Announcements

Researchers in corporate and financial laws

The National Institute of Public Finance and Policy is looking to hire two researchers (1 legal researcher and 1 economics/public policy researcher) on a full-time basis in the field of corporate and financial laws. The positions are based out of Delhi. Our work is inter-disciplinary, bringing together knowledge of public economics, public administration, law, and quantitative research.

National Institute of Public Finance and Policy (NIPFP)

NIPFP is a premier research institution in public economics and policy. NIPFP has partnered with the various Government departments and regulatory authorites for providing policy and research assistance. NIPPF has worked on issues relating to agency regulatory design, regulation of professions, capital flows, financial regulation, reform of insolvency and bankruptcy laws, public administration and other areas of fiscal and monetary policy.

Some examples of our work in this field include:

1. Ajay Shah and Susan Thomas, The Indian bankruptcy reform: The state of the art, 2018, The Leap Blog, 22 December, 2018.
2. Renuka Sane, The way forward for personal insolvency in the Indian Insolvency and Bankruptcy Code, NIPFP Working Paper Series, No. 251, 24 January, 2019.
3. Shubho Roy, Ajay Shah, B.N. Srikrishna and Somasekhar Sundaresan, Building State capacity for regulation in India, NIPFP Working Paper Series, No. 237, 03 August, 2018.
4. Pratik Datta, Value Destruction and Wealth Transfer under the Insolvency and Bankruptcy Code, 2016, NIPFP Working Paper Series, No. 247, 27 December, 2018.
5. Sudipto Banerjee and Vishal Trehan, Invoice financing in India: TReDS and way forward, The Leap Blog, 10 October, 2018.
6. Pratik Datta and Rajeswari Sengupta, The proper purpose of insolvency law, Live Mint, May 06, 2018.
7. Smriti Parsheera, CCI's order against Google: infant steps or a coming-of-age moment?, The Leap Blog, February 22, 2018.
8. Pratik Datta and Rajeswari Sengupta, Commercial wisdom to judicial discretion: NCLT reorients IBC, The Leap Blog, 13 December, 2017.
9. Smriti Parsheera, Ajay Shah and Avirup Bose, Competition Issues in India's Online Economy, NIPFP Working Paper Series, No. 194, 03 April, 2017.
10. Ajay Shah, Arjun Rajagopal and Shubho Roy, From clubs to States: The future of self-regulating organisations, The Leap Blog, 19 December, 2013.

Remuneration

The remuneration will be commensurate with the candidate's experience and will be comparable with what is found in other research institutions.

Requirements

1. You must have a Masters degree in economics/public policy or LL.B.
2. Demonstrated knowledge in areas relating to corporate and financial laws.
3. Practical knowledge in accounting is desirable.
4. Very strong written and spoken English.

How to apply

Interested candidates may send in their covering letter and updated CV to: lepg-recruitment@nipfp.org.in. The email must contain the subject line: 'Researcher in corporate and financial laws'.

The rise of government-funded health insurance in India

by Harleen Kaur, Ila Patnaik, Shubho Roy and Ajay Shah.

The National Health Protection Scheme (NHPS) announced in the Budget 2018-19, targets providing affordable health care to 100 million poor households in India. It is arguably the world's largest health insurance scheme and an indicator of transformation of the role of government from being a health care provider, to that of a health care financier. Before independence, India focussed more on public health through interventions like water supply, sanitation and vaccination than providing health care through hospitals. The reorganisation after independence was a result of policy changes that merged public health and health care responsibilities within the same officers of the government, the doctors. A remarkable development in the field of health policy in India is the rise of government funded health insurance programs.

These programs feature purchases of health care services from private health care providers health insurance from health insurance companies. In a recent paper titled, The rise of government-funded health insurance in India, we discuss the history of health policy in India in three phases; pre-independence British India, independent India until the 2000s and independent India after 2000s, to understand the factors contributing to the shift in the health system of the country.

We offer fresh insights into these developments by placing them in a historical perspective. The roots of Indian health policy lay in British India, which laid the foundations of public health. This was done after the Royal Commission of 1859 was set up to investigate the health status of the army in India. The Royal Commission studied not just the army, but the civilian population as well. By and large, their emphasis was on public health and not on health care. The findings of Royal Commission can be summarised in two quotations:

1. The need for public health rather than health care

"Native hospitals are almost altogether wanting in means of personal cleanliness or bathing, in drainage or water-supply, in everything in short, except medicine."

2. The need for interventions outside of soldiers

"The health of the English army is indissolubly associated with the health of the population of the country which it occupies"

The legislative and institutional apparatus that was established in British India involved a prime focus upon public health, and a major role for sub-national governments (states, cities). When the Constitution of India was drafted, it largely reiterated this design.


The changes after independence came from two sources; the shift of power to the union government, and adoption of the Bhore Committee report. While the Constitution envisioned a federal arrangement, in practice, power shifted to the union government after independence. The union government designed programs, and financed state governments to implement these programs. There was a consequent atrophying of policy thinking and execution at the state and local government level. This had an impact on many aspects of public policy in India. In the present context, there was an adverse impact upon public health, as a large part of the field of public health consists of local public goods.

The Bhore committee report shifted focus from public health to health care, and gave a leadership role to doctors in health policy. It was adopted by independent India and became the gospel for health system thinking in India. There is an interesting tension in Bhore Committee report, between its recognition of the need for public health as a distinct problem from health care:

 The health services may broadly be divided into (i) those which may collectively be termed public health activities and (ii) those which are concerned with the diagnosis and treatment of disease in general.

versus its emphasis on health care:

Preventive and curative health work must be dovetailed into each other if the maximum results are to be obtained and it seems desirable, therefore, that our scheme should provide for combining the two functions in the same doctor in the primary units. (Emphasis added).

This document was accepted into the thinking of the Planning Commission, and translated into schemes and outlays in the following decades. There was a large scale attempt at building a public sector health care system.

For many decades, this induced the main paradigm of Indian health policy: an emphasis on health care at the expense of public health, weaknesses in local government, a big role for the public sector in the production of health care, and domination of doctors in policy thinking.

This approach worked badly. By the early 1980s, some policy thinkers began questioning this framework. By the 1990s, a great deal of evidence and literature had accumulated, that criticised this approach. Weaknesses in public health were giving a high disease burden. Alongside this, the public sector health care system was not effective. An unregulated, private sector health care system sprang up, to respond to the requirements of the citizenry.

While the mainstream health policy establishment proposed intensification of effort within this paradigm, by spending more money on it, politicians became increasingly concerned that the paradigm was delivering poor results. On the ground, it was apparent that private sector health care was the dominant feature of Indian health care.

This led to the ideas of public funding for the purchase of private health care, implemented through health insurance companies. This approach was attractive as it appeared to more directly translate fiscal outlays into tangible benefits for citizens. This policy innovation, which began in Maharashtra in 1997, spread rapidly across the country. By early 2018, there were 48 Government Funded Health Insurance Schemes (GFHISs).

We argue that there are four areas of concern with this approach. The first problem is the lack of emphasis on public health. The most effective public policy interventions in health are the public goods of public health, which were introduced in the British period. It is an incorrect strategy to have a high disease burden in the first place, and then build a curative layer on top of it. It is better to clean the air than to produce health care services for sick residents.

The second concern is about the conduct of the largely unregulated private health care sector, which yields poor outcomes for citizens. This calls for establishment of a regulatory strategy for the health care industry.

The third concern is about the weaknesses of consumer protection and micro-prudential regulation of health insurance companies, which yields poor outcomes for citizens. This calls for reforms of the regulation of health insurance companies.

Finally, there are important fiscal risks in this journey. Once voters get used to entitlements, they are politically difficult to withdraw. Population-scale health care is expensive, particularly in the context of weaknesses in public health which are giving a high disease burden. This is analogous to the field of pensions, where decisions about pension reforms need to be made only after estimating the implicit pension debt over 75-year horizons. There is a need for greater fiscal analysis, and caution, in the construction of government programs in health which make promises to households about future health care expenditures.


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

A Maximalist Approach to Data from the IBC

by Adam Feibelman and Renuka Sane.

Under the new Insolvency and Bankruptcy Code, the Insolvency and Bankruptcy Board of India (IBBI) has a statutory responsibility to collect, maintain, and disseminate data about the new insolvency and bankruptcy system. The Board has taken a number of preliminary steps to perform this responsibility. It has developed a user-friendly web site where it posts regulatory materials, orders issued by tribunals and courts, and directories of insolvency professionals and insolvency professional agencies. It has also begun reporting various aggregate and case-level data about the system in its quarterly newsletter. These efforts are an important start and reflect that the Board values data, but they represent only a portion of the relevant and useful data that is, or might be, generated by the system and that could be made available to the public.

In a recent paper, A Maximalist Approach to Data from India's New Insolvency and Bankruptcy System we propose that the Board, along with the Tribunals, that are adjudicating authorities under the Code, take a maximalist approach to data about the new insolvency and bankruptcy system. Gathering and disseminating data about the system may seem like a regulatory function of secondary importance. Yet the availability of comprehensive, reliable, and standardised data about the new system is essential for many purposes and very useful for many others. As others have noted, implementation and reform of the insolvency and bankruptcy is very much a work in progress. Without useful data, regulators and public observers cannot reasonably assess how the system is performing or determine what effect it may be having on its stakeholders and on the broader society. Such data can also provide a uniquely illuminating window into the economy, highlighting economic, financial, and social trends and potential micro and macro vulnerabilities.

Our paper emphasises the institutional responsibility the Board and the Tribunals have to gather and disseminate data about India's new insolvency and bankruptcy system. It also underscores the great opportunity these institutions have to provide a model for transparency about the functioning of the Indian legal system and to gather extremely useful information about the financial vulnerabilities of citizens, households, retail and commercial lenders, and the broader economy.

The American experience

To help frame some of the issues that the IBBI and the Tribunals will face in crafting policies about data collection and dissemination, our paper summarises the evolution of approaches that policymakers in the United States have taken with regard to bankruptcy data and describes some of the research utilising this data.

For most of the history of bankruptcy law in the U.S., bankruptcy petitions and supporting documents have been public documents; as of 2001, those documents and case docket information have been available electronically over the internet for a fee, with limited exceptions for personal information. For many decades, the Administrative Office of the U.S. Courts was charged with reporting very basic aggregate data about bankruptcy cases. Debates over bankruptcy policy and major reforms in 1978 revealed, however, that available information about the system was insufficient to shed meaningful light on key questions of policy and practice.

Over the last two decades of the Twentieth Century, scholars and other commentators who were engaged in empirical study of the U.S. bankruptcy system began drawing attention to the need for more and better bankruptcy data and statistics. In 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, a major reform to the personal bankruptcy laws, the U.S. Congress significantly augmented the responsibilities of the Administrative Office of the U.S. Courts for gathering and reporting data about bankruptcy cases as well as the data collection function of bankruptcy trustees. The aggregate statistics collected and reported by the Administrative Office of the U.S. Courts now provide an essential baseline set of information about the broad scope and trends of the operation of the U.S. bankruptcy system.

However, researchers continue to have concerns about the reliability of this aggregate data. Furthermore, the aggregate statistics provide rough and imperfect information about the determinants of financial distress, details of the operation of the bankruptcy system, or the impact of that system on debtors, creditors, and other stakeholders. The most useful bankruptcy data still appear to be the case-level public documents, especially the petitions and supporting schedules that debtors themselves submit, and qualitative data derived from interviews, surveys, and questionnaires. Studies utilising such approaches have explored the determinants of household, and corporate financial distress, outcomes of corporate reorganisations, the role of hedge funds, and the function of bankruptcy for entrepreneurs.

Research involving these types of data is inevitably costly and time consuming, and it can be difficult to replicate and evaluate. The American experience thus illustrates the value of relevant and reliable aggregate data and the essential need for useful case level data, but it also reflects how efforts to gather such data and make it available raise complicated issues of policy and practicality.

Thinking about data collection in the IBC

Turning to the IBC, the paper suggests that the initial challenge in this regard is identifying precisely what types of information about the new system would be useful for policymakers, stakeholders, and researchers, who should be collecting the data, the need for assuring reliability and uniformity of the data that is collected, and finally access to the data.

What data to collect?

We distinguish between three kinds of useful data about the IBC:

• Basic procedural data about cases brought under the Code provides an essential core of information about how the system operates. This data certainly includes the number of applications filed under each chapter of the Code in each jurisdiction, as well as more specific information about procedural events through the life-cycle of the case.
• Data about the primary stakeholders in the system
  includes information on the type of debtors in the system, the nature of their debts and assets, and the characteristics of their various creditors. It also includes information about which parties initiate cases under the Code.
• Data about the institutions and repeat professional actors within the system. Chief among these are the tribunals and their judicial officers, as well as the functioning of other pillars of the institutional machinery such as the insolvency professionals, the information utilities, and the Board itself.

Who should collect the data?

The Tribunals are well-positioned to gather and disseminate comprehensive aggregate statistics or case-level data about the cases they handle. Yet they have not traditionally performed that role. The Board can also gather and disseminate aggregate or case level information without cooperation from the tribunals, but it must rely on information provided to it by insolvency professionals and insolvency professional agencies. This may be a more cumbersome process in general, but the Board is likely in a better position to gather data about many aspects of cases that are conducted or managed by the insolvency professionals. Given that they likely have overlapping and complimentary capacities for gathering and disseminating data, it would be ideal for the Tribunals and the Board to cooperate or coordinate their efforts to make data timely, accurate, uniform, and easily accessible and usable.

Functionality of the data

The data gathered by the Board and the Tribunals needs to be reliable and consistent. This requires, among other things, systems for recording and retrieving information about procedural aspects of cases filed under the Code, forms designed to facilitate the extraction of data, and careful definition of terms employed in court documents and proceedings. The Board and the Ministry of Corporate Affairs have promulgated some model forms for use within the system. It is not currently clear how well these forms are generating useful data. It may also be the case that other forms are necessary to capture and generate important data from the system.

Access to the data

Policymakers must decide the scope of access it allows to such data. The most liberal approach would be to make data publicly available on an electronic database similar to the PACER system in the United States. Any policy in this regard must balance concerns about privacy with the benefits of widely available data about India's new insolvency and bankruptcy system.

Conclusion

In conclusion, we propose that the Board conduct or allow a study of cases brought under the Code to assess, among other things, what information the new system generates or might generate; how its model forms are utilised and the quality and uniformity of the data they reflect; whether other areas of practice warrant similar model forms; and how the data generated by the system can be most fruitfully assembled and disseminated.

 

Adam Feibelman is Sumter Davis Marks Professor at Tulane Law School. Renuka Sane is an Associate Professor at the National Institute of Public Finance and Policy.

Pick your poison: Money bill privilege or government shutdown?

by Pratik Datta and Radhika Pandey.

On January 2, 2019, the government introduced a bill in the Lok Sabha to amend the Aadhaar Act, 2016. Once again, the opposition is up in arms. Once again, there are apprehensions that this amendment bill will be certified as a money bill to avoid the opposition parties in the Rajya Sabha. In a parallel development, Jairam Ramesh filed a review petition against the Puttaswamy decision last week. The majority of the judges in that case had upheld the enactment of the Aadhaar Act, 2016, as a money bill. They refused to let judicial review be used as an institutional check to prevent abuse of money bills by Lok Sabha. The lone dissent was by Justice Chandrachud, who referred to such abuse as a `fraud on the constitution'. Ramesh's review petition now seeks to reopen this issue.

In this backdrop, this post revisits the basics to better appreciate the rationale for the Lower House's money bill privilege. In doing so, we highlight two extreme constitutional designs to overcome a common problem - how to decide on the funding for government agencies?

The problem

All government agencies need funds to function. These funds need to be appropriated from the state's finances every year. In liberal democracies, this funding decision cannot be left to unelected executives. Instead, the citizens through their elected representatives should have a say in this - should funds be released to the government? If so, how much? Consequently, the legal mechanism for such annual appropriation requires the citizens' elected representatives in the legislature to pass an appropriation bill into a law. In India, money bills perform this critical function (see Article 110(1)(d)).

In a bicameral legislature, an ordinary bill becomes a law usually after it is approved by the Lower House, the Upper House and the President. If the bill fails to receive approval from any one of them, it does not become a law. In that event, the prior law continues. Life moves on. Not so for an appropriation bill (or money bill in India). Failure to enact such a law would result in a funding crunch, potentially causing a government shutdown.

Solutions

There are broadly two different ways of resolving this problem.

The simpler solution is to leave it to negotiation among politicians in the Lower House and the Upper House, and the President. This option is costly because of coordination and hold-up costs. And till the negotiated solution is reached, the government remains shutdown, wasting huge public resources.

An alternative solution is to reduce the number of approvals needed to enact an appropriation bill into a law. The Lower House, being directly elected, could be empowered to enact an appropriation bill into law without any approval from the Upper House and the President. However, there is a flip side to this arrangement. The Lower House could abuse this privilege by camouflaging ordinary bills as appropriation bills to avoid opposition from Upper House and the President. Consequently, this arrangement may resolve the government shutdown problem at the cost of diluting the sanctity of the bicameral legislature itself.

Interestingly, the efficacy of these two different solutions are currently being tested in one of the world's oldest democracies - the USA - and the world's largest democracy - India.

USA

The American federal government has been partially shutdown since December 22, 2018. This is the 3rd shutdown of the US federal government in 2018 and the 21st in American history. However, this is the first shutdown of any significant length since 2013, when the government was shut for 16 days. Such government shutdowns arise out of failure to enact appropriation laws.

Under the American constitution, the House of Representatives (Lower House) alone can introduce an appropriation bill. The Senate (Upper House) cannot do this. An appropriation bill passed by both the Lower House and the Upper House must also be approved by the President to become an appropriation law. A direct consequence of this constitutional design is that either the Upper House or the President could block an appropriation bill, starving the federal government of funds. Further, the Anti-deficiency Act prohibits American executive branch agents from authorising expenditures or obligations in excess of the amount appropriated by Congress. Consequently, failure to pass an appropriation law results in government shutdown in the USA.

The ongoing shutdown started when President Trump refused to approve the appropriation bill for the budget for the current fiscal year that began on October 1, 2018. The President refused to approve the bill since it did not provide necessary funds for building the wall on the US-Mexico border. There are now two options to break this deadlock. Either, the proponents of the budget could negotiate with the President to get his approval on the appropriation bill. Or, the bill could be enacted even without President's approval, if a super-majority (ie. two-third) in each House approves the bill.

Both these routes require hard bargaining and trade-offs by Congressmen across party lines. The reason America accepted this cumbersome constitutional design is possibly best captured in Alexander Hamilton's following observation: "[t]he injury that may possibly be done by defeating a few good laws will be amply compensated by the advantage of preventing a few bad ones".

India

India seems to have adopted the exact opposite position. Our constitution, as interpreted by the Supreme Court, favours having a few good laws at the cost of suffering a few bad ones. After the Puttaswamy judgment, the Indian Lower House could potentially enact any bill, appropriation bill or not, into law using the money bill route. In the process, it can completely bypass any opposition from Upper House or the President. Even judicial review is not permitted. Consequently, there is currently no institutional check on potential abuse of money bills by the Lok Sabha. If left unchecked, such abuse may very well end up being the death knell of our bicameral model of legislature. However, from the perspective of resolving government shutdowns, the Indian system is undoubtedly efficient. India never experiences government shutdowns for failure to enact appropriation laws like in USA.

Conclusion

Is this trade-off worth it? The Indian Supreme Court may soon find itself asking this question. Jairam Ramesh's review petition offers the Supreme Court yet another opportunity to revisit this critical constitutional issue.

 

Pratik Datta and Radhika Pandey are Researchers at the National Institute of Public Finance and Policy.

State capacity in regulation in India, 2018

29 January: Analysing the National Medical Commission Bill: Composition, Malhotra, Roy.

17 July: Building State capacity for regulation in India, Roy, Shah, Srikrishna, Sundaresan.

18 September: DEA released a draft payments law, which features significant regulatory process improvements.

30 September: MCA established a committee to review the Competition Act.

10 October: Cabinet approved the establishment of NCVET and the associated legal instrument.

22 October: IBBI released a regulation on the regulation-making process. Press release.

and there was a great debate about privacy and the new proposed privacy regulator -- the DPA -- with the Srikrishna report, their draft bill, our response to their call for comments, and Suyash Rai's article on this.

Value destruction and wealth transfer under IBC

by Pratik Datta.

India experienced a major structural change with the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). Since its enactment, India's ranking under the Insolvency head in the World Bank Group's Doing Business report has sharply risen from 136 to 103, attracting international attention. Yet, as per IBBI data, till end of September 2018, only 20% of the cases admitted were successfully resolved under IBC, while 80% ended up in liquidation. And now, even the constitutionality of IBC is under serious challenge before the Supreme Court of India for discriminating against operational creditors.

In view of these contemporary challenges facing IBC, my paper titled Value destruction and wealth transfer under the Insolvency and Bankruptcy Code, 2016 argues that many of these challenges fall within two conceptual categories - the value destruction problem and the wealth transfer problem. The paper uses the law and economics literature on insolvency to identify the potential sources of these two problems within the IBC.

Value Destruction Problem (VDP)

A well-designed insolvency law should help in correctly determining if an insolvent business is suffering from financial distress or economic distress. A business is financially distressed when total value of its debt exceeds its net present value. Insolvency law should facilitate a going-concern sale or restructuring of a merely financially distressed business. But a financially distressed business could also suffer from economic distress - the net present value of the business could be less than the total value of the assets of the business were they to be broken up from the business and sold separately (break-up `liquidation value'). In such cases, insolvency law should facilitate liquidation, whether through a going-concern sale or a break-up sale.

A poorly designed insolvency law could inadvertently push a merely financially distressed business into liquidation, causing value destruction. Value destruction could also happen due to delayed restructuring. I refer to these as Value Destruction Problem (VDP).

IBC suffers from VDP

VDP could arise under IBC. Secured financial creditors comprising the super-majority (i.e. 66%) in the Committee of Creditors (CoC) may not necessarily have the right incentives to sustain a merely financially distressed, but not economically distressed, company. This is because the secured creditors are not entitled to going concern surplus. Instead, such creditors are likely to have a stronger incentive to immediately liquidate the financially distressed company and realise the liquidation value, thus destroying the going concern surplus of the company.

To illustrate, let's consider a hypothetical example. Suppose a company has two types of creditors - secured financial creditors and unsecured operational trade creditors. It owes USD100 to its secured financial creditors, USD30 to its unsecured operational trade creditors, and the liquidation value ('L') of the company is USD90. If the company is continued as a going concern for next 6 months, there is a 0.5 probability that in good state ('G') it will be worth USD200 and a 0.5 probability that in bad state ('B') it will be worth USD40. In other words, if the company is continued for the next 6 months, the expected going concern value of the company would be USD (0.5).(200) + (0.5).(40) = USD120. Assuming discount rate to be zero (for simplicity), since the net present value (USD120) is higher than the liquidation value (USD90), the company is not economically distressed. It is only in financial distress because the total debt of the company (USD130) exceeds its net present value (USD120). Therefore, the value maximising option would be to keep the company going, so that both the financial and operational creditors can recover a total of USD120 as against only USD90 if the company is liquidated.

However, if things go well and after 6 months the company is actually worth USD200, the secured financial creditors will still get only USD100, the value of debt owed to them. On the other hand, if things go badly and after 6 months the company is actually worth USD40, they will get the entire USD40. Therefore, the expected return for secured financial creditors would be USD (0.5).(100) + (0.5).(40) = USD70 - much lesser than what they would get in liquidation (USD90). Therefore, the secured financial creditors comprising the CoC would rationally prefer to liquidate the company for USD90, although ideally the company should have been sustained to get USD120. Looked at from this perspective, IBC suffers from VDP.

	L	G	B	E(v)
FCs	90	100	40	70
OC	0	30	0	15
Sh. H.	0	70	0	35
Company's value	90	200	40	120

Wealth Transfer Problem (WTP)

When insolvency law provides cramdown powers to majority claimants to facilitate restructuring, it raises the possibility of abuse. Majority claimants in control over the restructuring of the corporate debtor may be able to advantage or disadvantage different groups of beneficiaries by structuring of the securities, contract rights or other property received by each. They could even abuse this control to derive disproportionate private benefits by transferring wealth away from the dissenting minority claimants through the restructuring plan. Wealth transfer could also happen if valuation of the corporate debtor is left to one particular class of creditors. Senior creditors have an incentive to undervalue the company's business, while junior creditors have an incentive to overvalue it. I refer to these as Wealth Transfer Problem (WTP).

IBC suffers from WTP

The IBC empowers majority financial creditors with 66% vote by value in the CoC to impose a resolution plan on the dissenting minority financial creditors as well as the non-voting operational creditors. However, it does not provide proportionate protection to dissenting financial creditors. Till October 5, 2018, IBC regulations required the resolution plan to identify specific sources of funds to pay the `liquidation value' due to dissenting financial creditors. On October 5, 2018, this minimum protection was removed. Therefore, currently there is no specific provision under the statute or regulations to protect dissenting financial creditors from potential wealth transfer by abusive use of cramdown powers by majority financial creditors.

Further, the IBC overlooks a basic distinction between restructuring and going concern sales. Restructuring, being a hypothetical sale of the corporate debtor's business to the claimants of the corporate debtor, some finite notional value has to be placed on the business of the corporate debtor. Therefore, restructuring requires a valuation benchmark, according to which the rights of each claimant in the restructured business has to be determined. No such problem arises in a going concern sale for cash to a third party after proper marketing exercise. Consequently, no such valuation benchmark is necessary for a sale transaction. However, the IBC uses the liquidation valuation benchmark to protect operational creditors in both restructuring as well as sale transactions. This creates opportunities for wealth transfer from operational creditors in sale transactions under IBC.

To illustrate, assume that a corporate debtor has entered insolvency resolution process under the IBC. It has a going concern value of USD130 and break-up `liquidation value' of USD110. The face value of debts owed to its financial creditors is USD100 and to its operational creditors is USD30. If the company is liquidated on break-up basis, then the financial creditors would get USD100 and the operational creditors would get only USD10. However, if the company is sold for cash to a third party at going concern value, then the financial creditors could get USD100 and USD30 will be left over. Applying the creditor protection rules under the IBC, the financial creditors could approve a resolution plan that provides only the break-up liquidation amount (USD10) to the operational creditors and the remaining USD20 to the lower claimaints like shareholders. This would effectively amount to a wealth transfer from the operational creditors. Looked at from this perspective, IBC suffers from WTP.

Conclusion

Recently, the NCLAT in the Binani case tried to solve the WTP by taking an extreme position. It held (para 48) that a resolution plan must not discriminate against dissenting financial creditors or non-voting operational creditors. This broad non-discrimination principle developed by NCLAT is problematic. It could be misused by out-of-the-money minority financial creditors or non-voting operational creditors to engage in hold-up strategies to extract a better deal for themselves, causing wealth transfer from the majority financial creditors. Additionally, an increase in hold-up costs and coordination costs could in turn result in value destruction. It is rather ironic that in a bid to resolve the WTP under IBC, the Binani ruling could end up creating avenues for further WTP as well as VDP.

Solving the contemporary challenges emanating from the VDP and the WTP under IBC would require deeper policy thinking. Indian policymakers need to take into account the root causes of these problems, as highlighted in this paper. Ultimately, the fundamental legislative design choices underlying IBC may need to be revisited.

 

Pratik Datta is a Researcher at the National Institute of Public Finance and Policy.

An incomplete guideline: Enabling India's health facilities to cope with disasters

by Supriya Krishnan.

Health facilities offer the first line of response in any disaster. Damage to hospitals impedes long-term recovery of victims. The recent floods in Kerala highlighted the frailty of health systems. The flood damaged a 125-year-old hospital that serves 3.5 lakh people. This was similar to the Chennai floods (2015) where 18 patients died due to a hospital power failure. The Gujarat earthquake (2001) collapsed a 281-bed civil hospital leading to 172 deaths. Such losses and lapses in health infrastructure are not a recent problem in India. Then, how are Indian states formulating plans to make their hospitals resilient?

Resilient hospitals

The governance response to manage natural disasters in India is the Disaster Management Act 2005. The Act requires state governments to formulate state disaster management plans (SDMPs) to detail how to prepare, mitigate, respond and recover from disasters (Section 23). A component of these plans is medical preparedness and mass casualty management. When both time and resources are constrained, these SDMPs are essential for knowledge transmission to enable faster decision making. We review SDMPs of Indian states to study the inclusion of guidelines for disaster management of health facilities.

We utilized two recognised guidelines for resilient hospitals to review the SDMPs: 1) WHO indicators; and 2) India's national guidelines for hospital safety. In 2010, the World Health Organization (WHO) laid down indicators for "Safe Hospitals in Emergencies and Disasters". The indicators are made for countries to assess the vulnerabilities of existing health facilities and upgrade them to ensure continuous operations. WHO organises the indicators into three assessment checklists: Structural, Non-Structural and Functional. Countries are required to adapt actions in these checklists to suit their local context and protocol.

In 2016, the National Disaster Management Authority (NDMA) India laid down guidelines for Hospital Safety. These guidelines are in line with the WHO guidelines and build upon further requirements suitable for Indian frameworks for hospitals. To ensure a fair comparison of Indian SDMPs, the global indicators that were not addressed by any Indian SDMP have been excluded from the evaluation altogether. Based on the two documents (WHO, NDMA), the following list of indicators was chosen for assessment:

1. Structural: Indicators that enable the facility itself to withstand the shock from disasters such as design and engineering standards, location, compliance with fire codes and building materials.

Chosen indicators (2): Design codes; location/ land use.

2. Non-structural: Indicators for the smooth functioning of the facility following a crisis such as a lifeline equipment, architectural elements, service installations, handling of hazardous substances and general security of the facility.

Chosen indicators (1): Safety checklists.

3. Functional: Indicators that enable the facility to be fully operational to respond during disasters such as emergency procedures, site accessibility, communication and monitoring systems.

Chosen indicators (8): Equipment and supplies; Plans for emergency and disaster: Contingency Plan, Medical Preparedness Plan, Psycho-social care and mental health, Hospital networking, Mass casualty management; Human Resources: Emergency teams, training, and drills.

4. Others: Indicators not part of the WHO guidelines but present in most SDMPs to enable better management of health resources during a disaster.

Chosen indicators (8): Mobile hospitals; Media; District level data; Capacity of facilities; Standard Operating Procedures (SOPs) of departments in charge; GIS; list of hospitals; Use of National and State Disaster Resource Network (SDRN).

We studied SDMPs of 24 states that were available in the public domain on websites of State Disaster Management Authorities or allied departments (such as the Revenue Department).  The plans were text mined for keywords related to health like "hospitals", "health", "medical" and "casualty". Each paragraph containing any of the keywords was then evaluated against the above indicators to check for actions/guidelines for compliance. For each indicator addressed, one point was assigned to that plan document. The resulting scores are tabulated in this SDMP scoreboard spreadsheet. A map of India with state scores is presented below in Figure 1.

Figure 1: State-wise scores for the inclusion of health in State Disaster Management Plans (SDMPs)

The current state of plans

A broad overview of SDMPs indicates the lack of a comprehensive framework to ensure the inclusion of relevant aspects. There are significant gaps in the style and comprehensiveness in drafting the plans. Hospitals are identified as critical lifelines but requirements for health are scattered throughout different sections for different SDMPs. Plans were also out of date. Even though the law requires states to update their plans annually, only 12 states had updated their plans till 2016. Plans dedicate the majority of their sections towards response to a disaster, rather than preparedness in their Standard Operating Procedures (SOPs). Jammu and Kashmir, Himachal Pradesh, Punjab and Meghalaya address the most indicators while Haryana, Jharkhand and Andhra Pradesh address less than half the chosen indicators. The following is a detailed evaluation per indicator:

Structural indicators: Structural indicators are the most communicated and find mention in 75% of the documents. E.g. Himachal Pradesh mentions that 48% of its medical institutions are located in highly vulnerable districts and must comply with codes of the Bureau of Indian Standards (BIS). Punjab recommends assigning a quality auditor agency to monitor construction in seismic zones 3,4 and 5 (medium to very high earthquake risk).

Non-structural indicators: Non-structural indicators are the least addressed in all documents. Less than 50% refer to even one of the indicators from the WHO Safe Hospitals indicators. Points on the safety of medical equipment, furniture, backup supplies are mentioned as part of larger checklists for response but most do not provide actionable points. The plans do not refer to any other universal guidelines that hospitals may follow for the safety of non-structural aspects.

Functional indicators: Functional indicators find a mention in 75% of the documents. All states recommend the preparation of a medical preparedness plan, mass casualty management plan and checklists to train health workers for emergencies. An essential requirement to enable functional continuity of hospitals during emergencies is a list of all available health facilities and supporting services (such as power station, police station, ambulances). A mere 45% of documents provide any information on health facilities in the state. Odisha highlights provisioning of a dedicated high tension power line to the district headquarters hospitals for uninterrupted communication with the health control room.

Other indicators: Other indicators such as mobile hospitals, media management and public relations, district-level data and SOPs are well addressed. 19 of the 24 states mention utilizing the India Disaster Resource Network (IDRN). It is an online portal that includes data of health professionals and medical equipment to accelerate decision making during a disaster. Assam and Gujarat have established a functional State Disaster Resource Network (SDRN). Some states elaborate on existing programs to strengthen their health systems to respond to disasters:

1. Assam: Study on the multi-hazard safety aspect of schools, hospital buildings in Guwahati City along with retrofitting solutions.
2. Gujarat: Safety audit of hospitals.
3. Jammu and Kashmir: Vulnerability assessment of hospitals; promote hazard resilient construction; and implement a disaster preparedness plan for hospitals.
4. Uttar Pradesh: Medical database for health facilities; resource management and identification of a medical incident command system.

Level of detail in plans

The level of detail of a State Disaster Management Plan did not seem proportional to the disaster proneness of the state. Flood and earthquake-prone Uttarakhand, flood-prone Bihar and the recently flood-ravaged Kerala fair below average on the scoreboard.

The collapse of the civil hospital during the Bhuj earthquake triggered the last revision of the Indian Seismic Code for Earthquake Resistant Design of Structures (IS 1893: 2002). This has also improved the inclusion of structural indicators in most SDMPs as there is both legal mandates and evolved guidelines for health facilities to comply to.

Non-structural indicators have few or no guidelines in India. The NDMA guidelines on Hospital Safety (2016) elaborates on this in detail. But as a relatively recent document, it has not seen adoption in SDMPs yet. This needs more attention while formulating plans as non-structural safety includes a spectrum of indicators for equipment safety, power/water supply backups, architectural elements, fixtures, electrical installations etc that are essential to reduce service disruptions.

Functional indicators such as post-disaster psycho-social support and mental health find a mention in more than half the documents but Meghalaya is the only state with a detailed guideline. At least one-third of the survivors of the super-cyclone in the state of Odisha suffered disabling psychiatric symptoms. NDMA has recognised this issue as "a continuum of the interventions in disaster situations" and laid down guidelines on Psycho-social Support and Mental Health Services (PSSMHS) in Disasters (2009) that states may follow.

Conclusion

While plans alone will not determine the quality of response to a disaster, lack of a well-drafted plan will reflect in poorly implemented practices when both time and resources are limited. In comparison with global frameworks, India's SDMPs need to improve inclusion of non-structural and functional indicators to better guide the resilience of health facilities. Our study pushes for the creation of a systematic methodology to evaluate plans to start filling these gaps. This mainstreaming of resilience is essential to reduce the negative consequences of a disaster and promote overall well-being. This is achievable through a systematic regulatory framework to evaluate and improve state disaster management plans and assign a value to documented processes.

Data sources and analysis

1. Link to State Disaster Management Plans (SDMP) utilized for this study.
2. Link to the evaluation SDMP scoreboard spreadsheet.
3. Link to the extracted lines relating to health from all State Disaster Management Plans.

Table 1: Compliance scoreboard for the top four and bottom four states (refer spreadsheet for details on each indicator)

State	Structural (2)	Non-structural (1)	Functional (8)	Others (8)	Total score (20)
Jammu & Kashmir	2	1	6	7	16 (80%)
Himachal Pradesh	2	0	7	6	15 (75%)
Meghalaya	2	0	5	8	15 (75%)
Punjab	2	0	7	6	15 (75%)
Andhra Pradesh	1	0	4	2	7 (38%)
Jharkhand	0	0	2	4	6 (30%)
Haryana	0	0	0	3	3 (15%)

References

EM-DAT. Emergency Events Database by Centre for Research on the Epidemiology of Disasters (CRED), Accessed on September, 2018.

ADB 2005. India Post Tsunami Recovery Program Preliminary Damage and Needs Assessment by Asian Development Bank, United Nations and World Bank, March 2005.

Hengesh, J.V., Lettis, W.R., Saikia C.K., et al., 2002. Bhuj, India Earthquake of January 26, 2001 Reconnaissance Report, Hengesh, J.V., Lettis, W.R., Saikia, C.K., Thio, H.K., Ichinose, G.A., Bodin, P., Polet, J., Somerville, P.G., Narula, P.L., Chaubey, S.K. and Sinha, S., Earthquake Spectra 2002

BIS 2002. Indian Standard Criteria for Earthquake Resistant Design of Structures IS 1893 (Part 1): 2002 by Bureau of Indian Standards, June 2002.

Gupta 2000. Cyclone and After: Managing Public Health Meena Gupta, Journal Article, Economic and Political Weekly, 2000.

WHO 2010. Safe Hospitals in Emergencies and Disasters, Technical Report, World Health Organization, 2010.

NDMA 2016. Guidelines: Hospital Safety, National Disaster Management Authority, Government of India, 2016.

IPHS 2012. IPHS Guidelines for District Hospitals, Indian Public Health Standards, Guidelines, 2012.

GHI. A disaster safety checklist for hospital administrators by GeoHazards International.

GoI 2005. Disaster Management Act 2005, Government of India, 2005.

NDMA 2007. Guidelines: Preparation of State Disaster Management Plans. National Disaster Management Authority, Government of India, July 2007.

 

Supriya Krishnan is a consultant with the United Nations Office for Disaster Risk Reduction and was previously a researcher at the National Institute for Public Finance and Policy. The author would like to thank Shubho Roy for valuable feedback and guidance through the writing of this blog.