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October 16, 2017

Pro bono criterion for judges too?

  • Taking its cue from the Supreme Court’s guidelines issued last Thursday, which stated that a lawyer should have fought a certain number of cases pro bono or free of cost in order to be designated as a senior lawyer, the government wants the same principle to be followed in the appointment of judges.
  • The issue, however, is tricky as judges to higher courts are appointed by the Supreme Court collegium, — made up of the top five judges of the apex court — and the Law Ministry only has to give its concurrence. So, the idea has to be first approved by the collegium before it can be implemented.

New guidelines

  • On October 12, the Supreme Court fixed guidelines on how to designate a senior advocate and mentioned pro bono work as one of the criteria.The Supreme Court has now set up a committee that will also look at various other criteria apart from pro bono work.
  • Integrity, conduct, reputation and the number of reported judgments in which the advocate has appeared would all be factored in by the committee before recommending someone as a senior advocate, sources said.
  • The Department of Justice has also written to various Bar associations asking for data on lawyers offering free legal service.

Money-go-round is neat way to fix Indian banks

  • India is eyeing a circular solution to fix its banking mess. New Delhi might revive so-called “recapitalisation bonds”, which it used back in the 1990s. This makes sense given that banks are flush with deposits after Prime Minister Narendra Modi’s ban on big banknotes.
  • New Delhi will recapitalise its banks in the next few months, senior finance ministry official Sanjeev Sanyal said last week. He added that options included a mix of reducing the government’s stakes to 52%, a direct cash injection, and recapitalisation bonds.
  • Local banks need as much as $65 billion by 2019 to meet Basel III standards, Fitch Ratings reckons. With valuations below book value for most state banks, the government could raise barely $6 billion by reducing its stake in around 20 lenders. Nor does New Delhi have much cash to deploy in direct injections, since it is already stretched to meet a 3.2% fiscal-deficit target.
  • So, recapitalisation bonds could make a serious comeback.
  • Here the government borrows from the banks by issuing them bonds, and then uses the proceeds to bail the lenders out. This looks attractive because banks are flush with deposits, giving them firepower to lend, but credit demand is weak. Bank of Baroda grew deposits almost 5% over the year to end March but saw a decline in advances. Over time, New Delhi can potentially settle the debt by selling the bank equity it acquires using the bond proceeds.

Fiscal deficit impact

  • Neelkanth Mishra, equity strategist at Credit Suisse, says under some accounting standards this fix would not add to the fiscal deficit — though it would do under India’s current norms. Perhaps those might be changed.
  • Credit-rating agencies might not be impressed either, since this would add to the government’s overall debt burden, but the only obvious alternative, privatisation, is not on the table.
  • The details will matter. A 2003 IMF study of more than 40 bond issues for recapitalisation by countries including Algeria, Croatia, Indonesia, and Tanzania found such instruments are most effective when they are tradable and pay high enough coupons that banks can still fund loan growth. On the right terms, this money-go-round could get India’s key financial institutions moving again.

Information utility under the IBC

Last month, National e-Governance Services Ltd (NeSL) became India’s first information utility (IU) for bankruptcy cases under the Insolvency and Bankruptcy Code 2016. NeSL is owned by State Bank of India and Life Insurance Corporation Ltd., among others. Recently, the Insolvency and Bankruptcy Board of India (IBBI) eased ownership norms for setting up such utilities.

  • What is an information utility?
    • Information utility is an information network which would store financial data like borrowings, default and security interests among others of firms. The utility would specialise in procuring, maintaining and providing/supplying financial information to businesses, financial institutions, adjudicating authority, insolvency professionals and other relevant stake holders.
  • Why is it important? How useful is it?
    • The objective behind information utilities is to provide high-quality, authenticated information about debts and defaults, as per the report of the Working Group on Information Utility published by the Ministry of Corporate Affairs. Information utilities are expected to play a key role as they allow storage of financial information of registered users and expeditiously process and verify information received. Moreover, the database and records maintained by them would help lenders in taking informed decisions about credit transactions. It would also make debtors cautious as credit information is available with the utility. More importantly, information available with the utility can be used as evidence in bankruptcy cases before the National Company Law Tribunal.
  • What are the rules governing these utilities?
    • Information utilities are governed by the Insolvency and Bankruptcy code 2016 and IBBI (Information Utilities) Regulations 2017. The Insolvency and Bankruptcy Board of India (IBBI) overseas aspects such as registration and cancellation of these entities, their shareholding and governance among others. Recently, IBBI eased norms for information utilities, allowing Indian firms listed on stock exchanges to hold 100% in such firms. It also allowed individuals to hold 51% in the utility for a period of three years.
  • How will the utilities help stakeholders in the insolvency process?
    • Corporate lawyer Anant Merathia explains: Financial creditors (banks which provide loans to the company): It is mandatory for financial creditors to provide financial information to the information utility. When they initiate insolvency proceedings against the defaulting firm (known as corporate debtor), the utilities may help as they would act as a centralised platform for accessing data.
    • Operational Creditor (Suppliers of goods and services to the firm in question): Unlike financial creditors, it is optional for the operational creditor to provide financial information to the utility. While the idea behind information utility is to have a financial data repository, it has to be seen to what extent firms provide data with regard to dues owed to operational creditors and how the utility is going to help the operational creditors during insolvency process.
  • What are the key challenges for these utilities?
    • While the onus is on financial creditors, operational creditors and corporate debtors to provide the required information, procuring authentic information might be a challenge due to the sensitivity involved. There may also, be resistance in sharing information. Since it is a digital database, there is the risk of exposure to data piracy and data theft.