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Why in News?

• In May 2018, Union Cabinet approved a National Policy on Biofuels – 2018.
• It replaces earlier policy made by Ministry of New and Renewable Energy in 2009.

What are Biofuels?

• A biofuel is a fuel that is produced through contemporary biological processes, such as agriculture and anaerobic digestion, rather than a fuel produced by geological processes such as those involved in the formation of fossil fuels, such as coal and petroleum, from prehistoric biological matter.
• Biofuels can be derived directly from plants, or indirectly from agricultural, commercial, domestic, and/or industrial wastes.

Salient Features of the Policy

• The policy categories biofuels into the following 3 categories :-
  • First Generation (1G) : Also called as ‘basic fuels’, it includes bioethanol and biodiesel
  • Second Generation(2G): It includes ethanol, Municipal Solid Waste (MSW) to drop-in fuels and is also known as ‘advanced fuels’
  • Third Generation(3G) : Biofuels like bio-CNG

The categorization is done to enable the extension of appropriate financial and fiscal incentives under each category.

• Expands the scope of raw material: The policy allows the use of Sugarcane Juice, Sugar-containing materials like Sugar Beet, starch containing materials like Corn, Cassava, Damaged food grains like wheat, Rotten Potatoes, unfit for human consumption for ethanol production.
• Use of surplus food grains : To avoid wastage and to provide farmers appropriate prices, the policy proposes the use of surplus food grains for production of ethanol for blending with petrol with the approval of National Biofuel Coordination Committee.
• Viability Gap Funding : Policy indicates a viability gap funding scheme for 2G ethanol Bio refineries of Rs.5000 crore in 6 years.
• It encourages setting up of supply chain mechanisms for biodiesel production from non-edible oil seeds, Used Cooking Oil, short gestation crops.

Expected Benefits

• With the upswing in the oil price putting pressure on the economy, even small steps to encourage the use of biofuels are welcome.
• Reduced Import Dependency : The ethanol supply for year 2017-18 is expected to be around 150 crore liters of ethanol which will result in savings of over Rs.4000 crore of forex.
• Cleaner Environment : By reducing crop burning & conversion of agricultural residues/wastes to biofuels it will help in abetting Greenhouse Gas emissions.
• Municipal Solid Waste(MSW) management : Around 62 MMT of MSW is generated in India annually. With existing technology, there is potential to provide around 20% of drop in biofuels from one ton of MSW waste.
• Additional Income to Farmers: The otherwise burnt agricultural residues/waste can be commercialized augmenting the farmers’ income.

Implementation Challenges

• Technical Challenges : The technology for production of biofuels is still in its nascent stage and further research is needed for making it more economically viable.
• Supply Chain Management : For streamlining the movement of agricultural waste and other raw material for biofuel from source to industrial gates, robust supply chain is required which is still not well-developed.
• Limited Private Sector investment : Accelerated investment is needed in the sector which can only be achieved with the involvement of private sector whose participation has been hampered because of financial constraints and lack of cohesive support from central to local level.
• Food vs Fuel Challenge :There is the risk of diverting farmland or crops for biofuels production in detriment of the food supply which can lead to food inflation.
• Environmental Challenges : There is a risk of farmers opting for mono cropping preferring crops used for biofuel production which can disbalance local ecology as well.

Conclusion

• The Policy has the potential to transform India’s fuel market, mitigating environmental pollution, diversify farmers income and much more.
• However, the government need to take steps to remove policy barriers that have discouraged private investment in building supply chains and also need to channelise more research in new technology so as to make the production of biofuels more economically viable.

Introduction

The Parliament has recently passed the Insolvency and Bankruptcy Code Bill, 2016. It was first passed in Lok Sabha and later in Rajya Sabha in the month of May 2016.

• The bill will replace the existing bankruptcy laws to make it easy for investors to exit within a fixed time frame, in an effort to improve the ease of doing business in India.
• The Code creates time-bound processes for insolvency resolution of companies and individuals.

The bill introduced as a money bill

The Insolvency and Bankruptcy Bill, 2015 was introduced as a money bill in the Lok Sabha.

• In case of money bills, the Rajya Sabha can only make recommendations that are not binding on the Lok Sabha.
• The president has no power to return a money bill.

What is Insolvency?

• Simply speaking, insolvency is a financial state of being – one that is reached when you are unable to pay off your debts on time.
• Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity – a person, family, or company – becomes insolvent when it cannot pay its lenders back on time.
• Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.

What is Bankruptcy?

• Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.
• Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government.
• In general, there are two main forms of bankruptcy –

1. Reorganization: Under reorganization bankruptcy, debtors restructure their repayment plans to make them more easily met.
2. Liquidation bankruptcy: Under liquidation bankruptcy, debtors sell certain assets in order to make money they can use to pay off their creditors.

It should be noted here that while insolvency is a financial situation and bankruptcy is a legal condition. Insolvency may or may not lead to bankruptcy.

Bankruptcy laws across the world:

USA

• The US has a Bankruptcy Code that provides for fairly quick liquidation or reorganisation of business with what is popularly known as Chapter 7, with cases being filed in bankruptcy courts; Chapter 11, which deals with reorganisation of businesses; and Chapter 15, on cross-border insolvencies. Individual bankruptcies are dealt with separately.

UK

• In the UK, once cases are filed for bankruptcies, after 12 months, there is either discharge with part of the assets being used to pay off debts, or, in situations where companies can be turned around, court-appointed administrators handle cases.

Germany

• The German insolvency law is applicable to both individuals and firms, with independent court-appointed insolvency practitioners helping in realising assets or reorganising the business.

Why does India need a bankruptcy law?

• India is a capital-starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.
• Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on. The entire process of winding up is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process.
• According to the World Bank’s Doing Business 2016 report,

1. On average, secured creditors in India recover only 25.7 cents for every dollar of credit from an insolvent firm at the end of insolvency proceedings. This contrasts poorly with the OECD countries where creditors recover 72.3 cents.
2. The whole insolvency process takes 4.3 years to conclude in India whereas it takes just 1.7 years in OECD countries.
3. Because of the above reasons, India ranks an abysmal 136 out of 189 countries with respect to “resolving insolvency”.

Previous Bankruptcy Laws in India

• There are several laws that deal with insolvency for companies, such as the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
• There are also a couple of laws dating from the time of the British Raj for dealing with individual debtors like Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

The Bankruptcy Law Reform Committee

• To fix the issues with the current insolvency regime, the government had set up a high-level Bankruptcy Law Reform Committee (BLRC) in August 2014 under T. K. Viswanathan.
• This committee had submitted its report in November 2015 while suggesting new institutions and structures to modernize the present outdated system.
• After consultation with stakeholders about the committee recommendations, the government prepared a draft bill and introduced it in the Parliament.

Salient Features of the Insolvency and Bankruptcy Code, 2015

The bill contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

Timeline

• The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

Insolvency Resolution Plan

• The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

• The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

Information Utilities

• Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

Bankruptcy and Insolvency Adjudicator

• The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
• The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

Insolvency regulators

• The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

What about financial sector insolvencies?

The Financial Sector Legislative Reforms Commission (FSLRC) has recommended the creation of a resolution corporation to monitor financial firms, and intervene before they go bust.

• The aim is to either close firms that can’t be revived or change their management to protect investors or depositors.
• This is important because the failure of large banks or institutions imposes costs on taxpayers in the form of bailouts or capital infusion.
• The proposal is to promote the Deposit Insurance and Credit Guarantee Corporation (DICGC) as resolution corporation.

Critical Analysis of the Code

• Time-bound insolvency resolution will require the establishment of several new entities.  Also, given the pendency and disposal rate of DRTs, their current capacity may be inadequate to take up the additional role.
• IPAs, regulated by the Board, will be created for regulating the functioning of IPs.  This approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating licensed professionals.  Further, requiring a high value of performance bond may deter the formation of IPAs.
• The Code provides an order of priority to distribute assets during liquidation.  It is unclear why:

1. Secured creditors will receive their entire outstanding amount, rather than up to their collateral value,
2. Unsecured creditors have priority over trade creditors, and
3. Government dues will be repaid after unsecured creditors.

• The Code provides for the creation of multiple IUs. However, it does not specify that full information about a company will be accessible through a single query from any IU.  This may lead to financial information being scattered across these IUs.
• The Code creates an Insolvency and Bankruptcy Fund.  However, it does not specify the manner in which the Fund will be used.

Importance of the bankruptcy code

The Insolvency and Bankruptcy Code would provide such an environment to ensure easy exit for sick companies and help the country to improve its position in ease of doing business.

• The bankruptcy code will make it easier for companies to wind up failed businesses and bring India on a par with developed nations in terms of resolving bankruptcy issues.
• A stated objective of the new law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders.
• Once the code will come into place it will minimize the problem of delay as there are strict timelines within which the case has to be disposed off.
• The code will also consolidate the existing laws thus making the process simpler.
• Quick disposal of cases will maximize the recovery amount.
• Establishment of information utilities will help in creating a database to provide information on the insolvency status of individuals. In addition to this, specialized insolvency professionals will help in guiding through the process.
• Easy process of claim by the creditors also encourages financial institutions to extend credit facilities thus strengthening the financial markets with increased availability of credit for business.

Panel for adopting UN model on cross-border insolvency

• The Insolvency Law Committee (ILC), tasked with suggesting amendments to the Insolvency and Bankruptcy Code of India, has recommended that India adopt the United Nations’ model to handle cross-border insolvency cases.
• “The ILC has recommended the adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law of Cross Border Insolvency, 1997, as it provides for a comprehensive framework to deal with cross-border insolvency issues,” the government said in a statement.
• “The committee has also recommended a few carve-outs to ensure that there is no inconsistency between the domestic insolvency framework and the proposed cross border insolvency framework.”
• The UNCITRAL Model Law has been adopted in 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues, the government said.

UNCITRAL

• UNCITRAL was established by the UN General Assembly in 1966 to promote the progressive harmonisation and unification of international trade law.
• It is the core legal body of the United Nations system in the field of international trade law.
• It also aims to modernize and harmonize rules on international business.
• The Commission comprises 60 member States elected by the United Nations General Assembly for a term of six years. Membership is structured to ensure representation of the world’s various geographic regions and its principal economic and legal systems.
• India is a founding member of UNCITRAL.
• India is only one of eight countries which have been a member of UNCITRAL since its inception.

The necessity of amending the IBC

• The current law related to IBC applies to domestic companies only.
• Moreover many Indian companies have a global footprint and many foreign companies have a presence in multiple countries, including India, which calls for amending IBC.              

Advantages of bringing Model Law

• It will enhance the ease of doing business and protect creditors in the global scenario by providing increased predictability and certainty of the insolvency framework.
• Provide greater confidence generation among foreign investors.
• Provides a robust mechanism for international cooperation.

Conclusion

• However, enactment of the code is just a beginning. For effective results, the government will have to ensure that its so-called pillars — insolvency professionals, information utilities, a strengthened adjudication mechanism, and a regulator — are institutionalised.