Daily Current Affairs

The Insolvency and Bankruptcy Code (IBC) (GS Paper 3, Economy)

Context:

• October 1 marked the sixth anniversary of the Insolvency and Bankruptcy Board of India (IBBI).

What is the Insolvency and Bankruptcy Code (IBC)?

• In a growing economy like India, a healthy credit flow and generation of new capital are essential, and when a company or business turns insolvent or “sick”, it begins to default on its loans. In order for credit to not get stuck in the system or turn into bad loans, it is important that banks or creditors are able to recover as much as possible from the defaulter and as quickly as they can.
• In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, and older loan recovery mechanisms such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI),LokAdalats, and Debt Recovery Tribunals were seen to be performing badly, the Insolvency and Bankruptcy Code (IBC) code was introduced to overhaul the corporate distress resolution regime in India and consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model as opposed to the debtor-in-possession system.
• When insolvency is triggered under the IBC, there can be two outcomes: resolution or liquidation; all attempts are made to resolve the insolvency by either coming up with a restructuring or new ownership plan and if resolution attempts fail, the company’s assets are liquidated.

 

What is the process followed under the IBC?

• When a corporate debtor (CD), or a company which has taken loans to run its business, defaults on its loan repayment, either the creditor or the debtor can apply for the initiation of a Corporate Insolvency Resolution Process (CIRP) under Section 6 of the IBC.
• Earlier, the minimum amount of default after which the creditor or debtor could apply for insolvency was ₹1 lakh, but considering the stress on companies amid the pandemic, the government increase the minimum amount to ₹1 crore.

 

Adjudicating Authority (AA):

• To apply for insolvency, one has to approach a stipulated adjudicating authority (AA) under the IBC; the various benches of the National Company Law Tribunal (NCLT) across India are the designated AAs.
• The Tribunal has 14 days to admit or reject the application or has to provide a reason if the admission is delayed. The CIRP or resolution process begins once an application is admitted by the AA. The amended mandatory deadline for the completion of the resolution process is 330 days.
• Once the application is admitted, the AA appoints an interim resolution professional (IRP), registered with an insolvency professional agency (IPA). IRPs could be experienced and registered chartered accountants, company secretaries, lawyers and so on.
• Once appointed by the Tribunal, the IRP takes control of the defaulter’s assets and operations, collects information about the state of the company from Information Utilities (repositories keeping track of the debtor’s credit history), and finally coordinates the constitution of a Committee of Creditors or a CoC.

 

Committee of Creditors (CoC):

• A CoC, comprising all (unrelated) financial creditors of a defaulting company, is the most important business decision-making body in every CIRP, as it decides whether the defaulting company is viable enough to be restructured and given a fresh start, or liquidated.
• It also appoints an insolvency professional (IP), who can either be the same as the IRP or a new professional, who looks after the operations of the company during the CIRP.
• The IP invites and examines proposals for a resolution plan for a company, which could include restructuring of debt, merger or demerger of the company. It submits eligible plans to the CoC, which can approve a plan if it receives 66% of the voting share of committee members. If the CoC fails to approve any resolution plan, the company goes for liquidation.
• If a plan is approved, the CoC submits it to the Tribunal (before the maximum 330-day deadline), which then approves the plan which the debtor is bound to implement. The AA can also reject a plan.

 

Pre-pack insolvency resolution process (PIRP):

• In July 2022, the IBC was amended to introduce pre-packs or pre-pack insolvency resolution process (PIRP) for Micro, Small, and Medium Enterprises (MSMEs).
• Under a pre-pack resolution, creditors and owners of a business agree out-of-court to sell the business to an interested buyer. The buyer may be a third party or someone related to the business.
• The current law limits the pre-pack resolution mechanism to defaults not exceeding Rs. 1 crore

 

What are the challenges for the IBC?

• According to its regulator, the Insolvency and Bankruptcy Board of India (IBBI),the first objective of the IBC is resolution, a way to save a business as a going concern, through restructuring, change in ownership, mergers and other methods.
• The second objective is to maximize the value of assets of the corporate debtor and the third objective is to promote entrepreneurship, availability of credit, and balancing the interests. The Code says that the order of these objectives is “sacrosanct”.
• Keeping this order in mind, when one looks at the IBBI data for the 3,400 cases admitted under the IBC in the last six years, half or more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution, which is the first objective.

 

Time taken:

• The IBC was touted as a time-bound mechanism in the face of the often laggard states of older mechanisms. Timeliness is key here so that the viability of the business or the value of its assets does not deteriorate further.
• The IBC initially stipulated a 180-day deadline to complete the resolution process, with a permitted 90-day extension.
• The IBC was subsequently amended to further make the total timeline for completion 330 days— almost a year. While in 2018, when the timeline was 180+90 days, most cases (from companies that owed less than ₹50 crore to those which owed more than ₹1000 core) were completed in under 300 days.
• However, in FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crore. The average number of days it takes to resolve such cases increased rapidly over the past five years.

 

Haircuts:

• A haircut is the debt foregone by the lender as a share of the outstanding claim. The Parliamentary Stan­ding Committee on Finance pointed out in 2021, that in the five years of the IBC, creditors on an average had to bear an 80% haircut in more than 70% of the cases.
• There are also other challenges to the IBC, some of which were pointed out by the Standing Committee. These were related to the conduct of the CoCs and the IPs.
• The Committee stated that the committee of creditors has significant discretion in accepting resolution plans and appointing IPs and called for more transparency and the framing of a professional code of conduct for the CoC.

 

What recommendations have been made by experts and judicial authorities?

• In order to address the delays, the Parliamentary Standing Committee suggested that the NCLT should not take more than 30 days after filing, to admit the insolvency application and transfer control of the company to a resolution process.
• Citing the more than 50% vacancy in the Tribunal compared to the sanctioned strength, it suggested recruitment in advance based on the projected number of cases.
• It also recommended the setting up of dedicated benches of the NCLT for IBC cases. To reduce caseloads,the Committee suggested that the pre-packs option be extended to all corporates after review. This is because, under PIRP, unlike CIRP, the debtor continues to manage company operations during the resolution process.
• The IBBI has also called for a new yardstick to measure haircuts. It suggested that haircuts not be looked at as the difference between the creditor’s claims and the actual amount realised but as the difference between what the company brings along when it enters IBC and the value realised.
• It asserts that a company may have already deteriorated significantly in value by the time it comes under the Code’s process, so the value realised should pertain to the company’s existing assets and not previous assets.

India abstains from UN vote on Uighur Muslims in UNHRC

(GS Paper 2, International Relation)

Why in news?

• Recently, the efforts of the US and Western countries to bring a resolution against China on the situation of Uighur Muslims in the United Nations Human Rights Council (UNHRC) suffered a setback when 11 countries, including India and Ukraine, indirectly helped China by being absent at the time of voting.
• The failure of this resolution in the 47-member UN council is being considered a major setback for America and the entire Western lobby.

Details:

• Human rights groups have been sounding the alarm over what is happening in the in the Xinjiang Uyghur Autonomous Region of Chinafor years, alleging that more than one million Uyghurs had been detained against their will in a large network of what China calls ‘re-education camps’.
• The draft resolution was presented by a core group consisting of Canada, Denmark, Finland, Iceland, Norway, Sweden, UK and USA, and co-sponsored by a range of states, including Turkey.
• Serious allegations of human rights violations against Uyghurs and other predominantly Muslim communities in China were brought to the attention of the UN Human Rights Office and UN human rights mechanisms since late 2017.

 

US proposal rejected at UN:

• This is only the second time in the UNHRC’s 16-year history that a US resolution has been rejected. It also explains the changing global equations.
• Most of the discussion after the UNHRC vote is about India’s stand. Given the current state of relations with China, the US expected support from India. However, India said that it has stuck to its policy of not voting against any country in institutions like the UNHRC.
• However, it is believed that India has taken this step due to the apprehension of a UN vote on Jammu and Kashmir in future.

 

Recent India-China equation:

• An agreement has also been reached recently to resolve the ongoing military dispute between the two countries on the Line of Actual Control (LAC) in eastern Ladakh of India from May, 2020 and the withdrawal of troops.
• However, during this period, China has also thwarted India’s efforts to ban terrorists hiding in Pakistan by using its veto power in the UN Security Council (UNSC).

 

India challenges US in global diplomacy:

• The motion brought by US, Britain and Canada at the UN got 17 votes in favor and 19 against while 11 countries did not take part in the UNHRC vote.
• Voting at the UNHRC also marks a change in global diplomacy. India, a close partner of the US, has not only been absent, Ukraine has also been absent from voting.
• The US, Britain and Canada are currently engaged in helping Ukraine against Russia. This proposal was brought to draw world attention to the situation of Muslims in China, but Pakistan, Indonesia, Qatar, UAE, Uzbekistan, Sudan, Senegal opposed it.

 

About UNHRC:

• It was created by the United Nations General Assembly in 2006. It replaced the former United Nations Commission on Human Rights.
• It is made up of 47 United Nations Member States which are elected by the UN General Assembly (UNGA).
• The Office of the High Commissioner for Human Rights (OHCHR) serves as the Secretariat of the Human Rights Council.OHCHR is headquartered in Geneva, Switzerland.

 

12-hour single-duty system of Kerala State RTC

(GS Paper 2, Governance)

Context:

• The public transportation system in the country has long been beset with issues, although the situation varies from one state to another.
• The Kerala State Road Transport Corporation (KSRTC) latest decision to implement a 12-hour single-duty system for employees has triggered protests with unions putting up stiff resistance to the move.
• The management however has implemented the new system on an experimental basis at Parasala depot in Thiruvananthapuram from October 1.

 

What is the 12-hour single-duty system?

• The new system, as per the Motor Transport Workers Act 1961, envisages utilizing the optimum efficiency of employees. As per the existing system, the employees will have to work only eight hours and they can opt for double-duty after the first eight hours.
• Making use of this system, the majority of the employees used to take double-duty and at times three duties at one go. In short, an employee will have to report for duty for only three days if he/she chooses double duty in three days.
• In the 12-hour single-duty system, employees will have to spend around 12 hours in the office, although they would only be on duty for eight hours. The peak hours of the transport Corporation a day are between 7 a.m. to 11. a.m. and 3 a.m. to 8 p.m.
• However, by shifting to the new system, the management can judiciously make use of the working hours of employees during peak hours without going for double duty. Therefore, the original working hours of employees would be the same, but the corporation can save a considerable amount of money. 

What is the benefit of the new system compared to the old system?

• While the old system requires an employee to work only three days if one chooses double-duty (16 hours a day), the present system demands their attendance six days a week by limiting the working hours to eight hours per day.
• The Corporation maintains that the single duty system would increase the productivity of employees and reduce the risk of accidents caused by work-related stress. Further, employees working beyond the allotted eight hours would be eligible for overtime allowance, making it a win-win situation for the Corporation as well as the workforce.
• As per the old system, most of the employees will be idle during the slack hours. However, the single duty system would enable the Corporation to make optimum use of the employees by deploying them judiciously during peak and slack hours.

 

Why have the employees raised a banner against the new system?

• The old system was more convenient for them. However, the new system demands their service six days a week and they will have to spend more time in the office.

 

Way Forward:

• The Corporation will be able to raise additional revenue of up to ₹25 crore per month by switching to the new system and it will reduce the Corporation’s dependence on the State government to some extent in terms of financial assistance.
• However, more similar measures are needed to turn the ailing Corporation around and make it profitable.

Strengthening the CSR framework is a profitable idea

(GS Paper 3, Economy)

Context:

• Ever since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013, CSR spending in India has risen from ₹10,065 crore in 2014-15 to ₹24,865 crore in 2020-21.
• But there is no data to verify whether this increase is commensurate with the increase in profits of Indian and foreign (having a registered arm in India) companies. 

Partial participation:

• Besides, there were 2,926 companies in 2020-21 with zero spend on CSR while companies spending less than the prescribed limit of 2% rose from 3,078 in 2015-16 to 3,290 in 2020-21.
• There was also a decline in the number of companies participating in CSR;  25,103 in FY2019 to 17,007 in FY2021.

 

Stipulated requirement:

• If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years. The latter proviso in the Act weakens the former provision since the requirement of 2% is only a minimum requirement.
• Ideally, companies should be encouraged to spend more than this. Besides, many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation. It is unclear if this is allowed under the Companies Act/CSR rules.

 

Issues/Challenges:

Geographical bias:

• The first proviso to Section 135(5) of the Act is that the company should give preference to local areas/areas around it where it operates. This is logical.
• However, a report says that 54% of CSR companies are concentrated in Maharashtra, Tamil Nadu, Karnataka, and Gujarat (receiving the largest CSR spends) while populous Uttar Pradesh and Madhya Pradesh receive little.
• A high-level committee observed in 2018 that the emphasis on ‘local area’ in the Act is only directionary and that a balance has to be maintained.
• Unfortunately, this ambiguity has left much to the discretion of the boards of these companies in the absence of clear percentages for local spends vis-à-vis other area spends.

 

Focus on environmental issues:

• Item (iv) of Schedule VII of the Act deals with broader environmental issues to create a countervailing effect.
• However, an analysis of CSR spending (2014-18) reveals that while most CSR spending is in education (37%) and health and sanitation (29%), only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States.

 

Monitoring:

• Under the existing regulation, monitoring is by a board-led, disclosure-based regime, with companies reporting their CSR spends annually to the Corporate Affairs Ministry (MCA) through filing of an annual report. It is not known if there is a review of these reports and companies taken to task.
• A major issue with this design is that it focuses on output rather than quality of the expenditure and its impact.
• The Standing Committee on Finance had also observed that the information regarding CSR spending by companies is insufficient and difficult to access.

 

Auditing:

• As per the ‘Technical Guide on Accounting’ issued by the Institute of Chartered Accountants of India, a company is only required to mention its CSR spends, non-spend, underspend, and overspend in the ‘Notes to Accounts’.
• Additionally, an auditor can investigate only the details of spending and at most can question the board about its authenticity.
• However, the auditor is not mandated to qualify the accounts for non-compliance or inadequate CSR performance in the audit report, a feature which can be instrumental in ensuring its compliance.

 

Roadmap:

• There is a need to curate a national-level platform centralised by the MCA where all States could list their potential CSR-admissible projects so that companies can assess where their CSR funds would be most impactful across India with, of course, preferential treatment to areas where they operate.
• Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts.
• This model would be very useful for supporting deserving projects in the 112 aspirational districts and projects identified by MPs under the Government’s SansadAdarsh Gram Yojana.

Suggestions:

• Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration.
• All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
• Recommendations by the high-level committee in 2018 should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime.
• These include strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.; bringing CSR within the purview of statutory financial audit with details of CSR expenditure included in the financial statement of a company, and mandatory independent third-party impact assessment audits.
• Since the Government itself has begun separate schemes for sanitation, water supply and education (listed in Schedule VII), steps to stop duplication and fraud are essential.
• CSR non-spend, underspend, and overspend should be qualified by the auditor in the audit report as a qualification to accounts, and not just as a note to accounts.
• The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spend by companies through the line ministries (for public sector undertakings) and other industry associations (for non-public units) instead of merely hosting all information on the Ministry’s website.