Is it still too early to judge the success of IBC? Businessline 27th September 2021

 

Progress has been more than satisfactory, but India has to work hard to ensure that the resolution processes get stronger

There is still a debate on whether the IBC has been a success. The view here is that it may be still too early to judge, but credit should be given to the Insolvency and Bankruptcy Board of India (IBBI) for having this system in place. And, more importantly, we need to have this structure, which could be fine-tuned, if required.

The path has not been smooth for sure as defaulters do not want to give up on their assets and believe that it is okay to not service loans. The RBI had to fight a battle here (the famous February 12, 2018 notification) with the government, and the courts had ruled that this could not be driven by the central bank.

Onus on banks

The RBI had to retreat and dilute its circular, and finally put the onus on banks to ensure that defaulters are taken to the IBC. Therefore, the modified rules now increase the provisions that must be made by banks in the absence of a resolution plan not being implemented in a timely manner. Recovery through the IBC has been higher in FY20, according to the RBI, at 46 per cent, compared with SARFAESI, DRTs or Lok Adalat.

This number came down in FY21 and, as of June 2021, was at 36 per cent, which was again expected, given that the government had provided relief for six months for companies, which was extended in September 2020 by another three months. The IBC was to have a benchmark of 180 days, with another extension of 90 days, to resolve the cases before insolvency proceedings were invoked. It is again not surprising that it has been pointed out that over 75 per cent of the ongoing cases are over 270 days, especially due to the pandemic, and the various measures taken for restructuring assets as well as moratorium provided last year.

The metric which can be used to measure the success of insolvency resolution is the recovery rate. In the past it was in the region of 20 per cent, which means that 40 per cent-plus according to the IBC is good. True, when the dirty dozen was sifted to begin with, the recovery rates were impressive at 70 per cent-plus, but this is exactly where the conundrum lies. As proceedings get delayed, the realisation will fall, especially if the plants are not operational to the full extent as the value comes down under such conditions.

Global recession

Further, markets have changed significantly due to the global recession last year, and the pandemic has altered the way of doing business. Again, a change in ideology, especially towards ESG, means that conventional power-generating companies are no longer attractive. The same holds for industries that contribute to a rise in emissions. This means that progressively buyers will get scarce leading to bigger haircuts. This will come in the way of further resolution of NPAs.

‘Bad bank’

The National Asset Reconstruction Company is now being formed and will soon be operational as a bad bank. The idea is not new as the asset reconstruction companies that were in operation were not able to do complete justice to the task, which led to the IBC. Now, with the NARC coming up, there will be diversion of proposals potentially from the IBC to NARC.

The issue is in the realm of game theory. All sellers of bad assets want the best realisation, while the buyer wants to pay the lowest amount. This leads to the bargaining game, which, so far, has been in favour of the buyer.

The IBC tries to change the dynamics by forcing such assets to be put on the table and, more importantly, keeping it time-bound. NARC being owned by the public sector should work as PSBs were always scared of selling assets to the asset reconstruction companies as audit at a later date could jeopardise their stance.

Owners of assets will always drag their feet and look for legal recourse, which was the case earlier. The point made by the defaulting companies is straight forward. If all NPAs are going to be auctioned after 270 days, then the incentive to invest will come down as will risk-taking ability. The fear of failure will come in the way of setting up new enterprises. Therefore, the banking system must be tolerant, especially when the failure of business is due to the economic environment and is not a ‘willful action’. The argument is strong, but given that banks deal with deposit holders’ money, there is a moral dilemma.

When the IBC came up with numbers like 180 days with an extension of 90 days, it was done after careful deliberation. Now, it is 330 days. In 2015, the World Bank Doing Business Indicators highlighted that it took 4.3 years for resolution of insolvency with a recovery of 25.7 per cent. For China, it was 1.7 years with recovery of 36 per cent.

Therefore, the progress made has been more than satisfactory over the years. All such processes, which involve legal issues as well as sentiment tend to run into the law of diminishing returns wherein once the low hanging fruits are plucked, it gets progressively difficult as one climbs up.

The IBBI has reported that of the 4,541 CIRPs admitted since June 2016, around 63 per cent have been closed, which is quite impressive, given the number that is involved. This is notwithstanding the various hiccups that have been encountered starting with the availability of professionals to companies seeking recourse to courts to protect their assets. The recovery rates could come down further with time, which can moderate to around 30-33 per cent. But having the IBC is essential to hold out a credible threat to companies.

Bond market

Also, as there is serious talk of growing the corporate bond market, the success of a resolution system is important. When there are NPAs the problem is for bankers who must make provisions and chase the borrowers.

However, when it comes to the bond market, there is no system of recourse except the legal system, and an individual bond holder will not know what to do in case of a default. Therefore, the country has to work hard to ensure that the resolution processes get stronger, including all institutions such as IBBI (IBC), DRT, ARCs, as the future growth of the economy has to come from the bond market, which cannot get out of the shell of being only a platform for AAA and AA-rated companies as 80 per cent of the corporates do not have such ratings.

From the far end of the field | Book Review — Star Gazing: The Players in My Life by Ravi Shastri with Ayaz Memon: Financial Express 26th Sept 2021

 Ravi Shastri is a well-known name in cricket for the new generation too, even though he stopped playing cricket in 1992. Besides being the coach for the Indian team today, his reputation has been built for being a levelheaded cricket commentator until he took over the coaching assignment. Known for his incisive and unbiased analysis, he did command respect from viewers.

In his book, Star Gazing, Shastri, along with Ayaz Memon, writes on several cricketers, starting from the ones he grew up admiring to the more contemporary players who he has been observing from the commentator box.

It is a good collection of write-ups on cricketers that will be of interest to cricket enthusiasts from all generations. Where he was personally involved as a player or commentator, there are nice reminiscences of specific bowling spells or batting episodes that readers can relate to well.

While he is very diplomatic in his commentary, which is to be expected, as this is all about cricketers he admires for various reasons, he steers clear of any controversy that some of the players may have been involved with.

Even for Greg Chappell, who had a fairly tumultuous relation with other Indian cricketers as a coach, Shastri talks only of his unsavoury mark on Test cricket when he asked his younger brother to bowl underarm, which was legitimate, though not fair. Other than that, he steers clear of any political discourse.

On another occasion, he talks of how he had chased Javed Miandad out of the Indian dressing room when he became unpleasant when the Indian team was celebrating. If the reader is looking to read more of such incidents, there would be some disappointment.

Shastri has been generous with his praise for various cricketers but the ones who would stand out in his ranking are Gary Sobers, for being the most gifted all-rounder, and Vivian Richards, the most feared batman. Both were from the West Indies and both were awe-inspiring. For sheer power with the bat, Clive Lloyd would get the applause. Here, there would be less debate as most enthusiasts who have lived through the years of cricket will not contest his picks.

Similarly, he is awestruck with Gundappa Vishwanath for sheer style and an effortless approach to batting, something the old-timers will agree with. There used to be a saying that whenever India won, Vishwanath would have done well.

Farokh Engineer was probably the first cavalier batsman who was liked by all and Mansoor Ali Khan Pataudi a very astute captain. There are chapters on them as well.

He also talks highly of Richie Benaud, not so much as a cricketer but a commentator, and here again one cannot have a different view. What have been the two key takeaways from Benaud are that appearance is very important, and this is something Shastri has also been known for. When you look at a commentator one should be inspired and there was everything perfect about Benaud’s appearance, starting from hair styling to the tie pin.

The second is that as a TV commentator one should know that it is different from radio and should be less descriptive and more critical so that there is more perspective. These are two good lessons for anyone who aspires to become a cricket commentator.

Hopefully, the present lot of commentators should take a cue from this observation, as watching cricket can be jarring when the commentators keep rambling, saying the same things we can see clearly on the screen.

Shastri has clubbed the players under different sections like the ones who inspired him and the ones who he played with, who he calls ‘friends and rivals’. The common thread through all these stories is that while cricketers may be nasty on the field, which holds traditionally for Australians starting from Ian Chappell to Ricky Ponting, they change colour once off field and are always open to having a drink with the other teammates. This is a good trait in any sport where one differentiates on and off field.

There are others he has observed from the box that are clubbed separately and include several Sri Lankan players and South Africans, while the last section on the present players has his favourites like Virat Kohli, Rohit Sharma, Ravichandran Ashwin, Ravindra Jadeja, Ben Stokes, Steve Smith and Kane Williamson.

Shastri brings to the forefront some real good cricketers who are almost forgotten today, like India’s four great spinners Erapalli Anantharao Srinivas Prasanna, Bhagwat Subramanya Chandrashekhar, Srinivasaraghavan Venkataraghavan and Bishan Singh Bedi —who had mesmerised the world in their heyday. They are covered in one chapter. He does the same for Dennis Lillee and Jeff Thomson, who would rank as the first feared duo of fast bowlers who set the trend for a pace attack.

This is sheer vintage stuff with black and white photos added in good measure and the contribution of Memon can be found when the past players are covered. There is another chapter on Andy Roberts, Michael Holding and Joel Garner, who were the unplayable West Indian bowlers who dominated cricket in the 1980s. There is ample credit given to Tony Greig, who brought not just life into the commentator box but also commercialised the game through the World Series Cricket franchise which was created by Kerry Packer.

While the coverage is quite comprehensive, surprising exclusions appear, like his contemporary Mohd Azharuddin, who was a classy player though had a controversial end, Krishnamachari Srikkanth, Sandeep Patil and Navjot Sidhu. They are presumably inadvertent omissions that happen when the canvas is particularly broad. But it still makes this a must-keep book for all cricket lovers of all ages.

Star Gazing: The Players in My Life

Ravi Shastri with Ayaz Memon
HarperCollins
Pp 299, Rs 699

On ETNow debate on sensex nearing 60000

 https://www.timesnownews.com/videos/et-now/shows/retail-investors-carrying-the-stock-market-bull-run-india-development-debate/110107

The PLI principle – Progressive approach to providing incentives to industry. Financial Express 21st September 2021

 For the government, giving conditional incentives seems clearly the way to make money work. A performance yardstick helps in sift through players. The first sense of such an approach was when conditional cash transfers were made to households in Latin American countries; these ensured that children went to school or had regular medical check-ups. In India, the mid-day meal scheme is an example as the free meal ensures that parents send children to school. This worked well for girls, especially from the lower income groups, who otherwise would not be allowed to go to school.

The PLI is hence a very progressive approach to providing incentives to industry. How it is interpreted by the global community remains it to be seen, because it directly gives cash to companies that meet certain performance parameters. It can be defended as not being a subsidy, such as those in agriculture where inputs are given virtually free to farmers. The PLI has been crafted to encourage domestic production, against importing the product from other countries. It doesn’t distort prices but makes industry more competitive.

This should help to pass the barrier. This can be pursued in other areas too to make government expenditure more effective. The government had offered alternative corporate tax rate schemes to companies (22% against 30%), and the observation was that, while they did make use of the benefit, there was little evidence that it enhanced efficiency or led to higher investment. In this context, the government can make tax benefits conditional where companies that are able to generate investment of a certain minimum amount along with production and employment performance (PLI talks of the first two components) can get a tax refund.

This will ensure companies invest more instead of using the benefit of lower taxes for paying higher dividend or piling up reserves. Indeed, there was a time when the tax laws had the concept of investment reserve that could be deducted from profits before tax. The compensation through a refund will ensure that the companies contribute to capital formation, which is a challenge today.

A similar idea can be pursued on job creation where units, from SMEs to large corporates, can be given an employment-generation-based incentive with firm targets set. Employment is the critical factor that spurs economies because, in the absence of new jobs being created, demand can’t be sustained. Jobs have been a problem even before the pandemic, where GDP growth didn’t translate into commensurate job creation. With the greater reliance on technology post the pandemic, job creation is rarely on the radar of large corporates. Providing incentives will work well and ensure that the focus is on being fair to labour.

The important part of this story will be how well the PLI works out in the next 4-5 years, the average time framework that has been set for the 13 industries identified in November 2020. Overall, the government has targeted around `2 lakh crore of incentive spread over five years or so. There will be spillovers to the exports sector, especially in pharma, textiles, etc, though the initial focus was more on import substitution through higher domestic production.
As the idea catches on, the government could also use the PLI scheme to change the cropping pattern in India which is heavily skewed towards rice and wheat as they have MSP-based procurement. This can help farmers to migrate to crops like oilseeds and pulses where we are more vulnerable and help in conserving water. If this is accepted conceptually, the details can be worked with the panchayats for implementation.

The case for cryptocurrency to be outlawed until we regulate it: Mint 20th September 2021

 Gold has no intrinsic value, but its scarcity and acceptability have created a pricing mechanism for it. Theoretically, any stone of any colour found only in select regions that can be used as an ornament will gather value from scarcity and acceptability. The same is true of cryptocurrency. There are willing buyers and sellers of something that has come from out of the blue. The idea has gained strength with the government of El Salvador announcing that it holds Bitcoin. The corollary is that if a government believes in it, no one can be left out and its use may become a habit.

Bitcoin, created by Satoshi Nakamoto, who has not yet been identified, is the most popular cryptocurrency. Despite its cryptic origin, Bitcoin is widely traded and a force to reckon with in financial markets. Other currencies have emerged with fancy names such as Ethereum, Litecoin and Dogecoin. While we may have to accept this wave, the broader question is whether they should be allowed to circulate.

The main purpose of a currency is to serve as a medium of exchange for transactions. Logically, the reins of such an instrument must be with a country’s central bank as we cannot have multiple currencies operating within a jurisdiction. In India, we must surrender foreign exchange beyond a limit to the Reserve Bank of India and cannot buy goods and services domestically with dollars or euros. This is the edifice of a currency system, which provides the basis for monetary policy. But today, interestingly, one can pay for hotels in Thailand or insurance in Switzerland with Bitcoin. Cryptocurrency is being used as a medium of exchange. This is bad news for central banks. If everyone uses cryptos for transactions, monetary policy would become superfluous.

The genesis of such currencies lay in the perception that central banks and governments had mismanaged economies by printing too much currency, which was what the US Federal Reserve did through quantitative easing, later followed by other central banks. The roll-back of all this easy money is now a problem, as it can generate turbulence in financial markets.

The concept of cryptocurrency seeks to overcome such a problem by generating a finite—yet infinite—stream of coins through blockchain technology. It’s finite because there is typically a cap on final currency units, but it’s infinite as the new coins generated would be at a proportion of the remaining balance, and this never changes. But their anonymity of use creates a conundrum, as the antecedents of a payment-maker can’t be known. Because identity gets concealed, such currencies serve as useful conduits for drug money. Therefore, it would be injudicious for governments to legitimize cryptocurrency as a medium of exchange.

An interesting implication of this was that there was nothing sacrosanct about Bitcoin, and so came a plethora of other cryptocurrencies. There are around 6,000 of them presently, although probably not more than 10 are actively being followed and traded.

How about crypto as an investment? If one can invest in stocks, race-horses and gaming, then why not in such currencies? Many things hold value that aren’t backed by anything but market perception. This is not too different from betting on sports or elections, in which there are no fundamentals driving the price. The argument here can be that if we permit these currencies as investment avenues, then all activities of this nature should be made legitimate (and taxed). Even betting on Indian Premier League matches can be seen as an investment. What’s important is that tax authorities should be aware of such transactions, lest they become ‘hawala’ deals where the gains escape taxation. There is already a lot of scepticism over participatory notes floated by foreign portfolio investors on concerns that Indians could be rerouting foreign exchange through them.

There is a strong case for banning cryptocurrencies, though tracking their activity could be a challenge. Or, if we allow them as investment avenues, investors should make full disclosures so that all transactions are taxed—under GST as well as capital gains.

There are two major threats for governments and central banks. First, while such transactions operate outside the financial system, all these currencies are denoted in dollars. This means that investors are using formal channels to gather dollars to pay for these cryptocurrencies. Therefore, any shock in the Bitcoin market can seriously disrupt the formal financial system.

The second is even more serious. If cryptos are legitimized, there is nothing to stop entities from starting a parallel crypto-banking system, where they accept deposits from holders and pay an interest rate which is higher than what one gets from a bank and use the same as a peer-to-peer lending platform. This can go on without authorities noticing.

The government of India has been relentlessly going after black money with measures like demonetization, which proved unsuccessful despite its boldness. Allowing cryptos would only encourage black money to be generated and stashed away from the regulatory system’s reach. Good reasons exist to ban them until we can put in place an appropriate regulatory framework.

ON Bloomberg TV : 17th September 2021

 https://www.bloomberg.com/news/videos/2021-09-17/care-ratings-madan-sabnavis-on-indian-economy-inflation-video

India needs to meet some more qualifications in the foreign investment arena : Economic Times 16th September 2021

 https://economictimes.indiatimes.com/opinion/et-commentary/view-india-needs-to-meet-some-more-qualifications-in-the-foreign-investment-arena/articleshow/86272043.cms