers the entire financial sector including central banking, 135 out of 414 (32%) of the provisions deal with good governance practices in regulators and tribunals, and are a useful first draft for economic regulation in other fields.



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