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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Insurance (Amendment) Bill, 2021

    The Rajya Sabha has passed the Insurance Amendment Bill 2021 that increases the maximum foreign investment allowed in an insurance company from 49% to 74%.

    It is very intriguing to see several amendments in news these days. Isn’t it?

    Insurance Amendment Bill

    • The Bill seeks to amend the Insurance Act, 1938.
    • The Act provided the framework for functioning of insurance businesses and regulates the relationship between an insurer, its policyholders and its shareholders.
    • It also had provisions regarding the regulator (the Insurance Regulatory and Development Authority of India).

    Key highlights of the bill

    The Bill seeks to increase the maximum foreign investment allowed in an Indian insurance company.

    () Foreign investment

    • The Act allows foreign investors to hold up to 49% of the capital in an Indian insurance company, which must be owned and controlled by an Indian entity.
    • The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%, and removes restrictions on ownership and control.
    • However, such foreign investment may be subject to additional conditions as prescribed by the central government.

    () Investment of assets 

    • The Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities.
    • If the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India.
    • The Act specifies in an explanation that this will also apply to an insurer incorporated in India, in which at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India.
    • The Bill removes this explanation.

    Expected outcomes

    • More capital at dispense: The FDI limit increase is also expected to provide access to fresh capital to some of the insurance companies, which are struggling to raise capital from their existing promoters.
    • Better solvency: This would not only increase the solvency position for some insurers but would provide long-term growth capital for other companies to invest in newer technologies.
    • Insurance penetration: These technologies would not only help in managing losses but also in customer acquisition and thus insurance penetration.
    • Technological impetus: The additional funds could be used to invest in technology to adapt to the evolving customer needs like responsive service through digital platforms.

  • Draft E-Commerce Policy

    The Department for Promotion of Industry and Internal Trade (DPIIT) will soon come out with a common acceptable draft e-commerce policy.

    Earlier policy

    • The previous draft in July last year had proposed a regulator, an e-commerce law, periodic audit of companies that store or mirror Indian users’ data overseas.
    • The latest draft calls for streamlining of regulatory processes to ease the burden of compliance for activities related to e-commerce and regulations for data that will provide for sharing mechanism.

    What are the provisions of the new law?

    Data Usage

    • According to a revised draft, the government would lay down principles for the usage of data for industrial development, where such norms do not already exist.
    • They aim to put in place safeguards to prevent misuse and access of data by unauthorized persons.
    • Such safeguards may include regulating the cross-border flow of data pertaining to Indians and transactions taking place in India and the requirement of adequacy audits to be carried out by Indian firms.
    • As per the recent draft policy, violation of safeguards shall be viewed seriously and attract heavy penalties.

    Regulation, exports

    • Conformity assessment procedures will be put in place to verify that goods and services sold on e-commerce platforms meet required standards and technical regulations.
    • The government shall collect information from e-commerce platforms to aid it in making necessary decisions.
    • In order to ensure that e-commerce is not used to defraud customers, registration with an authority identified by the Government shall be mandatory.
    • The policy shall bring e-commerce exports on par with non-e-commerce exports by enabling online grant of drawbacks, advance authorization and GST refund.

    Consumer protection

    • As per the draft, e-commerce operators must ensure to bring out clear and transparent policies on discounts, including the basis of discount rates funded by platforms.
    • Such a move aims to ensure fair and equal treatment.
    • It said consumers have a right to be made aware of all relevant details about the goods and services offered for sale including country of origin, value addition in India etc.
    • In case the seller fails to establish the genuineness of his products within a reasonable time frame, the e-commerce platform shall delist the seller.

  • What are AT1 Bonds?

    The decision of the Securities and Exchange Board of India (SEBI) to slap restrictions on mutual fund (MF) investments in additional tier-1 (AT1) bonds has raised a storm in the MF and banking sectors.

    What are AT1 Bonds?

    • AT1 Bonds stand for additional tier-1 bonds. These are unsecured bonds that have perpetual tenure. In other words, the bonds have no maturity date.
    • They have a call option, which can be used by the banks to buy these bonds back from investors.
    • These bonds are typically used by banks to bolster their core or tier-1 capital.
    • AT1 bonds are subordinate to all other debt and only senior to common equity.
    • Mutual funds (MFs) are among the largest investors in perpetual debt instruments and hold over Rs 35,000 crore of the outstanding additional tier-I bond issuances of Rs 90,000 crore.

    What action has been taken by the Sebi recently and why?

    • In a recent circular, the Sebi told mutual funds to value these perpetual bonds as a 100-year instrument.
    • This essentially means MFs have to make the assumption that these bonds would be redeemed in 100 years.
    • The regulator also asked MFs to limit the ownership of the bonds to 10 per cent of the assets of a scheme.
    • According to the Sebi, these instruments could be riskier than other debt instruments.

    Try this PYQ:

    Consider the following statements:

    1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 Only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    How MFs will be affected?

    • Typically, MFs have treated the date of the call option on AT1 bonds as the maturity date.
    • Now, if these bonds are treated as 100-year bonds, it raises the risk in these bonds as they become ultra long-term.
    • This could also lead to volatility in the prices of these bonds as the risk increases the yields on these bonds rises.
    • Bond yields and bond prices move in opposite directions and therefore, the higher yield will drive down the price of the bond, which in turn will lead to a decrease in the net asset value of MF schemes holding these bonds.
    • Moreover, these bonds are not liquid and it will be difficult for MFs to sell these to meet redemption pressure.

    What’s the impact on banks?

    • AT1 bonds have emerged as the capital instrument of choice for state banks as they strive to shore up capital ratios.
    • If there are restrictions on investments by mutual funds in such bonds, banks will find it tough to raise capital at a time when they need funds in the wake of the soaring bad assets.
    • A major chunk of AT1 bonds is bought by mutual funds.

    Why has the Finance Ministry asked Sebi to review the decision?

    • The FM has sought withdrawal of valuation norms for AT1 bonds as it might lead to mutual funds making losses and exiting from these bonds, affecting capital raising plans of PSU banks.
    • The government doesn’t want a disruption in the fund mobilization exercise of banks at a time when two PSU banks are on the privatization block.
    • Banks are yet to receive the proposed capital injection in FY21 although they will need more capital to face the asset-quality challenges in the foreseeable future.
    • Fitch’s own estimate pegs the sector’s capital requirement between $15 billion-58 billion under various stress scenarios for the next two years, of which state banks account for the bulk.

  • Respecting wealth creators

    The article deals with the recent acknowledgement of the private sector by the Prime Minister in the development of the country.

    Respecting wealth creators

    • In his recent speech in Parliament, the Prime Minister openly acknowledged the contribution and role of the private sector as an important engine of growth and employment in India.
    • The creation of wealth is essential for growth, employment and the reduction of poverty.
    • India’s successes in many fields in the last three decades are linked to the private sector.
    • The industries that have created growth, jobs, buzz and hope in the last three decades, the vast majority have been driven by private enterprise.

    Steps taken to promote business

    • India has been making commendable strides in the “Ease of Doing Business”.
    • It is easier to start a business in India than it was a decade ago.
    • We seem to have broken the shackles of a chained belief that business is bad.
    • The success of the Mudra Yojana and Start-up India are living testimony to this fact.
    • And that India is daring to look at sectors we were otherwise hesitant to — space, defence, aeronautics.
    • Some areas need work, but a government willing to listen gives a good head start to solving those problems.
    • Work on faceless tax assessment and PLI schemes are moves that have received encouraging responses far and wide.
    • The India stack has revolutionised the fintech sector.
    • The digital health stack will likely do the same for healthtech.

    Conclusion

    The recent Union budget has made clear the intent of this government to pursue economic reform and go for growth — whether it is the willingness to live with a higher fiscal deficit or to aggressively pursue divestment of public sector enterprises. Large spending on infrastructure is good news too.

  • [pib] SFURTI Scheme

    Union Minister for MSME has inaugurated 50 artisan-based SFURTI clusters, spread over 18 States.

    SFURTI is an off-track scheme compared to other HRD schemes with Hindi acronyms. Similar is the SPARSH scheme for philately.

    SFURTI Scheme

    • Scheme of Fund for Regeneration of Traditional Industries (SFURTI) is an initiative by the Ministry of MSME to promote Cluster development.
    • Khadi and Village Industries Commission (KVIC) is the Nodal Agency for the promotion of Cluster development for Khadi.
    • Under the Scheme, the MSME Ministry supports various interventions including the setting up of infrastructure through Common Facility Centers (CFCs), procurement of new machinery, design intervention, improved packaging and marketing etc.

    Types of clusters

    • SFURTI clusters are of two types i.e., Regular Cluster (500 artisans) with Government assistance of up to Rs.2.5 crore and Major Cluster (more than 500 artisans) with Government assistance up to Rs.5 crore.
    • The scheme focuses on strengthening the cluster governance systems with the active participation of the stakeholders so that they are able to gauge the emerging challenges and opportunities and respond to them.

  • Cabinet approves PLI Scheme for telecom

    The Union Cabinet has approved the production-linked incentive scheme for the telecom sector with an outlay of â‚č12,195 crores over five years.

    Why such a scheme?

    • The scheme aims to make India a global hub for manufacturing telecom equipment.
    • The sector is expected to lead to an incremental production of about â‚č2.4 lakh crore, with exports of about â‚č2 lakh crore over five years and bring in investments of more than â‚č3,000 crores.

    PLI Scheme

    • The PLI scheme aims to boost domestic manufacturing and cut down on imports by providing cash incentives on incremental sales from products manufactured in the country.
    • Besides inviting foreign companies to set shop in India, the scheme aims to encourage local companies to set up or expand, existing manufacturing units.

    UPSC can directly as the sectors included in the PLI scheme. Earlier it was only meant for Electronics manufacturing (particularly mobile phones).

    Benefits for MSMEs

    • For inclusion of MSMEs in the scheme, the minimum investment threshold has been kept at â‚č10 crores, while for others it is â‚č100 crore.
    • For MSMEs, a 1% higher incentive is also proposed in the first three years.

    Employment generation

    • The scheme was also likely to generate 40,000 direct and indirect employment opportunities and generate tax revenue of â‚č17,000 crores from telecom equipment manufacturing.

    Which equipments?

    • The telecom manufacturing would include core transmission equipment, 4G/5G Radio Access Network and wireless equipment, access and Customer Premises Equipment (CPE), IoT access devices, other wireless equipment.

  • Indian investments and BITs

    The article examine the termination of agreement for the development of East Container Terminal by Sri Lanka in the context of unilateral termination of bilateral investment treaties by India.

    Context

    • Recently, Sri Lanka terminated 2019 agreement with India and Japan that aimed to jointly develop the strategic East Container Terminal (ECT) at the Colombo port.
    • Apart from analysing the diplomatic fallout of this problematic decision for India-Sri Lanka ties, the issue also needs to be looked at through the prism of the India-Sri Lanka bilateral investment treaty (BIT).

    India-Sri Lanka  BIT and its termination

    • In 1997, India and Sri Lanka signed a BIT to promote and protect foreign investment in each other’s territories.
    • It empowers individual foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations.
    • This is known as investor-state dispute settlement (ISDS).
    • Article 3(2) of this treaty provides that investments and returns of investors of each country shall, at all times, be accorded fair and equitable treatment (FET) in the other country’s territory.
    • The normative content of the FET provision has been fleshed out by scores of ISDS tribunals in the last two decades.
    • The tribunals have persistently held that an important component of the FET provision is that the host state should protect the legitimate expectations of foreign investors. 
    •  In a case known as International Thunderbird Gaming Corporation v Mexico, it was held that the concept of legitimate expectations relates to a situation where the host state’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure to honour those expectations could cause the investor (or investment) to suffer damages.
    • Sri Lanka, by signing the agreement to jointly develop the ECT at the Colombo port, created such expectations on the part of Indian investors.
    • However, the twist in the tale is that India unilaterally terminated the India-Sri Lanka BIT on March 22, 2017.
    • This termination was part of the mass repudiation of BITs that India undertook in 2017 as a result of several ISDS claims being brought against it.
    •  In cases of such unilateral termination, survival clauses in BITs assume significance because they ensure that foreign investment continues to receive protection during the survival period.
    • But, in the case of the investment in developing the ECT at the Colombo port, this survival clause will be inconsequential, since the agreement was signed in 2019, i.e., after India unilaterally terminated the BIT.

    Important lessons

    • As a consequence of the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs.
    • However, an important attribute that perhaps has not received much attention is that BITs are reciprocal.
    •  BITs do not empower merely foreign investors to sue India, but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
    • Accordingly, given India’s emergence as an exporter, and not just an importer of capital, the government should revisit its stand on BITs.

    Consider the question “Examine the implications of unilateral termination of bilateral investment treaties(BITs) by India.”

    Conlcusion

    India needs to adopt a balanced approach towards BITs with an effective ISDS provision. This will facilitate Indian investors in defending their investment under international law should a country, like Sri Lanka, renege on an agreement.

  • IBC as an enabler

    The article analyses whether or not the Insolvency and Bankruptcy Code is delivering on its objectives.

    Criticism of IBC

    • The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to resolve the stress of companies.
    • However, the corporate insolvency resolution process (CIRP)  has been criticised as it rescues only about 25 per cent of companies and leads to liquidation for the rest.

    Is IBC delivering on its mandate

    Let’s analyse how Insolvency and Bankruptcy Code (IBC) 2016 is working towards value maximising outcomes.

    1) It enables the market to attempt to resolve

    • The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
    • When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
    • The market usually rescues a viable company and liquidates an unviable one.
    • There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
    • Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
    • In such cases, the code enables liquidation to release available resources to alternate uses.
    • It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.

    2) Look at the total asset value not the number of companies

    • In terms of absolute numbers, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation.
    • In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
    • Of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.

    3) Look at the overall impact, not just final numbers

    • Third, the stress that a company suffers is like an illness which can be treated by a variety of options.
    • Normally, recovery is better if diagnosis and treatment start early.
    • Likewise, the health of the company deteriorates if the resolution process is delayed.
    • The percentage of rescue at this later stage may not be significant.
    • The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship.
    • Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default.
    • Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP.
    • The number of companies that recover before filing the application as a percentage of those that get starts the insolvency process would give the fair idea about the efficacy of the IBC.

    Consider the question “The IBC has often been criticised for liquidating the companies rather than rescuing them. Do you agree with this criticism? Give reasons in support of your argument.”

    Conclusion

    Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.

  • What are the One-Person Companies (OPCs)?

    In her Budget speech, the Union Finance Minister had announced measures to ease norms on setting up one-person companies (OPCs).

    Q.What are One-Person Companies (OPCs)?  Discuss how they will help startups and non-resident Indians?

    What is an OPC?

    • As the name suggests, a one-person company is a company that can be formed by just one person as a shareholder.
    • These companies can be contrasted with private companies, which require a minimum of two members to get going.
    • However, for all practical purposes, these are like private companies.
    • It is not as if there was no scope for an individual with aspirations in business prior to the introduction of OPC as a concept.
    • As an individual, a person could get into the business through a sole proprietorship mode, and this is a path that is still available.

    Why do we need such companies?

    • A single-person company and sole proprietorship differ significantly in how they are perceived in the eyes of law.
    • For the former, the person and the company are considered separate legal entities. In a sole proprietorship, the owner and the business are considered the same.
    • This has an important implication when it comes to the liability of the individual member or owner. In a one-person company, the sole owner’s liability is limited to that person’s investment.
    • In a sole proprietorship set-up, however, the owner has unlimited liability as they are not considered different legal entities.
    • Some see the proposal as a move to encourage corporatization of small businesses. It is useful for entrepreneurs to have this option while deciding to start a business.

    Is this a new idea?

    • Such a concept already exists in many countries. In India, the concept was introduced in the Companies Act of 2013.
    • Its introduction was based on the suggestions of the J. Irani Committee Report on Company Law, which submitted its recommendations in 2005.
    • Pointing out that there was a need for a framework for small enterprises, it said small companies would contribute significantly to the Indian economy.
    • But because of their size, they could not be burdened with the same level of compliance requirements as large public-listed companies.

    Features of OPCs

    • The law on one-person companies that took shape, as a result, exempted such companies from many procedural requirements, and, in some cases, provided relaxations.
    • For instance, such a company does not need to conduct an annual general meeting, which is a requirement for other companies.
    • A one-person company also does not require signatures of both its company secretary and director on its annual returns. One is enough.
    • There was, however, criticism that some rules governing a one-person company were restrictive in nature. This year’s Budget has dealt with some of these concerns.

    How many OPCs does India have?

    • According to data compiled by the Monthly Information Bulletin on Corporate Sector, there were 34,235 OPCs out of a total number of about 1.3 million active companies in India (Dec 2020).
    • Data also show that more than half of the OPCs are in business services.

  • [pib] Hathkargha Samvardhan Sahayata (HSS) Yojana

    The Ministry of Textiles introduced the technology up-gradation scheme called Hathkargha Samvardhan Sahayata (HSS) Yojana.

    Much recently, in the budget, the Mega Investment Textiles Parks (MITRA) Scheme was launched.

    HSS Yojana

    • This scheme is introduced as an up-gradation scheme under National Handloom Development Programme (NHDP) and Comprehensive Handloom Cluster Development Scheme (CHCDS) in 2015-16.
    • It aims to provide upgraded looms/accessories to handloom weavers to improve the quality of the fabric and enhance productivity.
    • Under the scheme, the Union Govt bears 90% of the cost of looms/accessories.
    • It is designed for all the weavers, including SC/ST/OBC and women.
    • The performance of this scheme will be evaluated by independent third-party agencies.