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1.Amending the insolvency and bankruptcy code (The Hindu)

2.Menace of insider trading (Live Mint)

3.Challenges and opportunities of 15th Finance commission (Live Mint)

1.Amending the insolvency and bankruptcy code (The Hindu)

Synoptic line: It throws light on the recent changes made in the insolvency and bankruptcy court of India. (GS paper III)

Overview

  • Recently, less than 12 months after the Insolvency and Bankruptcy Code came into force with the goal of easing the resolution of corporate insolvency, the Central government has passed an ordinance that significantly amends the original law.

 Stricter version of Insolvency and Bankruptcy Code

  • President Ram gave his assent to an ordinance amending the Insolvency and Bankruptcy Code (IBC), barring errant promoters of defaulting companies from regaining control of their assets being sold under the bankruptcy process.
  • While experts welcomed the move as sending a strong signal against crony capitalism, some expressed concern that such stringent criteria for potential investors could reduce the number of revival proposals that may come up.
  • The IBC ordinance bars not only wilful defaulters, but also several other categories such as guarantors to the debtor, those with loans classified as non-performing assets (NPAs) for at least a year, those convicted for any offence with a prison term of more than two years, directors in companies that are disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.
  • The change in law comes at a time when 11 out of the 12 cases chosen by the Reserve Bank of India (RBI) for early bankruptcy proceedings are in advanced stages of auctioning assets. In some cases, such as that of Essar Steel Ltd, the promoters have also presented resolution plans. Another 29 firms identified by RBI are headed for the bankruptcy court if lenders cannot resolve their cases by 13 December.
  • The amendments aim to keep out such persons who have wilfully defaulted, are associated with non-performing assets or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company.

Concerns with the changes

  • Some experts expressed concern that amendments will disrupt nearly all pending insolvency proceedings as the eligibility of all bidders will have to be ascertained before examining their bids. There is also the concern that if the classification of a debtor as a wilful defaulter is challenged in court, it could complicate the insolvency resolution process.
  • Experts said that promoters will challenge the amendment in the courts, arguing that it is retrospective in nature and unfair to those whose accounts turned sour owing to extraneous factors.
  • By including promoters and those in management whose loan accounts are classified as non-performing assets for one year or more, as well as any person disqualified to act as a director under the Companies Act, the amendment risks becoming an instrument of blunt force that hurts more than it helps. As policymakers and central bankers have often pointed out, not all bad loans are a result of mala fide intent on the borrower’s part.
  • Specifically, in cases where companies have ended up struggling to service debt as a result of unpredictable external factors that adversely impacted their operations and financials, barring the promoters of such firms from a chance to restructure and turnaround the business, merely because the loans have turned sour, is unfair to both the entrepreneur and the enterprise itself. For instance, steel companies were among the worst hit in the wake of the global downturn in commodity prices and depressed demand.
  • It has been reported that the promoters of some of these debt-laden steelmakers were considering participating in bids to restructure the debt and businesses and hoping to run them again.

Way ahead

  • Along with other steps towards improving compliances, actions against defaulting companies to prevent misuse of corporate structures for diversion of funds, reforms in the banking sector, weeding-out of unscrupulous elements from the resolution process is part of ongoing reforms initiated by the Government.
  • These would help strengthen the formal economy and encourage honest businesses and budding entrepreneurs to work in a trustworthy, predictable regulatory environment.

Question–  how does the recent changes in the IBC will impact the economic development in India?

2.Menace of insider trading (Live Mint)

Synoptic line: It throws light on the challenges of insider trading in India. (GS paper III)

Overview

  • Active investors regularly track company disclosures and adjust their portfolios depending on the nature and substance of announcements. As disclosures are often price sensitive, insiders are always in a better position to make bigger trading gains.
  • But since this will be unfair to other investors, and in order to maintain trust and confidence in the market, trading on the basis of unpublished price-sensitive information is illegal.

Insider trading in India

  • However, insider trading is said to be fairly prevalent in the Indian stock market. A recent investigative report by Reuters lends credence to such claims. It recorded at least 12 cases of prescient messages regarding listed companies on WhatsApp groups.
  • These messages were about quarterly results and the information was related to revenues, profits and margins. It also had information on revenue guidance and bonus issues. Interestingly, the information was not about penny stocks, but some of the most widely owned and tracked companies.
  • Nothing has been proved as of now and, as Reuters noted, it is possible that the information involved lucky guesses or good forecasts. All numbers did not match with official results. However, it has raised doubts in the minds of investors and the securities market regulator—Securities and Exchange Board of India (Sebi)—has rightly decided to probe the matter.

Harms of insider trading in India

  • If some market participants make profits on the basis of insider information, it will put others in an unfavourable position and can affect investor confidence. At the macro level, lack of trust in the market can impede mobilization of capital, which can affect investment and economic growth in the long run. Therefore, it is important that investors don’t lose faith in the market.
  • Regulations in the context of insider trading are fairly robust in India and the definition of an insider is also quite broad. The Prohibition of Insider Trading Regulations, 2015, says: “…anyone in possession of or having access to unpublished price-sensitive information should be considered an ‘insider’ regardless of how one came in possession of or had access to such information.” According to the rules, communicating “any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law” is punishable.
  • For the record, the number of insider trading investigations taken up by the market regulator in 2016-17 went up to 34 compared with 12 cases in the previous year.

Curbing the insider trading

  • To be sure, it will not be easy for the regulator to eliminate the menace of insider trading. One of the problems is that Sebi is not adequately staffed. As the Kotak committee report on corporate governance highlighted, Sebi has just one employee for six listed companies, while the US securities market regulator, Securities and Exchange Commission, has about one employee for every listed company.
  • In the division that looks after the quality of financial reporting, compared with Sebi, the US regulator has about 15 times more employees.
  • It is important that the market regulator is adequately staffed to be able to enforce regulations effectively. The other problem is that evolving technology and modern means of communication are difficult to track. This only raises the level of complexity for the regulator in tracking insider trading cases. Therefore, the regulator needs to work on increasing its capacity as well as capabilities. Adequate manpower with required skills and better use of technology will help improve implementation of regulations.
  • Effective implementation of regulations will not only help in penalising the guilty, but will also work as a deterrent. It is often argued that an offence like insider trading happens because of lack of fear. So it is important for the regulator not to allow such a situation to persist where people get away with breaking the rules of the game. It may not be exactly comparable in the present context, but by securing conviction in the famous Rajat Gupta insider trading case in 2012, the US regulator managed to set an example.
  • The present messaging case could be an opportunity for Sebi to do the same. However, it is also incumbent on companies to protect price-sensitive information and make sure that it is released as per the law.

Way ahead

  • India has done well in the protecting minority investors indicator of the World Bank’s doing business rankings and was at the fourth position this year. Therefore, it is important that issues which can affect investor confidence are urgently addressed. In order to boost confidence, it will be critical that the difference between rules on paper and reality on the ground is minimised.

Question– What do you mean by insider trading? What are the efforts of government to curb the menace of insider trading in India?

3.Challenges and opportunities of 15th Finance commission (Live Mint)

Synoptic line: It throws light on the challenges and opportunities for the 15th Finance commission. (GS paper II)

Overview

  • Last week, the Union cabinet formally signed off on the setting up of the 15th Finance Commission. On the face of it, this is a routine exercise carried out every five years to detail the fiscal relations framework which needs to be tweaked in accordance with the changing economy—of a federal polity like India.

Evolution of 15th Finance commission

  • The Finance Commission, set up in 1951 under Article 280 of the Constitution of India, focuses on the vertical (division of revenues between centre and states) and the horizontal distribution (between states to ensure regional equity).
  • but this time, the constitution of the 15th Finance Commission can be potentially more than merely serving this broad mission objective. It actually comes about at a very interesting cusp in the evolution of India.
  • With the passage of the goods and services tax or GST (and especially the setting up of the GST Council, India’s first genuinely federal institution where the centre and states are equal stakeholders) the story of India’s federal polity has undergone a significant transformation.
  • Besides economically unifying the country a first in itself and increasing economic efficiency, the inherent design of GST favours the spread of regional growth and consequently tax revenues.

Deepening the cooperative federalism

  • The GST Council has demonstrated unequivocally that cooperative federalism is more than just a catchy slogan. In 23 meetings so far, despite deep differences in points of view, the Council has generated consensus on every decision. This is remarkable just scan the headlines of newspapers, especially on news relating to the upcoming Gujarat elections and this will be more than just apparent.
  • Without tapping this spirit of cooperative federalism, India will continue to struggle to resolve the developing country handicaps it has struggled with over the last seven decades. Unresolved, the country will never be able to realise its potential economic growth rate of 8-8.5%. And this is a luxury which the country, with about 400 million people still living below the officially defined poverty line, can ill-afford any longer.

Challenges of Urbanization

  • As per the 2011 Census, a little less than a third of India has urbanized. Six years later, based largely on anecdotal information, it is clear that this trend has accelerated. The change is welcome; unfortunately, public policy has failed to keep pace. Consequently, what you see around us is urbanization through trial and error; given the scale of India’s population, this is an imminent man-made disaster in the making.
  • Significantly, each Finance Commission has recognized that India is transforming and made its recommendations accordingly. For instance, the 10th Finance Commission mooted the idea of pooling all revenue resources (except customs).
  • Similarly, the 13th Finance Commission buried the idea of one-size-fits-all and laid out individual fiscal consolidation roadmaps for states. This is something the 14th Finance Commission took to the next level by nixing grants and also raising the share of states in tax revenues to 42%, thereby giving states unprecedented fiscal freedom.

Way ahead

  • It is then clear that the 15th Finance Commission provides an enormous opportunity in setting out a blueprint for India’s future that rests on the foundation of a strong federal polity. Presumably, the Union government, especially one which has championed cooperative federalism, is thinking similarly.

Question– How Finance Commission had acted as the alternate wheel of fiscal federalism? What are the challenges regarding the 15th Finance commission?