Money & Banking
Why the new bankruptcy law is not a magic wand
Both Houses of the Indian Parliament have passed the long-awaited Insolvency and Bankruptcy Code 2016. The Code sets out a legal framework for resolving insolvency of companies and individuals. This should make it easier for ailing companies to exit operations and for creditors to recover their dues in a timely manner. However, according to brokerages, the new law may not help banks in faster resolution of existing cases; it may take few more years to feel its effects.
 
"While we do not rule out the long-term benefits of a strong bankruptcy code for banks, bond markets and companies, we do not see any near or medium term benefits either as delays stemming from want of accurate and timely information and inefficient adjudicatory mechanisms, would take three-five years to resolve," says Religare Capital Markets Ltd, in a research note.
 
Nomura feels the new Code would be very positive for financial sector reforms. However, it added, "The full implementation of the Bankruptcy code is expected to take time, as the entire institutional structure around dealing with bankruptcy - insolvency professionals, insolvency professional agencies, information utilities and setting up of the bankruptcy board - needs to be established. Until the Board is set up, the Code provides that a financial sector regulator, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) will act as an interim regulator."
 
The Code will consolidate the existing framework by repealing two Acts and amending 11 others including Companies Act, 2013, Debt Recovery Tribunal (DRT) Act, 1993, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.
 
Currently, there are multiple laws dealing with insolvency, which lead to delays from overlapping jurisdictions of laws and a lack of clarity in their provisions. India currently ranks 136 in the World Bank's resolving insolvency ranking; it takes 4.3 years to resolve insolvency and the recovery rate (at 25.7 cents to a dollar) is very low. The DRTs have several pending cases at present, which is affecting the recovery and faster resolution of issues.
 
The Code proposes to set up two adjudicating authorities to hear and dispose cases by or against the debtor:
 
The Debt Recovery Tribunal (DRT): The DRT will have jurisdiction over individuals and unlimited liability partnership firms.
 
The National Company Law Tribunal (NCLT): The NCLT shall be the adjudicating authority with jurisdiction over companies and limited liability entities. All powers under all bankruptcy related regulation will be granted to NCLT.
 
The new Code also widens the definition of sick companies. At present to qualify as sick, a company has to be registered for a minimum period of five years in which at the end of any financial year, the accumulated losses have to be equal to or exceed its entire net worth. These requirements have been done away with and sickness has been linked to the event of default of payment by the company to its operational creditors, including workmen and employees whose past payments are due. 
 
"Therefore, a consolidated legal framework for resolving bankruptcy will play a key role in improving the ease of doing business in India. Additionally, this will be a big positive for the banking sector, as the Code gives banks (creditors) a legal path for recovering their dues in a time-bound manner," Nomura says.
 
According to Religare, at present there are two burning issues with the current bankruptcy laws or procedures. It says, "The current legislations and procedures are fraught with delays largely on account of lack of timeliness and accuracy of information on existing debt, collaterals against debt and other charges against the borrower and inefficient adjudicatory mechanisms like shortage of manpower in courts, stay orders and backlog of cases."
 
"For timeliness and accuracy of information, the role of information utilities (IUs) is very critical. IUs will work like a credit bureau for non-individuals and will hold all information (financial or operational) on firms at all times. The Parliament joint committee in its report highlighted that the timeline of 180 days for resolution of bankruptcy proceedings is difficult to meet unless IUs become fully operational with all set of information," the report added.
 
The research note says, considerable time will be lost in the establishment of a regulator for insolvency professionals (IPs) and IUs, as well as increasing the number and strength of National Company Law Tribunals (NCLTs). In addition, many procedural details on the working of IPs, IUs and other rules would be drafted by the regulator, which would take further time. "In view of the above, we see benefits flowing in after 3-5 years from now, and that too depending on the execution and effectiveness of the judiciary. Our interaction with lawyers confirms our view," Religare said.
 
The new Code will bring some important changes, like...
 
(a) There will be a strict timeline of 180 days (90 days for special cases) for resolution
(b) The Insolvency Resolution process (IRP) has to be approved by a majority of 75% of creditors as against current rules that require approval of 60% by value and 50% by the number of creditors.
(c) Any financial (in case of default)/operational creditor (in case of non-payment of dues) can initiate the IRP.
(d) The Role of IPs and IUs has been defined, which will bring a higher degree of professionalism in the insolvency process.

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SC nixes TRAI order on call drops
The Supreme Court on Wednesday struck down a Telecom Regulatory Authority of India (TRAI) notification obligating telecom service providers (TSPs) to compensate consumers for dropped calls.
 
Striking down the notification dated October 16, 2015, an apex court bench of Justice Kurian Joseph and Justice Rohinton Fali Nariman declared that "the impugned regulation is ultra vires of the TRAI Act and violative of the appellant's (Associations of TSPs) fundamental rights under Articles 14 and 19(1)(g) of the constitution".
 
The apex court also underlined that subordinate legislations should be framed after due consultation with all stakeholders so that they are transparent and shorn of any arbitrariness.
 
The TRAI had notified the Telecom Consumers Protection (Ninth Amendment) Regulations, 2015, by which every provider of mobile telephone services was made liable to credit only the calling consumer (and not the receiving consumer) with one rupee for each call drop, which takes place within its network, up to a maximum of three call drops per day.
 
Setting aside the February 29 Delhi High Court judgment in the case, the apex court said the high court was incorrect in holding that the penal regulation for call drops was for ensuing quality of service.
 
Pronouncing the judgment, Justice Nariman said: "(October 16 TRAI) Regulation does not lay down any quality of service -- what it does is to penalise service providers even though they conform to the 2 percent standard laid down by the Quality of Service Regulations, 2009."
 
"The finding that a transparent process was followed by TRAI in making the Impugned Regulation is only partly correct. While it is true that all stakeholders were consulted, but unfortunately nothing is disclosed as to why service providers were incorrect when they said that call drops were due to various reasons, some of which cannot be said to be because of the fault of the service provider," the judgment said. 
 
Pointing that 2 percent ceiling on the call drops as a condition of licence and October 16 regulation penalising call drops should be seen together, the judgment said: "We also find that when the service provider argued that it was being penalised despite being within the tolerance limit of 2 percent, the answer given by the high court is disingenuous, to say the least, when the high court says that 2 percent is a quality parameter for the entire network as opposed to payment of compensation to an individual consumer. We are unable to appreciate the aforesaid reasoning."
 
"We find that, subject to certain well defined exceptions, it would be a healthy functioning of our democracy if all subordinate legislation were to be "transparent" and framed after consultation with all the stakeholders." 
 
"We would exhort parliament to take up this issue and frame a legislation along the lines of the US Administrative Procedure Act (with certain well defined exceptions) by which all subordinate legislation is subject to a transparent process" involving consultation with all the stakeholders," the court said.
 
Similarly, it said the power of making rules and regulations is exercised after due consideration of the views of all stakeholders with an explanatory memorandum stating as to why the views of the stakeholders were agreed with or disagreed.
 
"Not only would such legislation reduce arbitrariness in subordinate legislation making, but also conduce to openness in governance. It would also ensure the redressal, partial or otherwise, of grievances of the stakeholders concerned prior to the making of subordinate legislation," the Supreme Court said.
 
This, the court said, would "obviate, in many cases, the need for persons to approach courts to strike down subordinate legislation on the ground of such legislation being manifestly arbitrary or unreasonable".
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Dredged material from ports can be multi-crore business in construction
Can infrastructure be sustainably built in a developing economy? As India undergoes a developmental period, this question assumes importance.
 
Infrastructure growth is likely in railways, roads, airports, smart cities, large industrial units, super technological communication systems and the like. One of the major factors in infrastructure development is civil construction. In this sand, soil, cement, aggregate and steel are forerunners.
 
With shrinking utility services, the requirements of legal environmental restrictions and advocacy and desirability of sustainability, the cost of construction is steadily rising.
 
To overcome the above situation, it is possible to use the huge amount of dredged material from various ports. At the moment this material is dumped in the sea.
 
Every year, ports such as Kolkata, Paradip, Visakhapatanam and Chennai on the east coast of India produce millions of tonnes of dredged material. A similar situation also exists on the west coast.
 
Dredging is essential for navigation, remediation and flood management of waterways.
 
Use of dredged material can reduce the quantities of primary resource needed for activities such as construction and habitat creation. Some countries do already make extensive use of dredged material. In Japan, more than 90 percent of dredged material was used in the past.
 
In India, a new capital city of Andhra Pradesh is coming up at Amaravati. An area covering 30 villages between Vijayawada and Guntur, some 35 km away from Amaravati town has been marked for capital development.
 
Pitched as a world-class riverfront capital city, Amaravati will be an energy-efficient and green city with concentration on industrial hubs. The Andhra Pradesh government, through the Capital Region Development Authority, has acquired some 30,000 acres of land.
 
Expected to be completed by 2018-19, the Seed Capital Area (SCA) of 16.7 sq.km. will be home to about 300,000 residents. The business hub is expected to generate about 700,000 jobs in various sectors, including government. There will be a thriving, state-of-the- art Central Business District (CBD) for business and living.
 
The master plan envisages nodes and corridors for a transit-oriented development approach. So, there will be an integrated network of 12 km of Metro railway, 15 km of Bus Rapid Transit system, seven km of downtown roads, 26 km of arterial and sub-arterial roads and 53 km of collector roads.
 
The plan for the capital city has huge potential for infrastructure, civil engineering and construction activity.
 
It is possible that the dredged material from the ports on the east coast could be easily used at Amaravati. Depending upon properties of dredge material, it could be used for brick-making. Initially, some trials may be required for this purpose, but once it is found to be useful, it would be the most sustainable process for development.
 
The dredged material could also be used for several other purposes such as landfill caps and covers, beach nourishment, top soil creation and enhancement, habitat creation or restoration, reclaiming of mined land and parks as well as in agriculture, forestry, aquaculture and horticulture.
 
If the dredged material is sold to the Amaravati Capital Project, it would generate a huge business. The capital project is planned to be developed in three stages and over 10 years. Financially, that would be highly beneficial to all dredging companies and also to Andhra government which could use the material for sustainable development.
 
There's a historical example of such sustainable development happening.
 
In the sixties of last century, laboratory experiments were conducted to find out whether fly ash waste from thermal plants could serve as a partial replacement for cement. After successful trials, researchers came to the conclusion that fly ash could be used in making concrete. At present, about one-third of fly ash replaces cement in making concrete.
 
There is no reason why dredging material cannot do what fly ash did for the construction industry.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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