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23rd December 2020 – Editorials/Opinions Analyses

Content:

  1. Delaying the inevitable
  2. Pandemic resilience

Editorial: Delaying the inevitable

Context:

  • The government has kicked the can down the road by deciding to keep in abeyance critical provisions of the Insolvency and Bankruptcy Code (IBC) of 2016 till March 31, 2021.

Relevance:

  • GS Paper 3: Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein.

Mains Questions:

  1. Restructuring of bad loans will get tardier as the bankruptcy code is kept in abeyance. Discuss. 15 Marks
  2. What is bankruptcy code? Assess its role to address the bad loans in Banking Sector. 15 Marks

Dimensions of the Article:

  • What is the Insolvency and Bankruptcy Code (IBC)?
  • What is the procedure to resolve insolvency in the Code?
  • Rational behind to suspend the some provisions of bankruptcy code
  • Concerns related to this suspension
  • Way Forward

What is the Insolvency and Bankruptcy Code (IBC)?

IBC consolidates various laws, regulations and rules concerning and classifies insolvency, bankruptcy and liquidation of non-financial entities, systematically and comprehensively. Since a ‘Code’ is a compendium of laws, thus, IBC becomes a code, than just being a law.

  • Insolvency: Inability of an entity to pay its bills as and when they become due and payable
  • Bankruptcy: Situation when an entity is declared incapable of paying their due and payable bills
  • Liquidation: Process of winding up a corporation or an incorporated entity.

What is the procedure to resolve insolvency in the Code?

The Code proposes the following steps to resolve insolvency:

  • Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.
  • Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them.  They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them.  If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
  • Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence:
    • Insolvency resolution costs, including the remuneration to the insolvency professional,
    • Secured creditors, whose loans are backed by collateral, dues to workers, other employees,
    • Unsecured creditors,
    • Dues to government,
    • Priority shareholders
    • Equity shareholders.

Rational behind to suspend the some provisions of bankruptcy code:

  • Economic stress because of COVID-19: Industries are grappling with supply chain breakdown, slowdown in demand, unavailability of labour and inability to complete contracts. Moreover, service sectors such as hospitality or aviation are facing reluctance of the customers in indulging in such activities. The by-product of this slowdown will be increased stress and default by debt-laden Indian corporates.
  • Tough IBC regime: Under the IBC, an entity can seek insolvency proceedings against a company even if the repayment (of more than 1 crore) is delayed by just one day. The approach of Creditor-in-Control regime and strict time frame of resolution has created an environment where corporate debtors try to avoid IBC as they may lose control over management otherwise.
  • Concern on value recovery: Of the total 221 resolved cases under IBC, just 44 per cent amount of debt has been recovered since the inception of the law in 2016.
  • Potentially huge litigation pressure on judiciary: judicial system would not have been able to handle a huge influx of cases triggered by economic downturn.

Concerns related to this suspension:

  • Ballooning of liabilities without resolution: When creditors cannot initiate the insolvency proceedings, it may restrict the exit of a business and lock-up its assets, thereby further deteriorating their value and leading to losses.
  • Use of alternative debt resolution mechanisms: suspension will negate the two stated objectives of faster resolutions and value maximization under IBC and creditors will be forced to turn to older adhoc mechanisms to address defaults.
  • Mounting NPAs: in the absence of any definite and timely resolution, NPAs of banking sector may rise which may lead to increment in lending rates, hamper the investment and credit cycle and lower investor confidence.
  • Higher provisioning norms for Banks: Prudential Framework for Resolution of Stressed Assets by RBI requires the lenders to undertake a prima facie review of the debtor upon the occurrence of a default. This move will force banks to increase provisioning, subsequently locking up capital for securing bad capital.
  • Potential of misuse: as proceedings under IBC can never be filed for default occurring in the suspension period, so:
    • Promoters of companies that have the capacity to repay dues could force a default during this period and never be held accountable under the IBC.
    • While only pandemic-related cases should get the benefit of this reprieve, it will be tough to pinpoint this as the reason for the non-servicing of loans.
    • It can adversely affect operational creditors, such as vendors and suppliers, as they would not be able to file insolvency proceedings that may lead to artificial delays in payments accrued to them by corporate debtors.
  • No suspension against personal guarantors of a company: If directors or promoters of a company have provided personal guarantees to its lenders, they may still be taken to the insolvency court under IBC.

Way Forward:

  • In Germany, two conditions have to be satisfied by the corporate debtor for a suspension. First, the reason for insolvency must be based on the effects of the pandemic. Also, under scrutiny would be the prospects of restructuring the company.
  • The United Kingdom has allowed for a much shorter moratorium without the creditor approval.
  • In Singapore, to get the benefit of the moratorium, corporate debtors have to prove they were unable to perform a contract because of COVID-19 pandemic.

Therefore, A more nuanced approach would have been better for banks, businesses and the economy. Delaying the inevitable would mean greater financial stress ahead, as the restructuring and recovery of bad loans shall get tardier and future growth momentum would be punctured at the cost of understating present systemic stress.


Editorial: Pandemic resilience

Context:

  • The report of the parliamentary Standing Committee on Home Affairs calling for a comprehensive Public Health Act, as a response to the extreme stresses caused by COVID-19, is a welcome call to reform a fragmented health system.

Relevance:

  • GS Paper 2: Welfare Schemes (centre, states; performance, mechanisms, laws, institutions and bodies constituted for protection of vulnerable sections);

Mains Questions:

  1. There should be a comprehensive public health Act with suitable legal provisions to keep checks and controls over private hospitals in times of a pandemic and to curb black marketing of medicines. Discuss. 15 Marks

Dimensions of the Article:

  • What is Public Health Act?
  • Why Public Health Act is needed in India?
  • Other issues related to Healthcare in India
  • Measures to address these issues
  • Way Forward

What is Public Health Act?

Public Health Law is the study of the legal powers and duties of the state, in collaboration with its partners, to ensure the conditions for the people to be healthy, and of the limitations on the power of the state to constrain for the common good the autonomy, privacy, liberty, proprietary, and other legally protected interests of individuals.

Why Public Health Act is needed in India?

  • Curb Black Marketing: There should be a comprehensive public health Act with suitable legal provisions to keep checks and controls over private hospitals in times of a pandemic and to curb black marketing of medicines.
  • Creating Robust Infrastructure: National Health Profile 2019 data showed that there were an estimated 0.55 government hospital beds for 1,000 people.
  • Increasing Health Spending: Prolonged underinvestment in public health infrastructure thus left millions seeking help from a highly commercialised private sector with little regulatory oversight; the situation was even worse in rural areas, where care facilities are weaker, and urban workers fled to their villages, afraid of the cost of falling sick in cities.
  • Providing Insurance Coverage: The panel has called for an omnibus law that will curb profiteering during such crises and provide robust cashless health insurance.

Other issues related to Healthcare in India:

  • Uneven distribution of healthcare workforce: Most of the workforce practice in metropolitan or tier I or tier II cities, creating personnel deficiencies in small towns and villages.
  • Denial of healthcare: Private hospitals are reportedly denying treatments to the poor along with the cases of overcharging patients despite accounting for about 62 percent of the total hospital beds as well as ICU beds and almost 56 percent of the ventilators.
  • Negative perception of medical career: The stories of shortages of PPE leading to health workers getting infected, and health workers getting attacked by infuriated patients and relatives etc. may create a negative perception towards medical career in India in long run.
  • Gaps in urban health services and urban planning: The coronavirus epidemic has disproportionately affected the urban areas and has highlighted that many large urban conglomerations lack public health services, especially the sub-urban regions.
  • Gaps in Care of Non-COVID-19 patients: Extreme focus on containment of COVID-19 infection is likely to result in missed opportunities for timely diagnosis and treatment of other chronic diseases.

Measures to improve the Healthcare System in India:

  • Upgradation of Public health services: by enhancing health budgets and adequate recruitment in public health systems.
  • Primary healthcare must be given importance: All public health activities required for epidemic control – including testing, early detection of cases and various other preventive measures are being carried out by Primary Healthcare Centres.
  • Improving robustness of Pharma Supply Chain: India needs to diversify its sources of raw materials as well as destinations for products.
  • Revamping urban health services: There is an urgent need to launch a massive programme for revamping of urban health services focussed on primary healthcare, along with major upgradation of urban living conditions, especially in “non-notified” slums which must be recognised as integral to the city.
  • Innovative approaches: such as converting train coaches into isolation wards, mobile hospitals etc.
  • Creation of Central Bed Bureau: as recommended by SC in 1997 to ease the pressure for emergency beds. The Bureau should be equipped with wireless or other communication facilities to find out where an emergency patient can be accommodated.
  • Promoting preventive healthcare: The huge and expanding network of Health and Wellness Centres (HWCs) within the Ayushman Bharat programme could become centres of health promotion as well as disease prevention. These could also act as for hub of community level monitoring.
  • Boosting private sector investment in social sector infrastructure through public-private partnership mode.

Way Forward:

Legal reform must provide for a time-bound transition to universal state-provided health services under a rights-based, non-exclusionary framework, with States implementing it. Private arrangements can be an option. COVID-19 has exposed the dangers of excessive reliance on private tertiary care. The corrective lies in raising public spending to the promised 2.5% of GDP on public facilities that are universally accessible.

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