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Working Papers | 2020

The Doctrine of Frustration under section 56 of the Indian Contract Act

M.P. Ram Mohan, Promode Murugavelu, Gaurav Ray, and Kritika Parakh

The performance of obligations under a contract may be hindered by unexpected supervening events, leading to contractual uncertainties. The doctrine of frustration paves the way for a just consequence of such an unfortunate event, which has happened without any fault of the contracting parties. The doctrine fills the void in a contract regarding supervening events, based on principles of fairness and equity. Considering the large implications on the obligatory and binding nature of a valid contract, it becomes important to analyse the factors that guide the courts to determine its application. Unlike common law, the Indian Contract law explicitly incorporates the doctrine of frustration under section 56 of the Contract Act. However, the evolution of this doctrine in India has been greatly influenced by English law. This paper attempts to restate the law on the doctrine of frustration as applicable in India.

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Working Papers | 2020

Auditors' negligence and professional misconduct in India: a struggle for a consistent legal standard

M.P. Ram Mohan and Vishakha Raj

Gross negligence is a severe form of negligence. Its severity has been characterized using the presence of a mental element or mens rea accompanying the negligent act. Within the context of professional negligence, gross negligence is important as it constitutes professional misconduct. For auditors, a finding of professional misconduct through disciplinary proceedings can result in suspension or expulsion from the profession. The Securities and Exchange Board of India also uses this concept to determine whether an auditor has violated any securities regulations. Given the implications of a finding of gross negligence on the practice of an auditor, this paper seeks to examine the legal standard in detail. The paper examines all reported High Court decisions from 1950s till 2019 and finds that the standards applied by the High Courts have been inconsistent. In the absence of any precedent from the Supreme Court of India that details what comprises gross negligence in the context of auditors, the inconsistent approach of the High Courts poses a problem. The Supreme Court decision in the P.K. Mukherjee case (1968) dealt with an auditor's misconduct, however, it did not examine the question of gross negligence. This paper offers a starting point for a discussion to minimize the uncertainty currently associated with auditors' liability for professional misconduct, especially hoping to assist the newly established the National Financial Reporting Authority in its decision-making process.

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Working Papers | 2020

Pre-packs in the Indian Insolvency Regime

M.P. Ram Mohan and Vishakha Raj

Pre-packaging allows a distressed company to negotiate a plan with its creditors and a purchaser before entering formal insolvency proceedings. By allowing the terms of a plan to be negotiated before formal proceedings, pre-packs provide a quick and discreet way of completing the insolvency resolution process. The speed and confidentiality offered by pre-packs have made them prevalent in the United Kingdom and the United States, however, these advantages come with trade-offs. Creditors' voting rights under the regular insolvency resolution process are circumvented by the pre-pack process. The US has two pre-pack processes, one that requires creditor approval and another which does not. In the UK and the US, there has been opposition to regulating pre-packs that do not need creditor approval because reforms that increase creditor participation will reduce the speed associated with such pre-packs. In India, pre-packs have not evolved through the present regime as it does not allow for the assets of a debtor to be sold without its creditors' approval. The Insolvency and Bankruptcy Board of India is considering introducing pre-packs in the Indian regime and faces unique challenges because of some of the features in India's insolvency regime. Insolvency law in India prohibits the participation of a company's directors and creditors in the pre-pack process. Indian insolvency law also has broad avoidance provisions which can complicate the implementation of pre-packs. This paper discusses these challenges and uses the experience of the UK and the US to suggest a framework for the introduction of pre-packaged insolvency in India. After evaluating the pre-pack regimes in the UK and the US, we conclude that it would be optimal for India to retain creditor protections and require creditor approvals in its pre-pack regime. This would ensure that pre-packs can be discreetly implemented and also avoids the disenfranchisement of creditors.

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Working Papers | 2020

Shukranitisara: A Political Economy Text at the Cusp of Indian Kingdoms and Colonial Rule
(Revised as on 15/03/3021)

Satish Y. Deodhar

Shukracharya's treatise on political economy has been referred to in many ancient Indian texts such as Arthashastra, Buddhacharitam and Mahabharata. However, that treatise has been lost. A text titled Shukranitisara was brought to light in the nineteenth century. Written no later than the early part of the
nineteenth century, the text has been written at the cusp of decline of the Indian kingdoms and entry of the colonial powers. The text is unique in that it seems to synthesize ancient Sanskrit writings as well as early regulations of East India Company. While a Sanskrit to English translation of the document exits and a few
have also written about this text from the perspective of political science, nothing has been written from the perspective of economic policies. This is an effort to capture the economic aspects of the treatise. Among the four purusharthas or the life objectives, while Arthashastra had given primacy to artha or material wealth, Shukranitisara considers dharmic or ethical conduct as foremost for the economic decisions of the state and the householder. Among other things, the treatise addresses issues of governance, breadth of vocations and sciences, public finance, prices, markets, contracts, labour relations, and advice to a householder. If some of
the policies mentioned in Shukranitisara are detailed and unique as compared to Arthashastra, some other are similar to the early regulations of the East India Company. Some of the policy advices from the text remain relevant even for today.

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Working Papers | 2020

Foreign Currency Borrowing and Firm Financing Constraints in Emerging Markets: Evidence from India

Sanket Mohapatra and Jay Prakash Nagar

This study examines the relationship between foreign currency borrowing and financing
constraints for Indian firms. Using panel data for 2,512 non-financial listed firms in India
during 1996-2016, this study finds that the sensitivity of investment to internal cash flows, an
indicator of financing constraints, is higher for firms with foreign currency debt exposure
compared to other firms. Financing constraints are higher prior to new foreign currency
borrowing compared to a matched sample of firms with only domestic borrowing, but
decrease after foreign borrowing, suggesting that foreign debt reduces firms' financing
constraints. Moreover, firms that have relationships with either private or foreign banks have
higher financing constraints when undertaking new foreign borrowing compared to those
enjoying exclusive relationships with only government-owned banks. The financing
constraints for foreign currency borrowers are also found to be higher during domestic credit
booms compared to other periods. Non-manufacturing firms and those with lower than
median export revenues and higher than median tangible assets experience greater financing
constraints compared to other firms when they borrow in foreign currencies. These findings
provide new evidence on the role of foreign currency borrowing in mitigating financing
constraints in emerging market economies.

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Working Papers | 2020

Social Enterprises and the Pursuit of Mission: Form Matters

Ankur Sarin and Sriram M S

Mission drift serves as an important parameter of success not only on its own right (Epstein and McFarlan 2011), but also because it shines light on the fundamental dilemma that social enterprises face between the pursuit of a solution to the social problem ("purpose") and financial sustainability of the organisation ('profit"). Without contradicting the legal and resource imperatives, we argue that the choice of organisational form for social enterprises is also a strategic one, and one that has implications for the success of the organisation and its vulnerability to mission drift.

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Working Papers | 2020

Fractional Differencing: (In)stability of Spectral Structure and Risk Measures of Financial Networks

Arnab Chakrabarti and Anindya S. Chakrabarti

Computation of spectral structure and risk measures from networks of multivariate financial time series data has been at the forefront of the statistical finance literature for a long time. A standard mode of analysis is to consider log returns from the equity price data, which is akin to taking first difference ($d = 1$) of the log of the price data. Sometimes authors have considered simple growth rates as well. Either way, the idea is to get rid of the nonstationarity induced by the {\\it unit root} of the data generating process. However, it has also been noted in the literature that often the individual time series might have a root which is more or less than unity in magnitude. Thus first differencing leads to under-differencing in many cases and over differencing in others.
In this paper, we study how correcting for the order of differencing leads to altered filtering and risk computation on inferred networks. In summary, our results are: (a) the filtering method with extreme information loss like minimum spanning tree as well as filtering with moderate information loss like triangulated maximally filtered graph are very susceptible to such d-corrections, (b) the spectral structure of the correlation matrix is quite stable although the d-corrected market mode almost always dominates the uncorrected (d = 1) market mode indicating under-estimation in the standard analysis, and (c) the PageRank-based risk measure constructed from Granger-causal networks shows an inverted U-shape evolution in the relationship between d-corrected and uncorrected return data over the period of analysis 1972-2018 for historical data of NASDAQ.

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Working Papers | 2020

'Too central to fail' firms in bi-layered financial networks: Evidence of linkages from the US corporate bond and stock markets

Abinash Mishra, Pranjal Srivastava, and Anindya S. Chakrabarti

Complex mutual dependencies of asset returns are recognized to contribute to systemic risk. A growing literature emphasizes that identification of vulnerable firms is a fundamental requirement for mitigating systemic risk in a given asset market. However, in reality, firms are generally active in multiple asset markets with potentially different degrees of vulnerabilities in different markets. Therefore, to assess combined risks of the firms, we need to know how systemic risk measures of firms are related across markets? In this paper, we answer this question by studying US firms that are active in both stock as well as corporate bond markets. The main results are twofold. One, firms that exhibit higher systemic risk in the stock market also tend to exhibit higher systemic risk in the bond market. Two, systemic risk within an asset category is related to firm size, indicating that `too-big-to-fail' firms also tend to be `too-central-to fail. Our results are robust with respect to choose of asset classes, maturity horizons, model selection, time length of the data as well as controlling for all major market level factors. These results have prominent policy implications for identification of vulnerabilities and targeted interventions in financial networks.

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Working Papers | 2020

Compensation for environmental damage: progressively casting a wider net, but what's the catch?

M.P. Ram Mohan and Els Reynaers Kini

The 2018 decision by the International Court of Justice (ICJ) in which it for the first time addressed compensation for environmental damage in the case Certain Activities Carried Out by Nicaragua in the Border Area (Costa Rica v. Nicaragua)-Compensation Owed by The Republic of Nicaragua to The Republic of Costa Rica ('Costa Rica case') serves as the perfect opportunity to take stock of where international environmental law stands in terms of liability and compensation for environmental damage. While keeping in mind the distinct features between State responsibility for wrongful acts, the international liability of States in the absence of wrongfulness and the civil liability of persons along with the secondary liability of States as addressed in international treaties (in Part II), this paper seeks to focus on the core elements which one could find at the center of a Venn diagram between these various liability regimes (in Part III), to know: how are international bodies as well as domestic courts, international treaties and national legislations, defining and interpreting environmental damage, and applying it in concrete cases where compensation for environmental damage is in order? What is the standard of care applicable to the no harm obligation-is it based on a fault-based regime, strict or even absolute liability? Which methodology does one apply to calculate environmental harm? Despite some of the progress made with regard to the theoretical aspects of environmental damage, this paper will also review how courts fill in the contours when assessing environmental damages, including their reliance on equity as well as punitive damages when deciding cases, and assess whether international and domestic courts sufficiently rely on independent experts and valuation methods to calculate natural resource damages. In Part IV we will more closely analyze how the weaknesses of the international regime for civil liability for oil pollution has triggered interesting and more robust domestic legislative responses, based on a brief analysis of the Deepwater Horizon oil spill in the United States and the Erika oil spill disaster in France. The red thread running through this paper is that there is a natural and mutual influence between international environmental law developments, be it soft law, treaties or Judgments by the ICJ, and domestic legislative or judicial responses and reasonings. We will be reviewing these various facets through the prism of the Costa Rica case and contrast some of the ICJ's approaches and conclusions vis-à-vis compensation for environmental damage with responses and methodologies adopted by domestic courts and national legislatures as well as international treaty regimes and international adjudicating bodies. In doing so, we will be able to better place the Costa Rica case in the context of contemporary environmental law developments and identify areas where the ICJ could have walked a more proactive judicial policy path (Part V).

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Working Papers | 2020

A comparable series of Tax Revenue Foregone

Reetika Khera and Anmol Somanchi

The estimate of tax revenue foregone by the government crashed in 2015-16 after steadily rising over the previous decade. This was, however, on account of substantive methodological revisions rendering the estimates incomparable across years. Reconstructing the series accounting for these revisions reveals that the crash entirely disappears. In absolute nominal terms, the tax revenues foregone have not increased and the share of direct revenues foregone (in the total) has increased. With significant changes to the overall tax architecture (e.g., the move from VAT to GST), it is unclear how useful the current method of calculating the tax revenue foregone series remains for an assessment of tax expenditures or latent fiscal space.

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