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Editorial Notes

Editorial Notes 21st November 2016

Commodity Derivatives Markets; Farmer Producer Organisations (FPOs); Insolvency and Bankruptcy Code (IBC), 2016; Bankruptcy Board of India (IBBI).
By IT's Editorial Notes Team
November 21, 2016

 

GS (M) Paper-2: “Government policies and interventions for development in various sectors and issues arising out of their design and implementation.”

 

Role of Insolvency Professionals

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Introduction:

  • The Insolvency and Bankruptcy Code (IBC), 2016 creates a new institutional framework for the quick and equitable resolution of distressed firms and individuals.
  • A critical pillar of this law is the creation of a new profession of insolvency professionals (IPs).
  • The IPs will be regulated by the code set out by Insolvency and Bankruptcy Board of India (IBBI) as well as by the insolvency professional agencies (IPAs).
  • The IBC sets out the broad framework for regulating IPs and delegates the task of framing detailed subordinated legislation governing their functioning to the IBBI.

About the Bankruptcy Board of India (IBBI):

  • The Board is being set up under the Insolvency and Bankruptcy Code, 2016 – approved by Parliament as well as notified by the government in May.
  • The Board will have 10 members, including representatives from the central government and Reserve Bank of India.
  • The main activity of IBBI would be to regulate the functioning of insolvency professionals, insolvency professional agencies and information utilities under the Insolvency and Bankruptcy Code 2016.

Variance in IBC and Draft regulation

  • The IBC defines a “person” in an expansive manner & it includes person’s resident outside India, different kinds of natural and artificial legal entities such as Limited Liability Partnerships (LLPs), trusts, etc.
  • This definition explicitly created the opportunity for the regulator to issue regulations permitting a foreign resident to register as an IP in India.
  • Draft Insolvency and Bankruptcy (Registration of Insolvency Professionals) Regulations, 2016 however clearly mentions a person resident outside India ineligible to register as an IP& IPA in clause 11.
  • And ‘no person residing outside India shall at any time, have or acquire control over the applicant or own more than 49% of the share capital of the applicant’-given in clause 3
  • Moreover it permits only individuals and partnership firms to register as IPs excluding LLPs and trust.

Aid of non-resident IPs

  •  The limiting factor here is, at present there are no existing IPs in India and many corporate debtors and creditors are facing severe financial stress.
  • In such circumstances, permitting non-resident IPs to mediate between debtors and creditors would enable rapid and efficient resolution, even as domestic expertise and capacity in this field gets created.
  • There will also be a potential to transfer expertise and know-how from other jurisdictions that have regulated IPs, leading to the faster development of the profession in India.

Case of UK & Canada:

  •  United Kingdom and Canada have a well-developed cadre of self-regulated IPs.
  • While Canada does not have IPAs, the UK has had them for almost three decades.
  • Over time, this structure of IPs and IPAs has witnessed better self-regulation, including the development of well-defined codes of ethics and business practices, along with better methods of monitoring the performance of member IPs by IPAs.
  • A lot of these learnings can be assimilated into the Indian system if professionals from such countries are allowed to service Indian debtors and creditors.

Is State intervention necessary?

  • State intervention through regulation can be justified when there is a market failure.
  • In the field of insolvency profession, potential sources of market failure include risks to consumer protection and concentration of market power.
  • None of these risks is aggravated by having non-residents register as IPs in India or allowing more than 49 per cent foreign ownership of IPAs.
  • In other words, from a risk-based perspective, it is not clear what risk is sought to be mitigated by not permitting non-residents to be IPs.

Regulations required:

  • Under the draft regulation, all IPs will have to clear a qualifying exam and become members of IPAs.
  • This will weed out unskilled or unethical persons regardless of whether they are residents of India or not.
  • The regulations could be designed such that any non-resident IP would be subject to the same standards of supervision, monitoring and disciplinary action in India as a resident IP.
  • The IBBI needs to ensure that adequate safeguard measures are built into the regulations to foster competition among the IPAs and prevent consumer protection related problems.
  • There is no plausible nexus between the discrimination against foreign IPs and the objectives of the regulator, especially when the IBC allows for it.

Blurred region:

  • Clarity required as to why state intervention is necessary and why some legal forms are prohibited while others are allowed.
  • While some legal forms may be difficult to regulate as IPs (for example, trusts and societies), it is unclear why LLPs are not permitted to apply when they are basically partnerships with limited liability.

Way forward:

  • In the insolvency and bankruptcy processes envisaged by IBC, the courts will have an administrative role, while the IPs will actually mediate in reaching a resolution.
  • It is of utmost importance that there be clarity on the regulatory structure for the IPs, given the crucial role played by them.
  • The adoption of best practices and principles from jurisdictions that have effective bankruptcy regimes will help jump-start this profession.
  • One way of doing this would be to permit non-residents to practice as IPs in India.
[Ref: Business Standard]

 

 

GS (M) Paper-3: “Agriculture related topics”

 

From farm to futures market

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Introduction:

  • The majority of Indian farmers have a holding of less than an acre. With no bargaining power, they are left to the mercy of middlemen. They struggle to make their ends meet.
  • While on the one hand input costs are high, on the other they don’t get the right price for their produce. The futures market can play an effective role in mitigating such risks.
  • The Indian commodity derivative exchanges have been in existence for over a decade, but not many farmers know about them.
  • Some farmer producer companies are using this platform to help out farmer members.

Commodity derivatives markets:

  • Commodity derivatives markets have been in existence for centuries, driven by the efforts of commodities producers, users and investors to manage their business and financial risks.
  • Producers want to manage their exposure to changes in the prices they receive for their commodities.
  • They are focused on achieving the fixed prices on contracts to sell their produce.

Farmer Producer Organisations (FPOs):

  • Farmer producer organisations received legal status in 2002 when they were allowed to register as companies.
  • FPO is one of the important initiatives taken by the Department of Agriculture and Cooperation of the Ministry of Agriculture to mainstream the idea of promoting and strengthening member-based institutions of farmers.

How does it work?

  • As per the concept, farmers who are the producers of agricultural products can form groups and register themselves under the Indian Companies Act.
  • These can be created both at State, cluster, and village levels. It is aimed at engaging the farmer companies to procure agricultural products and sell them.
  • Supply of inputs such as seed, fertilizer and machinery, market linkages, training & networking and financial and technical advice are also among the major activities of FPO.
  • They contribute capital, manage the company, appoint staff and share the profits.
  • They receive assistance from NGOs in the initial years (in some cases for a longer time).
  • They train the member farmers on managing the company and also help them reach out to corporate groups/ futures market and sell their produce directly.
  • By coming together as a company, farmers benefit from lower transaction costs as they aggregate their produce.
  • Some of these companies have taken to the futures market to help their members get better prices.
  • Eight farmer producer companies, covering 18,000-plus farmers, trade on the NCDEX, the agriculture commodity derivatives exchange.

Success story:

  • JEEVIKA, a World Bank-supported program for poverty alleviation in rural Bihar, started its pilot project in Purnia district in Bihar in 2015 for maize farmers.
  • As most of the farmers in this district were small with an average land holding of less than 1.4 acres, they had limited access to mandis.
  • The manual grading process followed by the agents saw farmers lose out as price was fixed by the look and feel of the crop.
  • Aranyak Agri Producer Company, a federation of producer companies in Bihar, supported by JEEViKA and a non-profit organisation, sells its produce in the futures platform on NCDEX.
  • After aggregation of the produce of the members, the company stores it in the exchange-accredited warehouse and sells it either directly to institutional buyers or to traders through the futures platform.
  • The company procured about 1,014 tonnes of maize in 2015-16 from about 300 members of the total 1,000 plus members under it.
  • A good portion of this was sold through the futures market. Farmers were able to realise 1,060/quintal, compared to Rs. 951 if they followed their usual ways.
  • The company uses the profits to source good quality seeds and fertilisers for farmers and give it to them at a lower than the market

Need for working capital:

  • Small Farmers’ Agri-Business Consortium (SFAC) or NABARD provide them financial assistance to FPOs.
  • But larger the producer group, higher the working capital requirement and these companies are at critical fund situation at most times.
  • When they sell their produce through the futures market, they incur a large expense. First, to adhere to the contract specifications, they have to do examine and grade the produce, for which they need to invest in some basic machinery.
  • And they need to put the produce in the warehouse and bear the rent for it.
  • They have to pay the margin money which may be about 10 per cent of the contract value when the produce has to be sold on the exchange’s platform.
  • Also, while these producer companies receive money two or three months later but they have to pay the farmers immediately.
[Ref: Business Line]

 

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