Working Papers

Section 29A of India's Insolvency and Bankruptcy Code: An Instance of Hard Cases Making Bad Law?

Ram Mohan, M.P.; Raj, Vishakha
Title : Section 29A of India's Insolvency and Bankruptcy Code: An Instance of Hard Cases Making Bad Law?
Authors : Ram Mohan, M.P.; Raj, Vishakha
Publication Date : 14-Jul-2021
Year : 2021
Publication Code : WP 2021-07-01
Abstract : The Insolvency and Bankruptcy Code, 2016 offers a second chance to a distressed corporation but not its incumbent management. Section 29A of the IBC excludes promoters and the incumbent management of corporations with non-performing asset accounts from submitting resolution plans. Though contained in the IBC, judicial interpretation made section 29A apply to corporate reorganisations under India\'s Companies Act, 2013 as well. The introduction and application of section 29A is reflective of a broader scepticism toward allowing promoters and directors to regain control of companies that went into financial distress under their watch. This perception seems to be at odds with the overarching policy of the IBC which is to foster rehabilitation over liquidation and give corporations a second chance. This paper re-evaluates section 29A by examining whether it has solved the problems it had set out to and finds that some ineligibilities prescribed for the incumbent management under section 29A can be relaxed. It uses the example of the United Kingdom\'s insolvency regime (with which India bears similarities) to explain why resolution plans from the incumbent management should not be disallowed.
Click here to Download (English) File

Insolvency set offs in India: A comparative perspective

Ram Mohan, M.P.; Raj, Vishakha
Title : Insolvency set offs in India: A comparative perspective
Authors : Ram Mohan, M.P.; Raj, Vishakha
Publication Date : 09-Jun-2021
Year : 2021
Publication Code : WP 2021-06-01
Abstract : The overarching objective of the Insolvency and Bankruptcy Code, 2016 (IBC) is to foster rescue culture in India and facilitate the reorganization, restoration and resolution of the corporate debtor rather than its liquidation. However, liquidation has been the most prevalent outcome so far for corporate debtors who have entered into the insolvency resolution process. The liquidation process under the IBC entails an orderly distribution of sale proceeds of the liquidation estate or the unsold assets of the corporate debtor where each creditor receives a proportionate amount of their claims based on their place in the distribution hierarchy of the liquidation process. A creditor\'s ability to set off a debt by-passes this orderly scheme of distribution and allows the creditor exercising the set off to be preferred over others to the extent of the set off value. Despite this manifestation of the right to set off, it is preserved in the insolvency and bankruptcy regimes of the US and the UK, the latter making it mandatory. India recognized set offs under insolvency law prior to the enactment of the IBC. After the IBC\'s enactment, an indebted creditor\'s right to set off during the insolvency resolution process has become ambiguous. The IBC\'s protective moratorium during the insolvency resolution process has been used to deny indebted creditors of their ability to exercise set offs against the corporate debtor. This paper analyses the evolution in the Indian position on insolvency set offs and compares it with the treatment of set offs in the UK and the US. The paper finds that set offs are not inherently antithetical to insolvency law and that they can be embraced by the IBC.
Click here to Download (English) File

Government responses, business continuity, and management sentiment: Impact on debt financing during COVID-19

Gopalakrishnan, Balagopal; Jacob, Joshy; Mohapatra, Sanket
Title : Government responses, business continuity, and management sentiment: Impact on debt financing during COVID-19
Authors : Gopalakrishnan, Balagopal; Jacob, Joshy; Mohapatra, Sanket
Publication Date : 23-Apr-2021
Year : 2021
Publication Code : WP 2021-04-03
Abstract : We examine how the government responses, amenability to remote working, and managerial outlook associated with COVID-19 influence debt financing by firms around the world. We find that the propensity and the amount of loan financing by firms is higher with greater stringency of lockdowns. Firms\' debt raising during the pandemic is also influenced by the work-from-home amenability of industries. We find that firms with greater reliance on customer interaction have a higher propensity for debt financing at the onset of the pandemic, indicative of their heightened need for liquidity. The propensity for bond financing is higher for firms that have a higher degree of exposure to the pandemic. In contrast, firms that hold a positive sentiment about the impact of the pandemic are less likely to raise debt financing. Our key results are largely robust to the effects of quantitative easing by the major central banks. The study deepens the understanding of the heterogeneous impact of the pandemic on debt financing on account of various country-, industry-, and firm-level factors.
Click here to Download (English) File

A minimum buyback requirement in open market repurchases: Impact on the signalling role

Srivastava, Pranjal; Jacob, Joshy; Pandey, Ajay
Title : A minimum buyback requirement in open market repurchases: Impact on the signalling role
Authors : Srivastava, Pranjal; Jacob, Joshy; Pandey, Ajay
Publication Date : 16-Apr-2021
Year : 2021
Publication Code : WP 2021-04-02
Abstract : The paper investigates the impact of the imposition of a minimum buyback requirement on open market repurchases in India. We find that the regulatory change has led to a significant increase in the abnormal stock returns earned around buyback announcements. There is lower market timing through buyback execution, accompanied by a change in the execution-style, implying a weaker instinct for opportunistic buybacks. Insiders increase their purchase of firms\' stock as against increased selling before the regulatory reform, during the buyback execution period. These findings suggest that the regulation has strengthened the information role of open market buybacks. Furthermore, implying a significant decline in the option value associated with open market buybacks after the regulatory change, we also document an increase in the propensity of firms with lower stock liquidity to buyback through fixed price tenders. Our findings suggest that the regulatory change has lowered the \"cheap-talk\" motives associated with the announcement of open market buybacks.
Click here to Download (English) File

The Role of Insolvency Tests: Implications for Indian Insolvency Law

Ram Mohan, M.P.
Title : The Role of Insolvency Tests: Implications for Indian Insolvency Law
Authors : Ram Mohan, M.P.
Publication Date : 09-Apr-2021
Year : 2021
Publication Code : WP 2021-04-01
Abstract : Insolvency determination is central to the formal insolvency and bankruptcy proceedings of a debtor entity. In determining whether a company is solvent or insolvent, two tests are generally used by the bankruptcy courts across all jurisdictions: the Commercial Cash Flow and the Balance Sheet test. While enacting IBC, India has moved away from the traditional dual test approach followed by Indian courts under the Indian Companies Act to specific Cash Flow test. This paper discusses conceptual basis of the two tests as evolved under insolvency laws of the United Kingdom and United States, with a view to comparatively study the nascent Indian insolvency regime. We conclude that irrespective of the statutorily prescribed test, over the years, courts across jurisdictions have taken recourse to both the tests to ascertain the overall commercial viability. In this lies an answer for India\'s work in progress - Insolvency & Bankruptcy Code, 2016. While the cash flow test is the test specified under Indian insolvency law, the paper shows, both the tests exist for a reason and Indian regime may have to adopt international experience in applying both the tests more or less jointly within the spirit of efficient debt resolution.
Click here to Download (English) File

Central bank gold reserves and sovereign credit risk

Rathi, Sawan; Mohapatra, Sanket; Sahay, Arvind
Title : Central bank gold reserves and sovereign credit risk
Authors : Rathi, Sawan; Mohapatra, Sanket; Sahay, Arvind
Publication Date : 22-Mar-2021
Year : 2021
Publication Code : WP 2021-03-02
Abstract : Gold holdings with central banks are often considered to play a stabilizing role in times of crisis. This paper performs a cross-country panel data analysis of developed and developing countries to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Our analysis confirms that an increase in central bank gold reserves reduces the credit default swap (CDS) spreads of a country. We also observe that during global crisis and country-specific crisis episodes, the role of central bank gold becomes even more important. In robustness tests, we account for potential endogeneity of central bank gold reserves using a Generalized Method of Moments (GMM) approach. The findings highlight the importance of gold in central bank reserves and indicate a positive role of gold in mitigating a nations external vulnerabilities in an uncertain global economic environment.
Click here to Download (English) File

A General Purpose Exact Solution Method for Mixed Integer Concave Minimization Problems (revised as on 12/08/2021)

Sinha, Ankur; Das, Arka; Anand, Guneshwar ; Jayaswal, Sachin
Title : A General Purpose Exact Solution Method for Mixed Integer Concave Minimization Problems (revised as on 12/08/2021)
Authors : Sinha, Ankur; Das, Arka; Anand, Guneshwar ; Jayaswal, Sachin
Publication Date : 01-Mar-2021
Year : 2021
Publication Code : WP 2021-03-01
Abstract : In this article, we discuss an exact algorithm for mixed integer concave minimization problems. A piece wise inner-approximation of the concave function is achieved using an auxiliary linear program that leads to a bilevel program, which provides a lower bound to the original problem. The bilevel program is reduced to a single-level formulation with the help of Karush-Kuhn-Tucker(KKT) conditions. Incorporating the KKT conditions lead to complementary slackness conditions that are linearized using BigM. Multiple bilevel programs, When solved over iterations, guarantee convergence to the exact optimum of the original problem. Though the algorithm is general and can be applied to any optimization problem with concave function(s), in this paper, we solve two common classes of operations and supply chain problems; namely, the concave knapsack problem, and the concave production transportation problem. The computational experiments indicate that our proposed approach out performs the customized methods that have been used in the literature to solve the two classes of problems by an order of magnitude in most of the test cases.
Click here to Download (English) File

Equity portfolio diversification: how many stocks are enough? Evidence from India

Raju, Rajan ; Agarwalla, Sobhesh Kumar
Title : Equity portfolio diversification: how many stocks are enough? Evidence from India
Authors : Raju, Rajan ; Agarwalla, Sobhesh Kumar
Publication Date : 23-Feb-2021
Year : 2021
Publication Code : WP 2021-02-02
Abstract : How many stocks are required to reduce unsystematic risk significantly is an important question for investors. While there is a large body of research on the subject in the United States, there is little formal work on this question in India. We show that a 15-20 stock portfolio, the traditional market rule-of-thumb for a diversified portfolio, is likely inadequate to minimise unsystematic risk. We show that an investor could target to reduce diversifiable risk by 90% with a 90% confidence with a portfolio of 40-50 stocks. We build a practical framework that serves as a baseline for investors to target a specific reduction in diversifiable unsystematic risk at a chosen confidence level.
Click here to Download (English) File

Doctrinal Conflict in Foreign Investment Regulation in India: NTT Docomo vs. Tata Sons and the Case for "Downside Protection"

Ram Mohan, M.P.; Ishizuka, Nobuhisa; Sharma, Sidharth
Title : Doctrinal Conflict in Foreign Investment Regulation in India: NTT Docomo vs. Tata Sons and the Case for "Downside Protection"
Authors : Ram Mohan, M.P.; Ishizuka, Nobuhisa; Sharma, Sidharth
Publication Date : 09-Feb-2021
Year : 2021
Publication Code : WP 2021-02-01
Abstract : The strategic importance of India as an investment destination for foreign investors is highlighted by ongoing tensions in the Indo-Pacific region, and the recognition that a strong economic relationship with India is in the interests of countries seeking a more stable balance of power in the region. From a policy perspective, India has struggled to balance its own economic interests with the commercial requirements of investors. Rules attempting to strike this balance have created uncertainties that have resulted in investors seeking greater protections, which in turn have triggered additional regulatory responses. The prevalent use of put options by foreign investors, whereby Indian parties are required to buy out their counterparties at pre-determined prices, has been a prominent subject of these regulations. India\'s judiciary has been drawn into this cycle through actions brought by foreign investors seeking to enforce arbitration awards validating their exit rights. In the process, they have created their own interpretation of the applicability of foreign investment rules that support principles of freedom of contract. This doctrinal conflict with regulatory policy is illustrated by a high-profile dispute involving one of Japan\'s largest and most well-known companies, NTT Docomo, and one of India\'s largest and most trusted companies, Tata Sons. Japan views India as a key strategic partner and in particular, views strong economic ties as a central linchpin of the partnership. Using, principally, the Docomo-Tata case as an example, and a review of other similar disputes, this paper analyses the regulatory and judicial doctrines that have shaped foreign investment regulation in India and explores the public policy implications of the conflict for India. In doing so, it proposes regulatory reforms to provide more clarity and certainty for investors, suggesting that express recognition of \"downside protection\" for investments provides a rational balance between private commercial interests and public regulatory objectives.
Click here to Download (English) File

A 2020 Vision of India's Farm Market Reforms

Deodhar, Satish Y.
Title : A 2020 Vision of India's Farm Market Reforms
Authors : Deodhar, Satish Y.
Publication Date : 21-Jan-2021
Year : 2021
Publication Code : WP 2021-01-02
Abstract : Concern for farmers and market facilitation by the state is as old as Indian civilization. In the post-Independence era, this concern was addressed by provision of market-yards for the farmers through APMC Acts of the state governments; and, by announcements of minimum support prices (MSP) for quite a few crops by the central government. Over time, however, these initiatives had their unintended consequences. APMC markets turned into monopsonies and central government has never committed itself to buying all produce at MSP from Indian farmers, except perhaps from a few states such as Punjab and Haryana. Contract farming was successful in a few states and for a few products; however, it never reached any threshold in most states. In this context, I discuss the institutional structure of the Indian farm markets and a few policy initiatives from the past. Thereafter, I present the main features of the new farm acts introduced in 2020 and emphasize the importance of their implementation.
Click here to Download (English) File