ECONOMIC DEVELOPMENT

# GS Paper (Prelims) & GS Paper III (Main)

INSOLVENCY AND
would provide a time-bound and cost-effective process
for resolving insolvency and bankruptcy.

BANKRUPTCY CODE INSTITUTIONAL FRAMEWORK

#Banking #Economy IBBI (Insolvency & Bankruptcy Board of

India) as the regulating authority

National Company Law Tribunal (NCLT) admitted Go First's

voluntary insolvency plea under Section 10 of Insolvency and
Bankruptcy Code (2016). This admission by NCLT gave IBBI (Insolvency &
Information utilities Bankruptcy Board of
temporary moratorium on any legal action by the debtors (credit information
Instituional
Framework India) as the regulating
against the airline company. storing units) authority
INSOLVENCY AND BANKRUPTCY CODE
Exit from business is as integral to ease of doing
business as is an entry. Earlier frameworks for
resolution, such as Debt Recovery Tribunals, Lok Adalats Adjudicatory mechanisms, to facilitate a
timebound insolvency resolution procedure
and even Securitisation and Reconstruction of Financial and liquidation if necessary
Assets and Enforcement of Securities Interest Act
(SARFAESI Act) of 2002, which sought to ease the process PROCESS
of resolution or liquidation failed to do the task The IBC seeks to achieve the stated objectives through a
effectively. It was in this context that the government well-defined process that includes various stages,
decided to frame and enact the Insolvency and including initiation of insolvency, appointment of an
Bankruptcy Code (IBC) of 2016. insolvency professional, resolution plan, and liquidation.
Objective: The IBC, which came into existence in 2016,
aimed to create a single, comprehensive framework that
Initiation Insolvency Resolution Process Liquidation

Minimum amount of  In case the application is admitted by the  If either the Resolution plan is
default: adjudicating authority, a moratorium is rejected by the CoC or failed to be
 ₹ 1000 (for Individual) declared on all the legal proceedings approved by it within 330 days, the
against the debtor until the completion process of liquidation kicks in
 ₹ 1cr (for Companies)
of the CIRP. automatically.
Initiators:
 A resolution professional is appointed by  The proceeds of liquidation are
 Debtor the NCLT who supersede the board of distributed among secured creditors,
 Secured & Unsecured directors of the debtor company and unsecured creditors, Govt dues,
Preferential shareholders etc. in the

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 Economic Development

creditors supervises its assets. respective order of priority.

 Employees
Adjudication Authority:
 DRT (for individuals)
 NCLT (for companies)
 Resolution Professional would help in
chalking out a resolution plan and get it
approved by the committee of creditors
(CoC) with a majority of 66%.

PERFORMANCE OF INSOLVENCY & BANKRUPTCY CODE
The apprehension of losing the business to the
resolution applicant in the event of a successful CIRP or
the eventual liquidation has instilled a sense of fear in
the minds of Corporate Debtors.
This has resulted in improvement in corporate
repayment culture of the bank loans and resultant
reduction in the nonperforming assets (NPAs) of the
banks in the recent years despite the adverse impact of
COVID-19 pandemic on the trade and economy of the
country.
Successful examples:
 In Essar Steel resolution, the creditors managed to
recover 92.5% of ₹49,000 crore of debt outstanding.
 In Bhushan Steel case, 64% of ₹56,022 crore
outstanding was retrieved, whereas Binani Cements in
whose case all the ₹6,469 crore outstanding was
recovered.
However,
 Out of the 4,376 cases for which Corporate Insolvency
Resolution Process (CIRP) had commenced till now,
only 2,653 have been closed, with just 348 (or 13.1%)
of those closed being disposed after approval of a
debt resolution plan.
 If we consider the proportion of outstanding credit
recovered from defaulters through the resolution
process, the figure stands at 39.26% even for the
minority of cases resolved through the CIRP, which is
not very much higher than the 26% registered for
cases dealt with under the SARFAESI Act. The
argument that the IBC would be a game changer is yet
to be validated.
CHALLENGES
 Backlog of cases in NCLT, which has led to delays in
the resolution process. The proportion of NCLT
benches to the high number of cases are imbalanced.
Such delays, beyond the prescribed timelines further
leads decay of the value of assets.
 Lack of infrastructure and trained professionals to
manage the insolvency process. At present, there are
less than 1000 registered insolvency professionals.
 Time limit of 330 days to complete CRIP is proving
to be very difficult. For companies having many
creditors, will have hindrances in the smooth
functioning of the creditor’s committee.
 No strict liability of directors for wilfully delaying
/concealing insolvency of company
To address these challenges, the government has taken
several measures, including increasing the number of
NCLT benches, increasing the number of insolvency
professionals, and amending the IBC to address practical
challenges.
WAY FORWARD
 Process of mediation be institutionalised and
integrated in CIRP Regulations with adequate
provision to exclude the time taken in the mediation
process within the stipulated timeframe of 180, 270,
or 330 days.
 Setting up of additional benches of NCLT and
National Company Law Appellate Tribunal should be
taken to bring down the pendency.
Despite certain challenges faced so far, it deserves to be
recognised that the IBC has significantly contributed to
consistent improvement in India’s ranking in the World
Bank’s erstwhile ‘Ease of Doing Business’ over the years.
Timely modifications of the existing legislation and
expanding to new areas (group insolvency, pre-pack
process for all assets, cross-border insolvency regime)
would facilitate overall improvement in the insolvency
resolution regime of the country.

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 Economic Development

COMMITTEE TO DEFINE
have more than one firm competing to provide same
good or services.

INFRASTRUCTURE E.g., Electricity transmission lines, Gas pipelines.

2) High Sunk Costs: Sunk cost refers to the money that
#Infrastructure #Economy has already been spent and cannot be recovered
even when the firm goes out of business. Typically,
infrastructure projects incur high sunk costs.
Finance ministry has tasked a high-level committee under
3) Non-tradability of output: Non tradable outputs
Bibek Debroy, chairman of the Economic Advisory Council to
are those which are produced and sold at the same
PM, to undertake a comprehensive assessment of the
location and cannot be transported to other
characteristics or parameters defining infrastructure and its
location. Generally, the infrastructure outputs are
financing framework.
consumed at the place they are produced and are
 Infrastructure refers to basic physical and structural
non-tradeable. E.g., Fly over.
facilities, which are essential for an economy to
4) Non-rivalness in consumption: non-rivalness
function.
implies that the cost of providing a good or service
 Infrastructure is also known as ‘social overhead
to an additional individual is zero. That means
capital’ and is a key enabler of socio-economic
consumption of an individual does not affect the
enhancement of a region or country.
consumption of others.
 Social Overhead Capital refers to certain basic services
5) Price exclusion: Price exclusion means that the
required in the production of virtually all commodities.
enjoyment of benefits is contingent on payment of
In its narrow sense, it includes transportation,
user charges.
communication and power facilities. However, in its
6) Externalities: The benefits of Infrastructure projects
broader sense, facilities such as education, health, law
go beyond the immediate provision of services for
& order etc.
which they are built, which are not directly
 There is no universally accepted definition of
measured.
infrastructure.
E.g., A gas pipeline contributes not only provides
 National Statistical Commission headed by C.
access to energy but also results in environmental
Rangarajan identified six characteristics of
and social benefits.
infrastructure sector.
Based on the above features, Harmonized Master List of
CHARACTERISTICS OF INFRASTRUCTURE
Infrastructure sub-sectors is updated from time to time.
1) Natural Monopoly: A natural monopoly typically The latest updated list is as follows.
has high fixed costs meaning that it is impractical to

HARMONIZED MASTER LIST OF INFRASTRUCTURE SUB-SECTORS

Category Infrastructure sub-sectors

 Roads and bridges

 Ports
 Shipyards
 Inland Waterways
Transport and
 Airport
Logistics
 Railway track including electrical & signalling system, tunnels, viaducts, bridges
 Railway rolling stock along with workshop and associated maintenance facilities
 Railway terminal infrastructure including stations and adjoining commercial infrastructure
 Urban Public Transport (except rolling stock in case of urban road transport)

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 Economic Development

 Logistics Infrastructure
 Bulk Material Transportation Pipelines

 Electricity Generation
 Electricity Transmission
Energy
 Electricity Distribution
 Oil/Gas/Liquefied Natural Gas (LNG) storage facility

 Solid Waste Management

 Water treatment plants
Water &
 Sewage collection, treatment and disposal system
Sanitation
 Irrigation (dams, channels, embankments, etc.)
 Storm Water Drainage System

 Telecommunication (fixed network)

Communication  Telecommunication towers
 Telecommunication & Telecom Services

 Education Institutions (capital stock)

 Sports Infrastructure
 Hospitals (capital stock)
 Tourism infrastructure
 Common infrastructure for Industrial Parks
Social and
 Post-harvest storage infrastructure
commercial
 Terminal markets
infrastructure
 Soil-testing laboratories
 Cold Chain
 Affordable Housing
 Affordable Rental Housing Complex
 Exhibition-cum-Convention Centre

NEED TO REDEFINE INFRASTRUCTURE

1. Some critical sectors are missing: Some critical
sectors like Electric Vehicle Charging infrastructure &
Digital Public infrastructure are missing from the
current harmonised list.
2. Inclusion of a sector in the infrastructure master list
leads to many benefits such as easier & cheaper
access to finance, land acquisition etc.
Central Board of Directors of Reserve Bank of India (RBI)
recently approved the transfer of ₹87,416 crore as surplus
to the Union government for the accounting year 2022-23,
almost thrice the ₹30,307 crore transferred for the previous
fiscal year. The RBI’s board also decided to raise the
Contingency Risk Buffer to 6% from 5.5% in the preceding
year.
SOURCE OF EARNINGS FOR RBI

RBI DIVIDEND PAYMENTS  Interest on Government securities held

 Interests on loans and advances made
TO GOVERNMENT  Interest earned on Liquid Adjustment Facility
#Mobilization of resources #RBI operations

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 Economic Development
 Interest income from foreign currency assets held
 Earnings from forex swaps
 Seigniorage
Composition of RBI’s balance sheet
Liabilities Assets
 Capital Reserves  Foreign Currency Assets
 Revaluation Accounts  Gold
 Deposits of Banks and  Investments in domestic
Government securities
 Currency notes in  Loans & Advances
circulation
 Capital reserves: Two important components are
o Contingency fund: The fund is set aside by RBI for
meeting unforeseen contingencies like risks arising
out of monetary policy operations, exchange rate
risks or systemic risks.
o Asset development fund: This fund is set aside for
investments in subsidiaries and associate
institutions and to meet internal capital
expenditure.
These two funds are considered as Risk provisions
of the RBI and provisioned from the earnings of
RBI. Such capital required to withstand risks is also
known as Economic Capital.
 Revaluation Accounts: RBI maintains revaluation
accounts to insulate its assets (Gold, foreign currency,
Investments in domestic and foreign securities) from
prevailing market trends. They include Currency and
Gold Revaluation Account (CGRA), Investment
Revaluation Account (IRA) and Foreign Exchange
Forward Contracts Valuation Account (FCVA).
 Deposits: In its traditional role as a banker to the
government, RBI usually accepts government
deposits, which constitutes a liability for the central
bank. The central bank also accepts deposits from
other banks and other financial institutions.
 Currency notes in circulation is a liability of the
central bank.
HOW SURPLUS IS SHARED WITH CENTRAL
GOVERNMENT?
After meeting the risk provisions and other operational
expenditures (salaries etc.) from the earnings of RBI, the
surplus is transferred to the central government in the
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form of dividends. Surplus transfer from the Reserve
Bank is an important component of non-tax revenues to
the central government. However, the quantum of
dividends shared with the central government depends
upon the amount of money provided for risk
provisioning, especially for contingency fund.
There occurred a controversy regarding the excess
capital reserves accumulated with the RBI and sharing of
dividend with the central government in 2018. To sort
out this controversy a committee (Bimal Jalan committee)
was appointed to review the Economic Capital
Framework. The Committee had prescribed a
Contingency Risk Buffer in the range of 5.5% to 6.5% of
its balance sheet.
GREEN FINANCE
#Mobilization of resources #Green
financing
With a view to fostering and developing green finance
ecosystem in the country, RBI has announced a framework
for green deposits.
Preliminary estimates conducted for Paris Agreement
suggest that at least US$ 2.5 trillion (at 2014-15 prices)
will be required for meeting its climate change actions
between 2015 and 2030 (Government of India, 2015).
India’s ambition of generating 175 gigawatts of
renewable energy by 2022 also entails massive funding.
The financial sector can play a pivotal role in mobilizing
resources and their allocation in green activities/projects.
Green finance is also progressively gaining traction in
India. However, there are some challenges to green
financing in India.
CHALLENGES TO GREEN FINANCING:
 Lack of clear definition: There is no clear-cut
definition for “Green Finance” in India. Various terms
such as Climate finance, sustainable finance is used
interchangeably with green finance. It led to
misunderstanding among stakeholders and made it
problematic to keep track of capital invested in green
sectors.
 Green Washing: Greenwashing is the practice of
channelling proceeds from green finance towards
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projects that have negligible environmental benefits
and providing misleading information to the investors
and public about the environmental impacts of the
company. Such practises discourage green financing.
 Failure to internalize externalities: Infrastructure
investments in India didn’t efficiently internalise the
environmental externalities (Positive externalities are
benefits arisen to third parties due to green
investments and negative externalities are damages
inflicted on third parties due to polluting investments).
This resulted in insufficient capitalization of “green”
projects and excessive investment in “brown” projects.
 Maturity mismatches: Generally green projects
require long-term financing with low returns in the
initial years. This results in mismatch between long-
term green investment and relatively short-term
interests of investors.
 Information asymmetry: Lack of information on
commercial viability of green technologies and
uncertain policies on green investments resulted in
risk aversion by investors in projects of renewable
energies.
GOVERNMENT’S STEPS
 Sovereign green bonds:
o Sovereign green bonds are fixed interest-bearing
financial instruments issued by any sovereign entity
/ inter-governmental organisation /corporation. The
proceeds of these bonds are used only for
environmentally conscious, climate-resilient
projects.
o Reserve Bank of India (RBI) recently auctioned its
maiden sovereign green bonds worth ₹8,000 crore
under its Sovereign green bond framework.
o There is no cap on foreign investment in these
bonds because these instruments are considered
as specified securities under the fully accessible
route.
 Green deposits: With a view to fostering and
developing green finance ecosystem in the country
further, RBI has put in place a Framework for
acceptance of Green Deposits by the banks.
WHAT ARE GREEN DEPOSITS?
 A green deposit is a fixed-term deposit for investors
looking to invest their surplus cash reserves in
environmentally friendly projects. Green bonds used
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to be the most common fixed-income ESG product in
India earlier, and now products like green deposits are
gaining significance.
 Corporates looking for inclusion of a sustainability
agenda into their treasury activities or those that have
limited opportunities for investment in
environmentally beneficial projects can invest in these
green deposits.
PURPOSE OF THE GREEN DEPOSIT FRAMEWORK
To encourage banks to offer green deposits to
customers, protect interest of the depositors, aid
customers to achieve their sustainability agenda, address
greenwashing concerns and help augment the flow of
credit to green activities/projects.
Key Guidelines:
 Applicability: The provisions of these instructions
shall be applicable to Scheduled commercial banks
(excluding payment banks, RRBs), deposit taking
NBFCs and Housing finance companies (HFCs)
 The Banks shall issue green deposits as
cumulative/non-cumulative deposits. On maturity, the
green deposits would be renewed or withdrawn at the
option of the depositor. The green deposits shall be
denominated in Indian Rupees only.
 The eligible banks shall put in place a comprehensive
Board-approved policy on green deposits covering all
aspects in detail for the issuance and allocation of
green deposits.
 Allocation of funds: The proceeds raised form the
green deposits shall be allocated to the following
activities
o Renewable energy
o Energy efficiency
o Clean transportation
o Climate change adaptation
o Pollution control
o Sustainable management of natural resources and
waste management
Projects involving nuclear power generation, generating
energy from biomass and hydropower plants larger than
25MW are excluded from eligible projects.
The banks shall ensure that the funds raised through
green deposits are allocated to the eligible green
activities/projects.
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 Third party verification: Allocation of funds raised
through green deposits shall be subject to an
independent Third-Party Verification/Assurance which
shall be done on an annual basis. The third-party
assessment would not absolve the bank of its
responsibility regarding the end-use of funds.
 A review report shall be published by the banks
covering the details about amount raised under green
deposits, amount of funding to the eligible green
projects and third-party verification report.
MERCHANT DISCOUNT
RATE
#Payment system #Banking
Payments Council of India (PCI), an industry body
representing payment fintech in the country, has requested
finance minister to restore Merchant Discount Rate (MDR)
for RuPay debit cards, as payment aggregator fintechs
continue to lose on revenue lines for processing payments
through the card infrastructure.
MERCHANT DISCOUNT RATE
 MDR (Merchant Discount Rate) refers to a fee that a
merchant is charged by their issuing bank for
accepting payments from their customers via credit
and debit cards. It is also known as Transaction
Discount Rate (TDR). While the card-issuing bank gets
a share of it, the remaining amount is distributed
between the payment network and point-of-sale
terminal providers.
Push for Digitalisation:
 The Government had mandated that large businesses
(With turnover greater than ₹50 crore) provide
customers with low-cost digital modes of payment
and had asked banks to levy zero charges on the
same.
 The finance minister gave this initiative a further push
by mandating that no MDR charges will be applicable
on digital transactions via the Rupay and UPI
platforms.
Concerns of Fintechs:
 Payment aggregator fintechs are claiming that a loss
of Rs 5,500 crore from no revenue being earned on
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UPI and RuPay debit card transactions. To
compensate for this, the body has sought an incentive
of Rs 4,000 crore in its representations to the ministry.
 Zero MDR is also seen as a hindrance in attracting
more players to adopt these payment modes and
invest more in the development of the tech
infrastructure to handle the huge volumes of
transactions.
PRELIMS PYQ
Q) Which one of the following best describes the
term "Merchant Discount Rate" sometimes seen
in news?
a) The incentive given by a bank to a merchant for
accepting payments through debit cards pertaining to
that bank.
b) The amount paid back by banks to their customers
when they use debit cards for financial transactions
for purchasing goods or services.
c) The charge to a merchant by a bank for accepting
payments from his customers through the bank's
debit cards.
d) The incentive given by the Government to merchants
for promoting digital payments by their customers
through Point of Sale (PoS) machines and debit cards.
ANGEL TAX
#Taxation #External sector
In the latest budget, the government has expanded the
scope of Angel tax to cover foreign funding. This proposal
has created uncertainty among the entrepreneurs.
Angel tax: Angel tax refers to the income tax (30.6 %)
imposed on any unlisted company (usually startup
enterprises) in receipt of investment which is above the
fair market value. Such investment is treated as income
from other sources for the tax purpose. This tax was
introduced in 2012 in the form of Section 56 (2) of the
Income Tax Act to plug money laundering practices.
Earlier, angel tax provisions were applicable only for
investments received from resident investors. However,
Finance Bill 2023 has extended its applicability to non-
resident investors as well.
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