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GS Paper: GS3

  • Asset Reconstruction Companies

    The article argues for the greater role to Asset Reconstruction Companies by allowing them to invest in the equity [shares] of the distressed companies.

    Context

    • In a recently released paper “Indian Banks: A time to reform” Viral Acharya and Raghuram Rajan argued for a greater role for Asset Reconstruction Companies.
    • They argue that when there are fewer bids in a bankruptcy auction, the value on loans is better realised if read an asset reconstruction company takes over the borrower and places the firm under new management.

    Current limits on the role of ARC

    • The RBI limited the role of  ARC to participation in resolutions under the Insolvency and Bankruptcy Code, 2016 (IBC) only by partnering with an equity investor, which is the resolution applicant.
    • If the application succeeds, the equity investor would acquire the shares, while the ARC trust would acquire the debt.

    Background of the ARCs

    •  Some stakeholders are asking for extending the role of ARCs by allowing direct invest in the equity of distressed companies through IBC resolution just like private equity funds.
    • The RBI doesn’t appear to favour such an extended role for ARCs.
    • This is due to the uninspiring performance of the Asset Reconstruction Companies in the past.
    • At the time of the Asian Financial Crisis,  India’s non-performing assets stood at a whopping 14.4 per cent.
    •  It was in this context that the Narasimham Committee (1998) recommended setting up an ARC specifically for purchasing NPAs from banks and financial institutions.
    • Subsequently, the SARFAESI Act, 2002 created the legal framework for establishing multiple private ARCs.
    • This policy achieved only modest success.
    • The maximum average recovery by ARCs as a percentage of total bank claims stood at 21.5 per cent in 2010.
    • Since then, it has steadily declined and reached 2.3 per cent in 2018.
    • This low recovery could be the result of collateral disposal rather than genuine business turnarounds [i.e. operating the business and turning it profitable].

    Need for extending the role of ARCs

    • In 2002, India lacked an effective bankruptcy system.
    • There was no market for corporate control of distressed firms.
    • ARCs were originally designed for this peculiar institutional ecosystem.
    • They were required to hand over the distressed business back to the original promoter once they had generated enough value to repay the debt.
    • Consequently, ARCs had little incentive to turn around distressed businesses.
    • This situation completely changed in 2016 as the IBC seeks to maximise the value of distressed businesses through a market for corporate control.
    • ARCs should be able to fully participate in this market and attempt successful turnarounds by acquiring strategic control over distressed businesses.
    • In a solvent company, shareholders have stronger incentives than creditors to maximise enterprise value.
    • This is because an increase in enterprise value automatically increases the value of its equity.
    • In contrast, creditors do not benefit from increases in enterprise value beyond their individual claims.
    • If ARCs could hold more equity instead of debt in the resolved company, they would also have a stronger incentive to take strategic control to ensure successful turnaround.

    Way forward

    • The law should enable ARCs to invest in a distressed company’s equity, whether by infusing fresh capital or by converting debt into equity.
    • Effectively, an ARC should act more like a private equity fund, as Acharya and Rajan suggested.
    • This in turn would make the market for corporate control under IBC deeper and more liquid, improving ex-ante recovery rates for banks.

    Consider the question “What are Asset Reconstruction Companies? How allowing the ARCs to invest in equity of distressed companies under IBC help successful turnaround of the distressed business?”

    Conclusion

    •  If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.

    Back2Basics: Difference between debt and equity

    • Debt market and equity market are two broad categories of investment available in the general investment milieu.
    • Equity markets trade in shares or stocks of the company listed on the stock exchanges.
    • A stock in a company indicates a unit in the ownership of the company.
    • As shareholders, you become part owners of the company.
    • The largest shareholder, with 50% or more shares, becomes the owner of the company.
    • Equity markets are riskier than debt markets.
    • Debt is a form of borrowed capital.
    • The central or state governments raise money from the market by issuing government securities or bonds.
    • In effect, the government is borrowing money from you and will pay interest to you at regular intervals.
    • The principal amount is returned on maturity.
    • In the same way, a company raises money from the market by selling debt market securities such as corporate bonds.
    • The debt market is made up of bonds issued by government authorities and companies.

  • GST Council and its Functioning

    The Goods and Services Tax (GST) Council has failed to iron out differences between some States and the Centre over the plan to get States to borrow from the market to meet the shortfall in compensation cess collections this year.

    Try this question from CSP 2018:

    Q.Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    About GST Council

    • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
    • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
    • The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
    • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

    How is the GST Council structured?

    • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
    • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
    1. The Union Finance Minister will be the Chairperson
    2. As a member, the Union Minister of State will be in charge of Revenue of Finance
    3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

    Terms of reference

    • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
    • They lay down GST laws, principles that govern the following:
    1. Place of Supply
    2. Threshold limits
    3. GST rates on goods and services
    4. Special rates for raising additional resources during a natural calamity or disaster
    5. Special GST rates for certain States

  • 2020 Nobel for Hepatitis C Virus discovery

    Americans Harvey J Alter and Charles M Rice, and British scientist Michael Houghton were awarded the Nobel Prize for Medicine or Physiology on Monday for the discovery of the hepatitis C virus.

    Try this PYQ:

    Q.Which one of the following statements is not correct? (CSP 2019)

    (a) Hepatitis B virus is transmitted much like HIV.

    (b) Hepatitis B. unlike Hepatitis C, does not have a vaccine.

    (c) Globally, the number of people infected with Hepatitis B and C viruses arc several times more than those infected with HIV.

    (d) Some of those infected with Hepatitis B and C viruses do not show the symptoms for many years.

    Hepatitis C Virus

    • Hepatitis C virus (HCV) is a bloodborne virus and causes liver diseases. It refers to an inflammatory condition of the liver.
    • The novel virus caused several deaths in the 1960s and 1970s — but remained unknown until its discovery in the late 1980s.

    What are other Hepatitis Viruses?

    • Before the discovery of the Hepatitis C virus, two other viruses were known to cause hepatitis in patients.
    • The Hepatitis A virus was known to spread mainly through contaminated food and water and caused a relatively milder form of liver inflammation.
    • Hepatitis B, discovered in the 1960s, was known to transmit mainly through infected blood and caused a more serious form of the disease.
    • Incidentally, the discovery of the Hepatitis B virus too was rewarded with a Nobel Prize in Medicine, given to Baruch Blumberg in 1976. There are vaccines available for this disease now.

    How Hepatitis C came to observation?

    • The discovery and identification of the Hepatitis B virus facilitated the development of a diagnostic test to detect its presence in blood.
    • Thereafter, only blood sanitized from this virus would be given to patients, but it was observed that even this sanitized blood was able to prevent only 20% of the blood-borne hepatitis cases.
    • It was then that the search for the new virus began.

    How is Hepatitis C treated?

    • Presently there is no vaccine available for HCV. However, it can be treated with antiviral medication.
    • Hepatitis A and B are preventable by vaccine.

    Back2Basics:

    https://www.civilsdaily.com/news/in-news-nobel-prize/

  • What is Sheltering of Taxes?

    This newscard is an excerpt from an original article published in TH.

    We can expect a statement based question comparing Tax Shelters and Tax Heavens.

    What is a Tax Shelter?

    • A tax shelter is a financial vehicle that an individual can use to help them lower their tax obligation and, thus, keep more of their money.
    • It is a legal way for individuals to “stash” their money and avoid getting it taxed.
    • A tax shelter is entirely different from a tax haven because the latter exists outside the country and its legality can, at times, be questionable.
    • A tax shelter, on the other hand, is entirely legal and keeps all monies within an individual’s home country.

  • What is Ketogenic Diet?

    Ketogenic or Keto Diet is popularly followed as a weight loss diet across the world.

    Try this PYQ:

    Q.Regular intake of fresh fruits and vegetables is recommended in the diet since they are a good source of antioxidants. How do antioxidants help a person maintain health and promote longevity? (CSP 2014)

    (a) They activate the enzymes necessary for vitamin synthesis in the body and help prevent vitamin deficiency.

    (b) They prevent excessive oxidation of carbohydrates, fats and proteins in the body and help avoid unnecessary wastage of energy.

    (c) They neutralize the free radicals produced in the body during metabolism.

    (d) They activate certain genes in the cells of the body and help delay the ageing process.

    What is Ketogenic Diet?

    • The Keto Diet is one of the most popular weight-loss diets the world over.
    • It consists of a high-fat, moderate-protein and low-carb diet.
    • It helps in weight loss by achieving ketosis — a metabolic state where the liver burns body fat and provides fuel for the body, as there is limited access to glucose.

    What constitutes a keto diet?

    • A classic keto generally requires that 90 per cent of a person’s calories come from fat, 6 per cent from protein and 4 per cent from carbs.
    • But there are many versions doing the rounds since this one was designed for children suffering from epilepsy to gain control over their seizures.

    How does it impact the body?

    • If we starve the body of carbohydrate, after burning out the glucose, the liver starts breaking down fats for energy.
    • Ketosis is common in all kinds of fasting, but in a keto diet, when one is feeding it by giving a lot of fats from outside without carbs, it can become mildly toxic.
    • It may lead to many nutrient deficiencies such as carbohydrates, proteins, vitamins (especially vitamin A, D, E, & K) and minerals like calcium, phosphorus, sodium.
    • Extreme carbohydrate restriction can lead to hunger, fatigue, low mood, irritability, constipation, headaches, and brain fog, which may last days to weeks

    What impact does it have on our kidneys?

    • Even the moderate increase in protein needs to be carefully monitored, especially in those who are already suffering from chronic kidney disease, as it could lead to kidney failure.
    • One should get a thorough assessment and make sure they have normal kidney function before choosing this diet.
    • This diet could lead to increased stress on the kidneys and result in kidney stones, as they are made to work overtime.

  • Need for streamlining the Insolvency and Bankruptcy Code

    The article analyses the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution and on Indian economy.

    Measures that will improve investment

    1)  IBC: transforming insolvency resolution

    • IBC replaced inefficient bankruptcy law regime and has transformed insolvency resolution in India.
    • The IBC has focused on time-bound resolution, rather than liquidation.
    • IBC acts as an empowering tool to support companies falling within its ambit.
    • It has successfully instilled confidence in the corporate resolution methodology.
    • It has allowed credit to flow more freely to and within India while promoting investor and investee confidence.
    • The IBC is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
    • Through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities.

    Impact of IBC

    •  According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018.
    • Further, the recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019
    • The overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019.

    2) Decriminalisation of minor offences

    • Criminal penalties including imprisonment for minor offences act as major deterrents for investors.
    • The Government of India is also working toward decriminalisation of minor offences.
    • This will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent.

    3) Other legislative measures

    • Together with the IBC, following 3 reforms suggests major and multi-dimensional effort by the government.
    • 1) The rolling out of the commercial courts.
    • 2) Commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts.
    • 3) Removal of over 1,500 obsolete and archaic laws.

    Way forward

    • There could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process.
    • This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.

    Consider the question “Examine the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution procedure and suggest the further improvements in the IBC.”

    Conclusion

    The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence, and helped encourage entrepreneurship while also providing support to MSMEs. Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.

    B2BASICS

  • ATAL: World’s Longest Highway Tunnel

    PM Modi has inaugurated the Atal Tunnel at Rohtang at an altitude of above 3,000 metres in Himachal Pradesh.

    Refer this link to read more about Himalayan passes and rivers

    https://www.civilsdaily.com/the-northern-and-northeastern-mountains-part-1/

    Atal Tunnel

    • The 9.02 km-long-tunnel, built by the Border Roads Organisation (BRO), is the world’s longest highway tunnel and connects Manali to Lahaul-Spiti valley.
    • It provides all-weather connectivity to the landlocked valley of Lahaul-Spiti, which remains cut-off for nearly six months in a year as the Rohtang Pass is usually snow-bound between November and April.
    • Before the tunnel construction, the Lahaul Valley used to remain closed for vehicular movement due to bad weather conditions.
    • It reduces the distance by 46 km between Manali and Leh and the travel time by about 4 to 5 hours. It is expected to boost tourism and winter sports in the region.
    • The tunnel, also significant from the military logistics viewpoint, will provide better connectivity to the armed forces in reaching Ladakh.

  • Shaurya Missile and India’s K missiles family

    A successful trial of the nuclear-capable Shaurya missile was conducted by India.

    Shaurya Missile

    • Shaurya is a land-based parallel of the submarine-launched K-15 missile.
    • It is a land variant of short-range SLBM K-15 Sagarika, which has a range of at least 750 kilometres.
    • These ballistic weapons belong to the K missile family — codenamed after late Dr APJ Abdul Kalam — which is launched from Arihant class of nuclear submarines.
    • Because these missiles are to be launched from submarines, they are lighter, smaller and stealthier than their land-based counterparts; the Agni series.

    A look at what this family of missiles is their strategic importance as a nuclear deterrent and their recent tests.

    K Family of missiles

    • The K family of missiles is primarily Submarine Launched Ballistic Missiles (SLBMs), which have been indigenously developed by DRDO.
    • These are named after Dr Kalam, the central figure in India’s missile and space programmes who also served as the 11th President of India.
    • The development of this naval platform launched missiles began in the late 1990s as a step towards completing India’s nuclear triad (land, sea and air-based).

    Strategic importance of SLBMs

    • The capability of being able to launch nuclear weapons submarine platforms has great strategic importance in the context of achieving a nuclear triad, especially in the light of ‘no first use’ policy of India.
    • The sea-based underwater nuclear-capable assets significantly increase the second strike capability of a country and thus boosts its nuclear deterrence.
    • These submarines can not only survive the first strike by the adversary but also can launch a strike in retaliation thus achieving Credible Nuclear Deterrence.
    • The development of these capabilities is important in light of India’s relations with the two neighbours China and Pakistan.

    Try this PYQ now:

    What is “Terminal High Altitude Area Defense (THAAD)”, sometimes seen in the news? (CSP 2018)

    (a) An Israeli radar system

    (b) India’s indigenous anti-missile programme

    (c) An American anti-missile system

    (d) A defence collaboration between Japan and South Korea

  • What is CBD Oil?

    These days, there are diverse opinions rising regarding the legalization of CBD oil in India after recent controversy rose after the alleged suicide of an actor.

    What is CBD oil?

    • CBD oil is an extract from the cannabis plant.
    • The two main active substances in it are cannabidiol or CBD and delta-9 tetrahydrocannabinol, or THC.
    • The high that is caused by the consumption of cannabis is due to THC.
    • CBD, however, does not cause a “high” or any form of intoxication.
    • CBD oil is made by extracting CBD from the cannabis plant, then diluting it with a carrier oil like coconut or hemp seed oil.

    What are the effects of Cannabidiol?

    • Cannabidiol has effects on the brain, preventing the breakdown of a chemical that aggravates the pain and affects mood, and mental function. It can reduce pain and anxiety.
    • It also reduces psychotic symptoms associated with conditions such as schizophrenia as well as epilepsy.

    Is it legal in India?

    • The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) outlaws the recreational use of cannabis.
    • The NDPS Act, however, does not apply to the leaves and seeds of cannabis plants. In case the CBD is extracted from the leaves of the cannabis, then technically it is not illegal.
    • CBD oil manufactured under a licence issued by the Drugs and Cosmetics Act, 1940 can be legally used.
    • However, the use of cannabis as a medicine is not much prevalent in India.

    Now try this PYQ:

    Q. Widespread resistance of malarial parasite to drugs like chloroquine has prompted attempts to develop a malarial vaccine to combat malaria. Why is it difficult to develop an effective malaria vaccine?

    A) Malaria is caused by several species of Plasmodium

    B) Man does not develop immunity to malaria during natural infection

    C) Vaccines can be developed only against bacteria

    D) Man is only an intermediate host and not the definitive host

  • Species in news: Madhuca Diplostemon

    A tree species, long believed extinct, has been rediscovered after a gap of more than 180 years from a sacred grove in Kollam district.

    Try this PYQ:

    Q.Consider the following statements:

    1. Biodiversity hotspots are located only in tropical regions.
    2. India has four biodiversity hotspots i.e., Eastern Himalayas, Western Himalayas, Western Ghats and Andaman and the Nicobar Islands.

    Which of the above statements is/ are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    Madhuca diplostemon

    • Scientists have identified the tree as Madhuca diplostemon (family Sapotaceae), a threatened species of the Western Ghats whose specimen was first collected in 1835.
    • In 1835, Robert Wight, a surgeon-botanist with the East India Company, had collected three specimens of the species.
    • Only one mature tree has been found so far, which makes this remarkable rediscovery extremely valuable from a scientific, environmental and conservation point of view.
    • Since the species is represented only by one specimen in a single locality, it is eligible to be categorised ‘Critically Endangered’ by the IUCN.