A bankable law: The Bankruptcy Code fills a crucial gap in India’s economic architecture

The Rajya Sabha passed the Insolvency and Bankruptcy Code 2016 on Wednesday, paving the way for perhaps the most important economic legislation initiated and seen through by the Narendra Modi government. In about 18 months, the government tapped expertise within and outside government to introduce a comprehensive legislation to deal with insolvencies of firms, partnerships and individuals. A timely and transparent resolution of insolvencies is a vital element in a country’s economic architecture. India now has a code that allows this.

Prior to this legislation, laws to deal with insolvencies were fragmented, which led to interminable delays. Consequently, it takes a little over four years now to resolve an insolvency. Delays also eat into the extent of recovery. In India, the recovery rate is 25.7 cents on a dollar as compared to the South Asian average of 31.8 cents. The prevailing system has made India a laggard even in its neighbourhood and made it difficult to do business in the country. To rectify this, the new code has repealed two colonial era laws and amended 11 others. What has emerged is a coherent approach towards a comprehensive insolvency and bankruptcy code.

One of the long-term benefits of this code should be the emergence of a deeper and wider bond market. India’s banks often overextend themselves on account of deficiencies in financial markets. In this context, with the intention of encouraging bond market development, government has done well to push the interests of creditors and employees ahead of its own in the event of an insolvency. The code also seeks to provide protection for employees when their employers fail to meet their legal obligations. Given the asymmetry between the two sides, the cover provided to employees by the bankruptcy code should deter deviant behaviour, such as was widely reported in case of Kingfisher.

The bankruptcy code will have prospective effect. India’s existing bad loan problems of banks will continue to go through the prevailing processes of resolution. But the introduction of a new code should help the entire financial sector. If the goals underlying the bankruptcy code are to be actualised, the Modi government must not drop the ball now. The code envisages the creation of a new regulator and even new professions to manage an insolvency process. Existing judicial mechanisms will have additional responsibilities and will need to be strengthened. The effort will be worthwhile as the outcome will strengthen the Indian economy.

No small change

Amended tax treaty with Mauritius promises more transparency, reduced evasion, shored up revenues.

The government’s decision to amend the tax treaty with Mauritius, which from April 1 2017, will allow India to tax capitals gains arising from the sale of shares of an Indian resident company, is welcome. Under the original bilateral agreement between the two nations, capital gains from the sale of securities can only be taxed in Mauritius. However, the gains from the sale of shares held for less than 12 months are treated as short-term capital gains within India and attract a 15 per cent short-term capital gains tax. This has created an anomaly, thanks to a double taxation avoidance agreement with Mauritius, that meant business entities operating out of Mauritius escaped even paying short-term capital gains tax on share transfers. This has been exploited even by domestic Indian investors, who have resorted to routing their equity investments via Mauritius to avoid the tax liability at home.

Under the amended treaty, the government has provided a level playing field for domestic and foreign investors, and the incentive for an Indian investor to channel investments via Mauritius has been neutralised. In fact, the amended tax regime will also apply to capital gains of Singapore-based companies, due to the direct linkage of the Singapore double taxation avoidance agreement (DTAA) clause with the Mauritius DTAA. These two locations account for roughly two-thirds of all investments, using P-notes, into India. P-notes are financial instruments used by overseas investors who wish to invest in India’s capital markets without registering themselves with the Securities and Exchange Board of India. The government’s move coincides with the global outrage against tax avoidance in the wake of the Panama Papers revelations. With the tax arbitrage possibility doused, it can be expected that foreign portfolio investment data would improve in quality as it is likely to reflect faith in the strength of India’s macroeconomic fundamentals.

Notably, instead of a sudden and retrospective change, the government has chosen to give ample time for all investors to adjust. The amended tax provisions will come into effect 11 months later and existing investors, who acquire shares before April 1 2017 will not be taxed. Further, firms in Mauritius and Singapore will be taxed at a concessional rate for the first two years, until March 31 2019, to help them transition to the new regime. This amendment follows on Finance Minister Arun Jaitley’s 2016-17 budget announcement on implementation of the general anti-avoidance rules (GAAR) from April 1 2017. These rules are intended to check tax avoidance for investments by entities based mainly in overseas tax havens. Overall, the tax amendment will improve transparency, shore up revenues and reduce tax evasion in the long term

Why the government should revitalise PPP models

By Aman Singh

India is poised for an unprecedented growth in infrastructure. The infrastructure outlay in this year’s Union Budget alone is Rs 2.2 lakh crore. Over the next 5-7 years, India will make investments of about $1 trillion in new infrastructure.

This coupled with its commitment to the United Nations of cutting emissions intensity by 33-35% by 2030 from 2005 levels, India will need $2.5 trillion over the next 15 years.

All of this cannot be through public spending. This represents a strong need for scaling up private financing through public-private partnership (PPP). However, headwinds in the form of regulatory, financial and policy challenges confront PPP today.

PPP is an amorphous concept and means different things to different stakeholders. Some see it as a way of using private sector capital. But more holistically, PPP is also an opportunity to leverage expertise, experience and efficiency of the private sector to deliver public services and infrastructure with equitable sharing of risk and return. It is more about ‘hows’ rather than ‘whats’.

PPP, with focus on defining output specifications, is a means of purchasing ‘services’ than only creating assets. While all the three Ps in PPP are important, ‘partnership’ is paramount.

Is PPP an innovation of recent vintage? While PPP gained traction in the 1990s, it has existed for ages in forms different from what we see today. India witnessed an early form of PPP in 1853 when the railways were introduced through private initiatives. After the Great Indian Peninsula Railway introduced the first railways near Mumbai, other companies built railways in other parts connecting the major port cities of Calcutta, Madras and Bombay.

Akin to the build-operate-transfer model of PPP, the then-government encouraged private investors to set up railways against a guaranteed annual return on capital. The government allowed the companies to acquire land.

While operations remained under the company, government owned the infrastructure.

Thereafter, there was a general decline in interest in PPPs and till the 1990s, only sporadic attempts were made.

In the post-liberalisation era, India witnessed a spate of PPPs with rising private sector participation in infrastructure. The PPP model got a major fillip in 2000 when the then-Atal Bihari Vajpayee government ushered in the National Highway Development Programme. Successive governments have since created a conducive ecosystem for PPPs through the appropriate policy framework and regulations. Today, PPP is a vital pillar of infrastructure development.

However, PPP projects in India are still affected by various challenges. We are yet to see an independent PPP regulator.

There is inadequate rigour in project development and preparatory activities. Challenges of financial closure and lack of institutional capacities to carry out PPP projects exist.

Against this backdrop, the recommendations of Kelkar Committee set up to revitalise the PPP model assume great importance. Apart from making reformative recommendations to liven up the somewhat dwindling interest in PPP in key sectors such as power, roads, ports, railways and airports, the panel has called for institutional interventions, such as creation of an overarching umbrella organisation, 3P-India, to further mainstream PPPs.

Timely and innovative measures by the government, such as the introduction of a hybrid annuity model in the road sector, are expected to be a shot in the arm for the investor community in the PPP space.

To make PPP models flourish, a lot rests on the reputation that the political dispensation of the day carries. A confluence of factors like the rule of law, transparency, ease of doing business and image of political leadership decides the quantum and cost of investment by the private sector.

Globally, ‘perceived ability’ of the government to fulfil responsibility as a partner goes a long way in attracting PPP investment. That is why Greece, with a 173% debt-to-GDP ratio, has defaulted on repayment while Japan with 250% continues to do well.

PPP may not be a panacea. But if used judiciously, it can surely address many of the challenges facing the infrastructure sector today. Government should develop simple yet robust and unambiguous PPP structures that are economically beneficial, financially feasible and politically acceptable.

Government officers should avoid the temptation to see themselves as PPP pundits. They must remain avid students and learn to ask the right question at the right time. It is important not to blindly follow an existing successful template, but to customise PPP as per the requirements of a project. Without a proper suitability test, such as a value-for-money analysis, PPP should not be considered at all.

The writer is principal secretary to the chief minister, Chhattisgarh