## Monday, September 18, 2017

Bonds markets are not different on Jayanth Varma's blog, 18 September 2017. How we achieve this in India.

Jaypee: consumer angle in IBC play by Aparna Ravi and Anjali Sharma in The Hindu, September 18, 2017.

Advantages of school-goers in Bombay: High school genetic diversity and later-life student outcomes by Justin Cook and Jason Fletcher in Vox, September 17, 2017.

A great churning by Ajay Shah in Business Standard, September 17, 2017.

Trump and Russia: what does Robert Mueller know? by Gillian Tett in Financial Times, September 15, 2017.

The Caribbean's pioneering form of disaster insurance in The Economist, September 14, 2017.

The great nutrient collapse by Helena Bottemiller Evich in Politico, September 13, 2017.

RBI faces a currency conundrum by Ishan Bakshi in Business Standard, September 11, 2017.

Interpretation of dreams: Growth is an artifact of how we compute GDP numbers by Abhijit Banerjee & Esther Duflo in The Economic Times, September 10, 2017.

Welcome support for the new bankruptcy law in Mint, September 7, 2017. Also see: The Economics chapter from Volume 1 of the BLRC report.

Behavioural insights for policy interventions: exploring the how and why? by Bhuvanesh Awasthi in NIPFP YouTube Channel, September 7, 2017.

The mystery of the lost Roman herb by Zaria Gorvett in BBC, September 7, 2017. While you can: Fifteen shades of green by Pushpesh Pant and Satya Prakash in Mint, 2 September 2017.

Pension as mandatory savings by Renuka Sane in Business Standard, September 5, 2017.

Right to Privacy Ruling Pokes Holes in Supreme Court's Order on National Anthem in Cinemas by Rohit Bhat in The Wire, September 4, 2017.

My life's mission to win over Kashmiris for India is irretrievably lost by Wajahat Habibullah in Scroll, September 4, 2017.

Cognitive and neural foundations of human decision making by Bhuvanesh Awasthi in NIPFP YouTube Channel, September 4, 2017.

This Tiny Country Feeds the World by Frank Viviano in National Geographic magazine, September 2017.

China Realizes It Needs Foreign Companies by Christopher Balding in Bloomberg, August 30, 2017.

Nehru's Speech at AMU Convocation, January 24, 1948.

## Wednesday, September 06, 2017

What shapes investment? by Ajay Shah in Business Standard, September 4, 2017.

Maximum pain by Ila Patnaik in The Indian Express, September 1, 2017.

A Rs 1 Crore Fund to Support Open Source Projects in India in Mozilla, August 30, 2017.

Extreme trust for govt almost tripled under Duterte admin: Survey by Jhoanna Ballaran in Inquirer, August 29, 2017.

Sarah Palin Defamation Suit Against The New York Times Is Dismissed by Sydney Ember in The New York Times, August 29, 2017.

Calls to weaken rupee are misguided by Vivek Dehejia in Mint, August 28, 2017.

The Two Americans by Sabrina Tavernise in The New York Times, August 26, 2017.

Privacy upheld as fundamental right: What term means for you, what is govt's view by Samarth Bansal in The Hindustan Times, August 24, 2017.

The republic of statistical scramble by Rajrishi Singhal in Mint, August 23, 2017.

The Role of the Council of Economic Advisers by Aaron Steelman in Richmond fed, August 23, 2017.

Monumental failures of RBI by Gajendra Haldea in Business Standard, August 22, 2017.

The Wonder Women of Botswana Safari by Hillary Richard in The New York Times, August 22, 2017. There is a great tradition of women guides and porters in Sikkim.

State of the police forces by Mandira Kala and Anviti Chaturvedi in NIPFP YouTube Channel, August 21, 2017.

Emerging infectious diseases in a city: dengue and chikungunya in Delhi by Olivier Telle in NIPFP YouTube Channel, August 22, 2017.

The great highway loot by Gajendra Haldea in The Indian Express, June 12, 2017.

Equal by Catastrophe by Victor Davis Hanson in Inference International Review of Science, Volume 3, Issue 2.

## Saturday, September 02, 2017

### Cost of compliance for clinical establishments

by Manya Nayar and Shubho Roy.

The Clinical Establishments (Registration and Regulation) Act, 2010 (Clinical Establishments Act) is facing resistance from the medical fraternity. The Indian Medical Association claims that the law will cause an increase in the cost of treatment and adversely affect small and medium size clinical establishments such as a clinic run by one or a few doctors. The Health Minister for Delhi promised that the law, as drafted by the Planning Commission, will not be implemented in Delhi. On 27th April, 2017, doctors observed black day', to protest against the law.

### Costs and benefits in a sound regulatory process

All regulation creates constraints for private persons. In general, the constrained cost minimisation of private persons will yield an inferior value (i.e. higher cost) when compared with the unconstrained cost minimisation. The question that society must ask is about the extent to which the regulation yields benefits that outweigh the costs.

In a sound regulatory process, this step is built into the regulatory process through administrative law. It is called Regulatory Impact Analysis (RIA) or Cost Benefit Analysis (CBA). The formal process of undertaking RIA/CBA is a healthy one for three reasons:

1. The process of undertaking the CBA helps policy makers improve thinking about the problem that we seek to solve and the alternative mechanisms that could be adopted.
2. The citizenry obtains greater transparency when the CBA is released. Officials get an opportunity to display expertise in the release of the documents. Transparency and expertise create legitimacy.
3. The public, and all interested parties, are able to modify assumptions and rework the thought process of the regulator. This creates a more informed public debate.

As an example of doing cost-benefit analysis, consider the way the the British Government proposed a regulation requiring clinics to check the English language skills of doctors before he/she is appointed in a clinic. The cost-benefit analysis weighs the costs and benefits of various policy option including the option to do nothing. On the side of costs, the government estimated that 15% of the doctors will be required to take the test, which would cost GBP 132 per test. On the side of benefits, it was estimated that over a period of 10 years, English competence, would prevent:

1 death, 2 cases of severe harm and 15 cases of moderate harm...

The quality adjusted life year was valued at GBP 60,000. The litigation costs arising out of the injuries from poor English knowledge of doctors was estimated to be half of that. These would be savings to society: clinics and patients. The analysis concluded that the costs would be around GBP 0.77 million while total benefits would be GBP 2.01 million (on a net present value basis). As the estimated benefits outweigh the cost, the proposed regulation is justified.

Turning to the Indian context, while the protesters are arguing about the increased costs of treatment under the proposed law, estimates about the financial implications for providers are lacking. Like the Clinical Establishments Act, the Right to Education (RTE) Act also focuses on the provision of inputs and not on outcomes. Most of the requirements under the RTE act impose costs on schools without any demonstration on improved learning outcomes. Wadhwa (2010) shows that learning outcomes are not correlated with the school infrastructure, which forms majority of the measures required under the RTE Act. Wadhwa's research shows that the most significant factor for learning outcomes is teacher attendance. Sadly, this is not part of the RTE Act measures. On the other hand there is research to show that complying with the RTE Act, substantially increases the cost of school fees. Centre for Civil Society calculated the compliance cost of RTE in Delhi. They found that due to RTE norms, the average cost per child will go up to INR 2,223 per month from the current fee of INR 322 per month, indicating an increase in average fee by 590%. While some the RTE Act requirements like the need for a 800 sq.m. playgrounds have been relaxed to 200 sq m most of the other input based requirements remain. Muralidharan and Sundararaman (2009) carried out a randomised control trial in five districts of Andhra Pradesh with 500 schools over two years. Teachers were offered a bonus for gain in standardised scores. The authors conclude that teacher performance pay led to significant improvements in student test scores. The results also showed positive spillovers i.e. students further more performed better in subjects for which teachers were not given incentives. However, such measures are yet to be incorporated into the RTE law.

In this article, we estimate the cost of setting up a basic doctor's clinic which complies with the standards under the Clinical Establishments Act.

### The standard

The Clinical Establishments Act prescribes standards for health care facilities. It covers pharmacies, dispensaries, clinics, diagnostic centres, and hospitals of various types and sizes. Standards have been made for different types of clinical establishments. The most basic type of clinical establishment under the Act is: Clinics (only consultation). This type covers a simple doctor's clinic. A doctor's clinic is usually the first, and most frequent, point of contact between doctors and patients. While these locations are limited to an interaction with a doctor, a few minor procedures like dressing, administering injections, etc. may be provided. No overnight stay or observation can be carried out in these clinics. The standards for this type of clinic constitute the smallest possible compliance cost under the law. We studied this standards document, Clinical Establishments Act Standard for Clinic/Polyclinic only Consultation, in order to estimate the cost of compliance.

### Methodology

1. We identified the requirements from the standards document.
2. Made certain assumptions, like location of clinic, consumption of medicines, registration costs, etc.
3. Obtained prices of the items required.
4. Estimated the annual compliance cost.
5. Drew up three scenarios based on assumptions about number of patients visiting each day.
6. Estimated the compliance cost per patient.
Identifying requirements:

The standards document groups the requirements into seven categories:

1. Infrastructure: Lays down the minimum floor area for the clinic.
2. Furniture/fixtures: Mandates that the clinic have cupboards, tables, observation tables, etc.
3. Human resource: Requires that the clinic have at least one support staff person.
4. Equipment/instruments: Lists out the medical equipment that a clinic should have.
5. Medicines: Requires the clinic to maintain inventor of 13 essential medicines.
6. Legal/statutory requirements: Requires the doctor to be registered with the state medical council, the clinic be registered under the Clinical Establishments Act, and comply with environmental laws for disposing biomedical waste.
7. Record Keeping: The clinic must keep records of all patients for 3 or 5 years.

Assumptions:

• Location: The clinic is located in Saket, New Delhi.
• Number of working days: The clinic is open for 26 days in a month.
• Resuscitation equipment: The phrase resuscitation equipment in the standard is ambiguous. We assume that the requirements for hospitals would also apply to clinics.

• Classifying medicines: We divided the list of medicines into emergency and non-emergency using Indian Public Health Standards: Guidelines for Community Health Centres.
• Consumption rate of medicines: We assume that emergency medicines are consumed at the rate of 5 per month and non-emergency medicines, at the rate of 26 per month. These values were chosen through discussions with doctors.
• Registration cost: The registration cost under the Clinical Establishments Act is assumed to be Rs.1000, which is generally the case.

Sources of price data: We found furniture and equipment prices from Amazon.in and Industrybuying.com. Rental charges were estimated using Magicbricks.com. The salary of the helper was estimated using Naukri.com. Prices of medicines were obtained from Medindia, MedPlus Mart and Indiamart.

Exclusions: Our estimates are conservative in that the following are not counted:

Number of users. The compliance costs will be distributed amongst the patients visiting the clinic. This requires assumptions about traffic at the clinic expressed in patients per day. We considered three scenarios: Optimistic (45/day), Realistic (30/day) and Pessimistic (15/day).

### Findings

The calculations were made using a spreadsheet that is released to the public.

Table 1 reports the total cost for setting up and running the clinic for two years, and the costs per patient based on our scenarios. In Table 2, we broke the cost down into sub-components to see which part accounts for the largest share.

Table 1: Compliance cost and cost per patient
Expenditure/ScenariosYear OneYear Two
Compliance cost:
Capital Expenditure95,11427,324
Revenue Expenditure4,29,6404,29,640
Total Expenditure
(Sum of capital and revenue)
5,24,7544,56,964
Cost per patient:
Pessimistic
(15 patients/day)
112 98
Realistic
(30 patients/day)
56 49
Optimistic
(45 patients/day)
37 33
Values are in Rs.

This suggests that the standard may impose a cost of around Rs.50 per patient, under the Realistic' case. These are significant values when compared with the typical charges at clinics in Delhi.

Table 2: Components of expenditure
Infrastructure 39.545.4
Furniture6.20.6
Human resource19.422.3
Equipment11.85.4
Drugs22.626.0
Legal requirements0.50.3
Values are in Percentage of total.

This shows that the cost structure is dominated by what the standard requires in the form of infrastructure.

### Our work is incomplete

We have only estimated the costs of the standards. We have no idea of the benefits arising out of these standards. No studies or estimates about either benefits or costs were released by the government as part of the process of drafting the standards. We know that infrastructure costs are important, but we do not know if the size of the waiting room affects the quality of medical care. This requires much more research about the benefits each requirement, like a 35 sq.ft. waiting room, bring to the table.

### Conclusion

Regulations impose costs. Costs are passed on to users. When the benefits to users are more than the costs, the regulations may be beneficial. It is not clear that the standards for basic clinics satisfy this criterion. There are no estimates about the benefits that flow from the standards. It is not clear that mandatory staff or minimum waiting area help induce a positive outcome for patients.

Regulations under the Clinical Establishments Act will have consequences on the price of health care in India. In India, an increase in prices of a few per cent can impact upon millions of users. People excluded from trained medical care may use quacks as a substitute. Such substitutions may have negative effects on health outcomes. More work needs to be done before imposing requirements on regulated entities. The government should carry out research and analysis to be satisfied that each word of each law/standard is justified and the benefits outweigh the costs.

### References

Centre for Civil Society, Effectiveness of School Input Norms under the Right to Education Act, 2009, 2015, Centre for Civil Society.

Misra, Kartik and Bapna, Akanksha and Shah, Parth J.,The cost to comply with the Right to Education Act, 2012 (on file with authors).

Muralidharan, Karthik and Venkatesh Sundararaman, Teacher Performance Pay: Experimental Evidence From India.(2009) NBER Working Paper Series 15323.

Narang, Prashant, Right to Education as Another License Raj: Punjab as a case study, 2014, Centre for Civil Society.

Wadhwa, Wilima, RTE norms and learning outcomes, 2010, ASER.

## Wednesday, August 30, 2017

### Watching India's insolvency reforms: a new dataset of insolvency cases

by Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri.

The legal framework for insolvency resolution in India underwent a structural change when the Insolvency and Bankruptcy Code, 2016 (IBC) was passed in May 2016. Once the provisions relating to corporate insolvency were notified (November 2016), the first cases of insolvency started being admitted in the National Company Law Tribunal (NCLT), the quasi-judicial tribunal vested with adjudication powers under the IBC. The final orders on these cases became the first public records of India's new insolvency framework. In a recent working paper titled Watching India's insolvency reforms: a new dataset of insolvency cases, we introduce a new dataset of all final orders passed by the NCLT and the appellate forum, the National Company Law Appellate Tribunal (NCLAT) under the IBC. In the paper, we also illustratively apply the data to answer questions about the economic impact of the IBC and the functioning of the judiciary under it. This blogpost presents some summary statistics on the IBC and our preliminary findings relating to the working of the IBC.

We use information collected from the final orders published by the NCLT in the first six months of operationalisation of the IBC, that is, from 1st December, 2016 until 15th May, 2017 (hereafter, "sample period"). There are 23 fields of information for each case in the data-set. This includes parameters such as, who are the initial users of the insolvency process under the IBC, what kind of evidence are they using to support their claims before the NCLT, the average time taken by the NCLT to dispose off cases, the outcome of the proceedings, reason for dimissal of a case and the variation in admission and dismissal across the nine benches of the NCLT.

## Using data to understand the economic impact of the IBC

We apply the data to answer three questions relating to the economic impact of the law:

Does the law improve the balance between rights of the creditors and the firm debtor during insolvency?

The Indian legal regime preceding the IBC conferred weak rights on creditors, especially unsecured creditors. It created scope for the judiciary to intervene in the commerical matters of debt re-structuring. The law itself and the courts and tribunals enforcing it, also exhibited a rehabilitation and pro-debtor bias (Ravi 2015). While the sample period represents the earliest days of operationalisation of the IBC and the current data-set is small to conclusively answer this question, this early data indicates that there has been a shift in the enforcement of creditors' rights under the IBC. Table 1 shows who used the IBC during the first six months of its operationalisation.

 No. of petitions filed by operational creditors 62 No. of petitions filed by financial creditors 21 No. of petitions filed by creditors 83 No. of petitions filed by debtors 26 No. of unknown applicants 1 Total 110

Of the 110 cases that were disposed off during the sample period, 75 percent of the cases were triggered by creditors. Of these, 75 percent were filed by unsecured operational creditors. This indicates that operational creditors, who hitherto had weak enforcement rights, have taken recourse to the IBC to enforce their claims. There may be multiple reasons for the relatively low number of financial creditors taking recourse to the IBC during the first six months. Anecdotal evidence suggests that firm debtors default to financial creditors the last. Financial creditors may largely be secured creditors who may choose to enforce their claim by realising their security. There was lack of regulatory certainty on provisioning norms for banks and the apprehension of scrutiny by the anti-corruption investigative agencies among bank management. However, in the absence of data on default or the enforcement of security by financial creditors in India, the reason for the divergence in creditor behavior in triggering the IBC is unclear.

Another feature of interest is the behaviour of the debtor. There is a commonly voiced apprehension that the debtor will avoid resorting to insolvency because the IBC moves away from the debtor-in-possession model to a framework where the debtor's board is suspended and the affairs of the debtor are run by an independent insolvency professional. However, contrary to this apprehension, around 24 percent of the petitions in this early six month period have been filed by debtors.

Of the 110 cases that were filed, 50% of them have been admitted by the NCLT and are now undergoing a mutually negotiated debt restructuring process. This shows that unlike the previous regime where the judicial bodies exhibited a pro-debtor bias, there is no explicit admission or dismissal bias for insolvency cases under the IBC.

Within the caveat that these are early days and we still have to observe how these cases get resolved, the observed data suggests that creditors are able to use the new insolvency and bankruptcy regime with increasing confidence compared to the previous regime.

Does the law empower various types of creditors when the firm defaults?

Table 2 shows the kind of operational creditors who took resort to the IBC during the sample period. While majority of the operational creditors are suppliers to the debtor, we find that even holders of decrees are taking recourse to the IBC.

 Employees 5 Vendors 43 Others 6 Not known 8 Total 62

Table 3 shows the outcomes of the insolvency cases filed by different kinds of creditors during the sample period. While 43 percent of the cases filed by the financial creditors were dismissed, the percentage of dismissal for operational creditors is slightly higher at 58 percent.

 No. of petitions filed Admitted Dismissed Operational creditors 62 26 36 Financial creditors 21 12 9 Debtors 26 23 3 Unknown 1 0 1 Total 110 61 49

A reading of Tables 2 and 3 would indicate that even during the earliest days of its operationalisation, a wide variety of creditors have shown the ability to trigger insolvency proceedings under the IBC. This is in contrast to the previous regime where only a certain subset of creditors were able to trigger insolvency proceedings against firm debtors, and other creditors had to file cases in civil courts.

Does the law empower only large sized debt holders?

Table 4 shows the size of debt claims that have been used to trigger the IBC during the sample period. The table also presents the distribution across the different quartiles, by showing threshold values at three different cut-off points: for the 25th percentile point, the 50th percentile and the 75th percentile point. The 25th percentile point is the value below which 25 percent of the cases will fall, the 50th percentile point is the point below which 50 percent of the cases will fall and so on. Further, this has been done by the different types of stakeholders: financial creditors, operational creditors and the debtor.

 Size of debt reported Corporate debtors Operational creditors Financial creditors Minimum 9,211,106 109,516 3,069,000 25th percentile 98,160,525 1,276,884 15,085,632 50th percentile 435,747,000 3,373,191 172,037,926 75th percentile 128,97,93,692 28,027,382 772,448,220 Maximum 25,800,700,000 1,319,000,000 8,565,257,199 No. of observations 24 54 16

The table shows that the smallest claim to trigger the IBC was filed by an operational creditor with a claim of debt default of Rs.109,516 (or Rs.1.09 lakh). In comparison, the smallest debt against which a financial creditor triggered the IBC was Rs.3,069,000 (or Rs.30.69 lakhs) which was 30 times larger. The maximum debt default claimed by an operational creditor was Rs.1,319 million (or Rs.131.9 crores) while the largest default to a financial creditor was Rs.8,565
million (or Rs.856.5 crores) which was only 8 times larger. This shows that operational creditors, who had considerably weaker rights under the previous regime, had considerably large debt repayments due from firm debtors. Thus, while the IBC is being triggered by creditors on a wide range of size of defaults, most of the cases observed so far (more than 75 percent of the cases) tend to be triggered using debt defaults that are approximately 10 to 100 times larger than the threshold of Rs.100,000 set in the law.

## Using data to understand the functioning of the NCLT under the IBC

We find that the published data is ambiguous about behavioural or structural changes in the judiciary to fit within the role defined for it, in the IBC. The information display systems of the NCLT do not give an overview of the entire cycle of a case, and bits and pieces of information are available in the final orders. For instance, while each order specifies the date on which it was passed, several orders do not capture other information critical for assessing the time taken for the disposal of insolvency petitions, such as: the date on which the insolvency petition was filed, the date on which it first came up for hearing. 16 of the 110 orders studied did not reflect the amount of debt or default that was the subject matter of the case. Admittedly, there are more laborous methods to discern the entire life cycle and facts of a given case, such as examining the case records maintained by the registry at the each bench of the NCLT. However, for reasons explained in our paper, we find that these methods will also not help in ascertaining the performance of the NCLT as a whole. This constrains the ability of both the court administration as well as independent researchers to readily assess the performance of the NCLT.

With the limited data that is available from the published orders, we have attempted to answer two important questions about the functioning of the NCLT under the IBC.

Does the NCLT function within the timelines set in the law?

The IBC requires the NCLT to dispose off an insolvency petition within 14 calendar days from the date on which it is filed before it. Our dataset captures the following dates in the life-cycle of an insolvency petition: date on which the case is filed (T0), date on which it first comes up for hearing (T1) and the date on which it is disposed off (T2). The amount of time that elapses between T0 and T1 could be attributed to the internal processes of the NCLT in scheduling hearings for a case. Our assessment shows that the NCLT exceeds the timeline of 14 days prescribed by statute. Table 5 summarises our findings.

 Stage Number of cases for which data is available Average time (calendar days) T0 to T1 12 18 T1 to T2 52 16 T0 to T2 24 24

Table 5 shows that the average time taken from the date of filing the insolvency petition to the date on which it first comes up for hearing, is 18 days. The average time between the date on which it first came up for hearing and the date on which it is finally disposed off, is 16 days. Finally, the average time taken for disposal is 24 days (T0 to T2). This is significantly more than the timeline of 14 days prescribed under the IBC. Currently, the data does not allow us to analyse the reasons for this delay.

Is the role played by the NCLT as visualised within the IBC?

While the law enumerates specific grounds for dismissing an insolvency case and is largely biased towards allowing an insolvency to be triggered if the debtor has committed a default in repayment of an undisputed debt, the NCLT has dismissed petitions on extraneous considerations as well. Table 6 shows the various grounds on which insolvency petitions were dismissed during the sample period.

 Ground of dismissal No. of insolvency petitions dismissed Existing dispute 8 Applicant was not a creditor as defined in the IBC 7 Settled out of court 5 Debt recovery barred by limitation 3 Incomplete application 2 Operational creditor failed to issue statutory demand notice prior to filing the case 2 Others 22 Total 49

A review of a sample of dismissals classified as "Others" in Table 6 shows that the NCLT considers extraneous factors for dismissing the insolvency petition. For instance, in an insolvency petition filed before the Mumbai bench, the Tribunal recognized that all the ingredients required under the IBC were present to admit the petition. However, the NCLT extended the scope of its inquiry to the balance sheet of the debtor and held that since the debtor had sufficient assets on its balance sheet, it would be unfair and inconvenient for the debtor if the petition were admitted. The NCLT ignored the creditor's argument that the provisions of the IBC do not allow the Tribunal to embark upon a balance sheet analysis.

This indicates that the NCLT seems to be viewing the admission of an insolvency case as an excessively harsh outcome for a debtor. If this trend continues, it may degenerate into a debtor-favouring bias going ahead. Thus, the data shows that the working of the NCLT is not always in line with the letter and spirit of the IBC.

#### Information gaps in the NCLT orders

We find that there is no standardised format of recording case information. Consequently, several final orders lack in basic information such as the kind of creditor who filed the petition, the claim amount and the date on which the insolvency case was instituted. Our finding on information gaps in the orders of the NCLT is in line with the findings of other research done with respect to the orders passed by the Debt Recovery Tribunals in India (Regy and Roy 2017).

There are three adverse consequences of such information gaps in the NCLT orders. First, the absence of basic information about the case hinders the ability of the NCLT to monitor the efficiency of its own benches. It also constrains researchers from assessing the quality of the procedural requirements and outcomes of the law. Second, this will hinder the ability to identify systemic lapses in the functioning of tribunals and in designing appropriate interventions. Third, inadequate or incomplete data has implications for the overall accountability and transparency of these tribunals to the public, and in the long run, will erode the credibility of the NCLT as an institution.

Finally, the strength of the legal framework ultimately rests on the efficiency of the adjudicator of the law. This is especially so for a procedural law like the bankruptcy law. Structural lapses in the NCLT are likely to cripple the working of the legal framework, reduce the efficiency of resolution and leave the bankruptcy reforms process undone. Fortunately, these are early days yet, and there is scope for
course correction.

### Conclusion and way forward

The empirical analysis in our paper, though preliminary, indicates that the IBC is likely to have a structural change in the behaviour of economic agents, as well as in the areas where the NCLT functions as the adjudicator under the IBC. Our exercise of building a dynamic dataset that is geared towards impact assessment, also brings out the gaps in data that courts publish. Our findings on the data gaps, elaborated in greater detail in the paper, will provide a framework for re-thinking the data management and publication systems of tribunals in India.

The ultimate goal of this dataset is to provide a foundation to answer questions on the impact of the IBC and the overall functioning of the Indian bankruptcy regime. The dataset is dynamic and will be updated on a regular basis. As the insolvency cases increase, the dataset will too increase in scope and size. As more data gets published, relevant fields, such as recovery rates and expenses associated with the recovery process, can potentially be integrated into the dataset. This will fuel deeper research on insolvency and credit markets in India. Such data-backed research will support policy interventions in this space in the years to come.

### References

The Indian insolvency regime in practice -- an analysis of insolvency and debt recovery proceedings, Aparna Ravi. Economic & Political Weekly, Volume 1, No. 51, December 2015.

Understanding Judicial Delays in Debt Tribunals, Shubho Roy and Prasanth Regy. NIPFP Working Paper 195, May 2017.

### Acknowledgement

We thank Susan Thomas for useful discussions and insights on empirics.

The authors are researchers at the Indira Gandhi Institute of Development Research.

## Wednesday, August 23, 2017

### Flat buyers under IBC: Creditors or consumers?

The Indian bankruptcy regime is developing very fast. There is a risk that the law may soon diverge from the original policy intent. One such example is the recent regulation by IBBI creating a third category of creditors - other than financial or operational creditor. Commentators have suggested that flat buyers would fall under this third category. This comes in the backdrop of recent decisions of NCLT and NCLAT that have left flat buyers jittery about their future once the real estate company enters corporate insolvency resolution process (CIRP).

There are two separate issues here. First, the Bankruptcy Law Reforms Committee (BLRC) in its report had only envisaged two categories of creditors (financial and operational) for the purposes of CIRP. But the ambiguous language of Insolvency and Bankruptcy Code (IBC)
prompted IBBI to create a third category of creditors. This third creditor can neither trigger the CIRP, nor be on the Committee of Creditors (CoC). Second, BLRC had categorically stated that not all assets present within the insolvent company shall form part of the liquidation. Whether the corresponding provisions of IBC will protect flat buyers of insolvent real estate companies remains to be seen.

### The third creditor

There are multiple ways in which creditors could be classified: financial versus operational, secured versus unsecured etc. The BLRC had to decide how to classify creditors in different contexts. One such context was CIRP - who will trigger it? Who will be on the CoC? Faced with these questions, the BLRC report noted that both the debtor and the creditors should have the power to trigger CIRP. However, a creditor could trigger the CIRP only on clear evidence of default. Since the process of establishing default would have to be different for financial and operational creditors, the BLRC had to classify creditors into these two categories. In this policy scheme, no third category of creditors was envisaged.

The two way classification was also useful in determining the composition of the CoC. The BLRC report notes:

The Committee deliberated on who should be on the creditors committee, given the power of the creditors committee to ultimately keep the entity as a going concern or liquidate it. The Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors.

In spite of the clear policy rationale for having only two types of creditors (financial and operational) for the CIRP process, the ambiguous language of IBC has now caused confusion.

### Ambiguity in IBC

First, most Indian statutes have only one section for definitions. In contrast, IBC has three sections with the title "Definitions" - section 3, 5 and 79. While section 3 is for the entire Code, section 5 is only for Part II (corporate insolvency) and section 79 is only for Part III (personal insolvency). The word "creditor" is defined in section 3(10) to include "any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decreeholder". This inclusive definition suggests that under IBC there could be creditors other than "financial creditor" and "operational creditor". This doubt is further entrenched because various sections within Part II (corporate insolvency) use "creditor" as well as "financial creditor" and "operational creditor". This drafting gives the impression that the legislature has used the word "creditor" to include more than just financial and operational creditor in CIRP.

Second, Indian statutes usually use a negative definition while making binary classifications. For instance, under FEMA there are only two kinds of transactions: "capital account transaction" and "current account transactions". To achieve this, the law provides a principle-based definition of "capital account transaction". Then it defines "current account transactions" simply as "a transaction other than a capital account transaction". Similarly, IBC could have also defined "financial debt" and then defined "operational debt" as any debt other than "financial debt". That would have ensured that there is no third category of debts (and creditors). Unfortunately, IBC provides principle-based definition for both "financial debt" and "operational debt", thus creating scope for a third category of debts.

These legislative ambiguities seem to have prompted IBBI to create a third category of creditors, contrary to the orginal policy intent.

### Consumers, not creditors

Some commentators have opined that certain flat buyers would fall under this third category of creditors. Simultaneously, IBBI has categorically denied media reports suggesting that flat buyers will now be part of CoC. On the other hand, NCLT has ruled that flat buyers are not "operational creditors" either. In view of these differing view points, it would be useful to first understand the basics of a simple flat purchase transaction.

Most buyers pay the real estate developer in advance for delivery of the property at a future date. The problem begins when the developer defaults in delivering the property on time. Buyers resort to various legal actions either to get possession of the property or to get their money back. Clearly, in these cases the buyers are not creditors of the real estate company. They are merely consumers of its services. Just like a pre-paid mobile customer is a consumer of the telco.

In one exceptional case - Nikhil Mehta v. AMR Infrastructure - NCLAT held the concerned flat buyers to be "financial creditors". But this was because of an exceptional clause in their agreement. The developer had contractually agreed to pay a monthly amount to the buyers till the property was delivered to them. In view of this unique clause, NCLAT held that these flat buyers were "financial creditors" of the developer company. This is not a principle of general applicability. Therefore, it can be concluded that all flat buyers are consumers but not necessarily financial creditors.

### Consumers under IBC

If flat buyers are consumers of the real estate company, what happens to them if a bank triggers CIRP against the real estate company? This is an important question with practical implications. Although the BLRC did not discuss this issue specifically, it had explicitly recommended that "not all assets that are present within the entity, from the start of the IRP, can be considered for liquidation." Accordingly, section 36 of the IBC excludes "assets held in trust for any third party" from being included in the liquidation estate.

It could be legitimately argued that the funds and properties held by the insolvent real estate company in trust for the third party consumers (flat buyers) should get the protection under section 36. In that case, these funds and properties cannot be taken away by the creditors (like banks) of the real estate company. However, section 18 of the IBC suggests that the interim resolution professional cannot take control and custody of these assets. In view of this contradiction, it needs to be seen how the jurisprudence on "assets held in trust" develops to provide effective remedy to aggrieved flat buyers under IBC.

### Conclusion

When IBC was enacted, policymakers realised that unforeseen challenges are likely to crop up during its implementation. That is why section 242 of IBC empowers the Central Government to remove difficulties faced during implementation. However, if necessary, the government can always streamline the law by suitably amending it. In view of the above complications arising out of the insolvencies in the real estate sector, policymakers need to consider if IBC is currently equipped to handle the challenges ahead or would an amendment be necessary to equip it suitably.

Pratik Datta is a researcher.

## Monday, August 21, 2017

Should we recapitalise the banks? by Ajay Shah in Business Standard, August 20, 2017.

Three young chess players who could be the next world beaters by Devangshu Datta in Business Standard, August 19, 2017.

Has resistance to economic reforms waned in India? by Tadit Kundu in Mint, August 17, 2017.

The costly failure of the South Asian judiciary in Mint, August 17, 2017.

Silly responses to financial internationalisation: Bank Negara hits out at SGX and ICE in The Star, August 10, 2017.

Aman Sethi’'s series on the banking crisis in the Hindustan Times:
Part 1: NPA crisis: The rise and fall of Bhushan Steel into the great Indian debt trap, August 8, 2017. Part 2: NPA crisis: Why banks keep lending big bucks, try to hide the distress signals, August 9, 2017. Part 3: NPA crisis: Banking on a new law for answers, August 10, 2017.

An unsettling precedent under IBC by Gausia Shaikh & Bhargavi Zaveri in Business Standard, August 8, 2017.

New technology accelerates the rise of English in India: Duolingo looks to learn more Indian languages by Shashwati Shankar in The Economic Times, August 7, 2017.

Government may give Bhim App users cashback bonanza on Independence Day by Digbijay Mishra in The Economic Times, August 7, 2017. Also see: Subsidies are the last refuge of a failed policy maker, April 16, 2016.

Discrimination, norms, family issues or safety? Why Indian women are quitting jobs by Namita Bhandare in The Hindustan Times, August 5, 2017.

EH Carr's sense of history by Tim Black in Spiked, July 2017.

## Sunday, August 20, 2017

### The accountability framework of UIDAI: Concerns and solutions

by Vrinda Bhandari and Renuka Sane and Bhargavi Zaveri.

The public discourse on Aadhaar has largely focused on concerns about the privacy issues associated with the collection of personal information, and the constitutionality of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 ("the Act"). Regardless of the outcome of the case at the Supreme Court, most residents will likely have to interact with the UIDAI, which is the body empowered to roll out an enrollment and authentication program for beneficiaries of welfare programs.

The UIDAI is an Agent established by the Principal (Parliament), with three powers. The law allows the State to compel an individual seeking a state-sponsored subsidy to undergo the enrollment and authentication processes designed by the UIDAI (although Aadhaar has now been made mandatory for certain non-welfare schemes as well, which goes beyond the conception in the law). The UIDAI is empowered to license and regulate Registrars and enrolling agencies to collect the demographic and biometric information of individuals, and enroll them under the Act. Finally, the UIDAI has quasi-judicial powers, such as the power to suspend the licenses of such enrolling agencies and Registrars.

In this article, we examine the foundations required to make UIDAI work properly: the performance and accountability standards. Under the present law, UIDAI is neither performance oriented nor is there accountability for failure. The problem of accountability at UIDAI is a little explored issue, other than occasional media reporting which expresses angst about data breaches and authentication failures (see here, here, and here). There is considerable knowledge from the global and Indian literature on public administration on how to achieve performance of such an Agent. Drawing on this body of knowledge, we propose that the UIDAI should be held to appropriate accountability standards, so as to create an environment where it will perform well.

### Agencification and its associated challenges

Since the 1980s, governments have established specialised organisations which perform certain functions. These Agents have diverse mandates such as regulating a specific sector (SEBI and TRAI); administration of social welfare schemes (the erstwhile Benefits Agency in the UK); and running prisons (such as the HM Prison Service (HMPS) in the UK or the Dienst Justitiële Inrichtingen - National Agency for Correctional Institutions (DJI) in the Netherlands).

The Agent performs its mandate through the exercise of three kinds of powers, namely, quasi-legislative powers, quasi-executive powers, and quasi-judicial powers (FSLRC, 2013). While some agencies have all three kinds of powers at their disposal, others have some of them. For instance, while SEBI has all three powers, agencies which are tasked with administrative functions such as the UK Benefits Agency or the HMPS have limited quasi-legislative powers and no quasi-judicial powers. Whatever may be the scope of powers of these agencies, two features cut across all such agencies: (a) they perform functions that the sovereign would have otherwise performed; and (b) they wield the power of the State in being able to coerce certain private persons in certain ways.

Broadly speaking, agencification has worked well in improving State capacity. However, this has come from establishing an array of mechanisms to deal with a few important concerns:

1. Weaker links between the people and agencies: When a sovereign delegates functions to agencies, this reduces accountability through elections (Maggetti, 2010). The persons manning such agencies are one more step away from the people, as they are autonomous from the government and are not politically accountable to the people. Power in the hands of unelected officials also creates concerns about democratic legitimacy (Majone 1998). For instance, agencies which have been tasked with the administration of social welfare have been accused of opacity (Pollitt et al, 2004).
2. Unfettered discretion: When agencies have the power to write subordinate legislation (i.e. regulations), this power is often not accompanied by checks and balances. In liberal democracies, there are elaborate checks and balances that are placed upon Parliamentary law. These checks and balances can, and often are, diluted in the context of the "regulatory state". For example, in all these years of SEBI's establishment, only one of its quasi-legislative instruments has been challenged. Compare and contrast this to the constitutional challenge that virtually every significant parliamentary law faces in India. Similarly, in the last 30 years, no order issued by RBI has been challenged by the person penalised. This leads to the possibility of abuse of power (Cochrane, 2015).

3. Size and ever-growing footprint in administration of public affairs: Autonomous bodies, especially those entrusted with the administration of social security benefits, end up assuming significant proportions, both in terms of their size and budget allocations. For instance, in 2000, the Benefits Agency which was responsible for the administration of social welfare schemes in the UK employed a staff of 70,642 and accounted for 30% of the overall state budget (Pollitt et al, 2004). Similarly, the Social Security Administration in the United States now has a staff strength of 60,000. In the Indian context, the annual expenditure of the RBI is larger than that of the States such as Goa.

### An accountability framework for agencies of the State

The power to coerce or the power to spend, that is conferred upon the Agent, must be associated with commensurate accountability mechanisms (Stone and Thatcher, 2002). Accountability mechanisms are ex-ante and ex-post. Examples of both are enumerated below:

Ex-ante accountability mechanisms:

1. Having an adequate strength of independent directors on the board of the agency
2. Regular internal audits to review the performance of the agency and ensuring that it complies with the law in exercising the discretion vested in it
3. Setting out the objectives of the agency and the instruments to be used to achieve them, clearly in the law
4. Setting out performance oriented goals and metrics for measurement of performance, in advance
5. Defining formal processes for the exercise of the powers vested in the agency
6. Mechanisms to facilitate transparent decision making, such as public consultations before making delegated legislation, maintaining a website, publishing a clear rationale for each decision of the agency

Ex-post accountability mechanisms:

1. Laying all quasi-legislative instruments before the Parliament
2. Reports showing the goals set out at the beginning of the year, the extent to which they are achieved at the end of the year and a statement of reasons for failure
3. Resource allocation towards different goals and year-end utilisation
4. Performance and audit by external independent agencies and publishing the reports of such audits

#### How do other social security administrators account for their performance?

Since the Aadhaar number is so often compared to the social security number issued by the Social Security Administration (SSA) in the United States, we can usefully draw a comparison with the annual performance and financial report published by the US SSA. The report sets out the strategic goals of the SSA that were determined at the beginning of the year. It divides the strategic goal into multiple objectives, specifies measurable performance metrics to ascertain the extent to which the objectives have been met, and the extent to which the goal was achieved. An example of how the performance reporting for the SSA works, is given below.

1. For FY 2012, a pre-determined strategic goal of the SSA was to deliver "quality disability decisions and services".
2. This strategic goal was divided into three objectives. One of the objectives was to "Reduce the wait time for hearing decisions and eliminate the hearing backlog". The metrics used to measure the performance of the SSA on this objective was to complete "the budgeted number of hearing requests" and "reduce waiting time between hearings and decisions". SSA reported its performance on these two metrics as under:

 Objective: Reduce the wait time for hearing decisions and eliminate the hearing backlog Performance Measure FY 2012 target FY 2012 Actual Whether target achieved Complete the budgeted number of hearing requests 875,000 820,484 No Minimize average wait time from hearing request to decisions 321 days 362 days No

The SSA's performance report also shows the funds allocated to each objective and a statement of reasons where the performance metric is not met.

### The current accountability framework of the UIDAI

A reading of the objectives and functions assigned to the UIDAI under the Act would suggest that the UIDAI must, at the very least, be held accountable for:

1. The enrollment and authentication of persons [sections 11 and 23(1)]
2. The regulation of enrollment agencies and other service providers licensed by it [section 23(2)(i)]
3. The security and confidentiality of the data shared by persons who have enrolled with the UIDAI [section 23(2)(j) and (k)].

The Act and the accompanying Regulations specify a limited accountability framework, which is not oriented towards performance or service delivery to the citizen. Three accountability measures are present under the Aadhaar Act and Regulations:

1. An annual CAG audit, and requiring these certified accounts of the UIDAI to be laid before each House of Parliament [Section 26 of the Act]; and
2. Requiring an annual report in a prescribed form describing UIDAI's past activities, accounts, and future programmes of work, to be laid before each House of Parliament [Section 27 of the Act]. However, no such manner and form for the publication of the report has been laid down in the Aadhaar Regulations, nor does such a Report seem to be available in the public domain.
3. Requiring certain processes to be followed by the CEO in transacting business at the UIDAI (Transaction of Business at Meetings of the Authority) Regulations, 2016, although these only relate to the number of meetings, quorum, voting procedure etc.

Apart from an annual financial audit, the law lacks any performance accountability mechanisms for the UIDAI. For instance, there is nothing in the law requiring the UIDAI to set performance standards for itself or account for core responsibilities such as number of people enrolled and not enrolled, number of authentication failures or number of data and security breaches. The law is similarly completely silent on ex-post accountability mechanisms. It neither requires a performance audit nor demands a justification for failures on its part.

### Weak law will deliver weak performance

The conduct of an agency is largely shaped by the law governing it. For instance, Burman and Zaveri (2016) find that there is a correlation between the laws which mandate transparency of a regulator and the responsiveness of such regulators to citizens' preferences. Similarly, the detailed performance reporting by the SSA is underpinned by a law called the Government Performance and Results Act, 1993, a law that set up a performance-oriented framework of reporting for the US federal agencies to show the progress they make towards achieving their goals.

In the absence of such statutorily mandated accountability standards, measuring the performance of the UIDAI is difficult. Stories of security breaches and authentication failures for availing benefits abound. For instance, Scroll.in queried the UIDAI about the authentication requests received between September 2010 (when the first Aadhaar number was issued) till October 2016, and how many failed or succeeded. The query was aimed at assessing the efficacy of biometric authentication. The UIDAI replied that it had not maintained any records between September 2010 and September 2012 and that it did not maintain authentication data state-wise. More importantly, the UIDAI revealed that data about the success or failure of the over 331 crore authentication requests was "not readily available", nor was the breakup of the negative reply to the requesting authority on each of the five modes of authentication "readily available".

Similarly, cases of fake Aadhaar cards have also been reported. Pertinently, in response to an RTI filed by PTI, seeking details related to all cases of duplicate and fake Aadhaar cards and the action taken on them, the UIDAI refused the request on the grounds that the disclosure might affect national security, or lead to incitement of an offence. The UIDAI also informed PTI that its CIDR facilities, information assets, logistics and infrastructure and dependencies, are all classified as "protected system" under the IT Act, and are thus, exempt from RTI. It further stated that the format in which it held the information contained identity details, which may be prone to identity theft, if divulged. The practical reality thus is that cases of unauthorised leaks/disclosures of identity information are being dealt with on a case to case basis, with zero clarity in the law on who is to be held accountable for such lapses in the future.

### Conclusion

In previous decades, when we first set up state agencies in India, we were driven by concerns of efficiency and expertise that such agencies would bring to public administration. We now have sufficient experience about the endemic failure of State capacity in that approach. If one more new agency is built, on the lines of existing agencies, there is a high chance that it will reproduce the failures of existing agencies.

The climate of thinking on these questions in India is shifting. The FSLRC report, which proposes a new financial regulatory architecture, made extensive recommendations on the accountability framework for financial sector regulators. These recommendations were codified in the Indian Financial Code (IFC), a draft law that accompanied the FSLRC report. For example, the IFC contains provisions that mandate (a) regulators to build a system of periodical internal audits and publish the reports of such audits, (b) performance audits by an external auditor, (c) building systems for measuring the performance and efficiency of regulators, and (d) public consultation and a cost benefit analysis before exercising quasi-legislative powers. Some of these provisions that do not require legislative amendments are being implemented by the Ministry of Finance through a Handbook on Governance enhancing recommendations of the FSLRC, adopted by the four financial sector regulators in October 2013.

The report of the Bankruptcy Law Reforms Committee (2015), drew on the regulatory governance framework recommended by the FSLRC and recommended four elements for achieving accountability of the Insolvency and Bankruptcy Board of India, India's new insolvency regulator. While some of these elements were codified in the Insolvency and Bankruptcy Code, others are sought to be implemented in the course of setting up the Insolvency and Bankruptcy Board of India. Recent events at TRAI are pushing the organisation towards sound processes.

While the subject of regulatory governance seemed remote and a second order issue in setting up institutions in India, policy thinking today has increasingly started recognising that enhancing governance standards is as important as technical soundness, when designing new frameworks. Every government agency is an Agent, and the journey to building high performance agencies lies in setting up a sound principal-agent relationship, in the law. UIDAI is an important new organisation, and it should emerge as a high performance agency. We must harness our experience and our knowledge, to build appropriate accountability standards for the UIDAI in the law.

### References

Cochrane, J. (2015), The rule of law in the Regulatory State.

Heidenheimer, A.J., Heclo, H. and Teich Adams, C. (1990), Comparative Public Policy: The Politics of Social Choice in America, Europe, and Japan, (3rd edition) New York: St. Martins.

Maggetti, Martino (2010). Legitimacy and Accountability of Independent Regulatory Agencies: A Critical Review, Living Reviews in Democracy Vol 2.

OECD (2014), The Governance of Regulators, OECD Best Practice Principles for Regulatory Policy, OECD Publishing.

Pollitt, Christopher, Colin Tablot, Janice Caufield, and Amanda Smullen (2004), Agencies: how governments do things through semi-autonomous organizations, New York: Palgrave Macmillan.

Young Han Chun, Hal G. Rainey (2005), Goal Ambiguity in U.S. Federal Agencies, J. Public Adm. Res. Theory 2005, 15 (1): 1-30.

Majone, Giandomenico (1998), The Regulatory State and its Legitimacy Problems, Political Science Series No. 56, Department of Political Science of the Institute for Advanced Studies (IHS)

Sweet, Alec Stone and Thatcher, Mark (2002), "Theory and Practice of Delegation to Non-Majoritarian Institutions", Faculty Scholarship Series, Paper 74

Report of the Financial Sector Legislative Reforms Commission, Volume 1 (2013)

Burman, Anirudh and Zaveri, Bhargavi (2016), Regulatory responsiveness in India: A normative and empirical framework for assessment, IGIDR Working Paper WP-2016-025, October 2016.

Vrinda Bhandari is a practicing advocate in Delhi. Renuka Sane is a researcher at the National Institute of Public Finance and Policy, Delhi. Bhargavi Zaveri is a researcher at the IGIDR Finance Research Group, Mumbai.