Special Purpose Vehicles – A Modality For Development

Special Purpose Vehicles (SPV) a catchphrase during the financial crisis of 2008 has assumed center stage as companies and financial institutions scramble for monies in a contracted economy in the wake of the COVID-19 pandemic. Empirical and anecdotal evidence suggests that SPVs have served the development community and beneficiaries well from a historical standpoint.

The key aspects of such SPVs, that led to their popularity, are our absorptive capacity, value for money, flexibility, bankruptcy proof, the ease with which multiparty funding can be handled, longevity, legitimacy, and other valuable characteristics. However, it remains to be examined whether this scheme will stand the test of subsisting unprecedented times.

RBI’s Latest Announcement

Recently, the Reserve Bank of India (RBI) announced that SBICAP, a subsidiary of the State Bank of India (SBI), will set up an SPV and operationalized ₹ 30,000 crores for this scheme. This SPV shall serve the special purpose of purchasing the investment-grade commercial papers and non-convertible debentures of NBFCs and housing finance companies (HFC) until September 30, 2020, and is expected to recover all dues by December 31, 2020.

The scheme is aimed at improving the liquidity condition of NBFCs and HFCs through an SPV, preventing any potential financial or systemic risks in the finance sector, which is closely intertwined with industries across verticals, and ultimately ensuring stability in the economy.

However, the RBI lays out stringent requirements for beneficiaries under the scheme, some of which are as follows: a) the NBFCs/HFCs must be registered with RBI

b) the NBFCs/HFCs must have been profitable in at least one of the two preceding FY 2018 or FY 2019

c) fulfill the requirements related to Capital To Risk-Weighted Assets Ratio (“CRAR”), Capital Adequacy Ratio (“CAR”) and Non-Performing Assets (“NPA”), Special Mentioned Accounts (“SMA”), and d) the NBFCs and HFCs must be rated by an investment grading agency approved by the Securities and Exchange Board of India (“SEBI”).

A Solution with underlying risks

The shadow financing sector was already struggling with funds in light of the IL&FS crisis when COVID-19 hit, jeopardizing the survival of the sector at large. RBI’s notification attempts to address the liquidity position of NBFCs/HFCs through SPVs with the primary objective to avoid any potential systemic risks to the financial sector.

At the outset, this scheme acts as an enabler for NBFCs and HFCs to get investment grades or a better rating for the bonds issued thereby augmenting the flow of funds from the shadow financing sector.

Moreover, the scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio and merely transfer their financial risks. The said advantages bring the government closer to its objective to eliminate or mitigate any potential systemic risks in the financial sector. 

However, these measures lack concerted and concrete action. 

Firstly, SPVs entail high costs for setting up such as the cost of incorporation, registration, stamp duty at the time of transfer of the company, and continuous compliance with FASB Rules. In addition to high costs, the efficacy of the SPV until September 30, 2020, is likely to be vociferously criticized and questioned as the move is a 3-month short-term measure as opposed to the industry requirement of over 2 years.

The sector is in dire straits for long-term funds so that they don’t run into an asset-liability mismatch; however, the present move may lead to a vicious cycle of extending loans. For instance, if somebody were to draw three months’ money, they will have to create another liability at the end of 90 days to be able to repay this.

Secondly, the high thresholds and requirements set by the RBI for NBFCs and HFCs are likely to face criticism for the reason that many numerous entities in dire need of financial support and liquidity will be left out of this scheme, thereby providing a lopsided cushion to the sector.

Thirdly, the number of NBFCs and HFCs availing of this scheme shall be contingent on the rate and amount they receive as part of this scheme, which will be a determining factor of whether the scheme is a true liquidity potion or just another half-baked solution. 

Fourthly, the complexity of SPVs – often in the form of layers upon layers of securitized assets – can make it near impossible to monitor and track the level of risk involved and who it lies with.

In theory, SPVs are bankruptcy remote. However, there exists a moral hazard, not for the banks, but for the end investors who know that they have no financial obligation and therefore little incentive to investigate and monitor the credit quality of the underlying assets.

It could therefore be argued that neither party will have an incentive to scrutinize the SPV’s activities. This means that SPVs could be inefficient, both from a risk and from a regulatory perspective. On the other hand, if SPVs are completely separated from their sponsors, albeit with more intense scrutiny and regulation, the moral hazard from the point of view of the SPV investors would be removed.

In practice, however, it is not a credible threat that the sponsor will leave an SPV to collapse during difficult times. From a reputational perspective, it is not in the sponsor’s interests to abandon the SPV affiliated with its name and it will often make more sense to provide the financial support it needs in times of difficulty.

What remains to be examined is whether, in view of the risks underlying SPVs, the use of these vehicles should be stopped altogether?

The answer lies in the negation, as meticulous management of SPVs can bring it closer to its original motive of reducing financial risk. Firstly, investors must understand the structure and implications of their investments in SPVs, and so some standardization of documentation and disclosure requirements may be needed.

Secondly, constant review and monitoring of the risk levels of SPVs in relation to the remainder of the sponsor’s portfolio would increase the transparency around SPVs and prevent weaker assets from being moved into them for sale to investors. Finally, in the case of a sponsor having to support an SPV, the risks of the SPV should be absorbed into those of the sponsor.

Despite the inherent risks, SPVs are a stride in the right direction enabling large NBFCs and HFCs to obtain finances, transfer risks and perform other investment activities to maintain adequate liquidity levels, eliminate or mitigate systemic risks, augment the lending resources of NBFCs and HFCs, although for a short duration of three months.

In order to mitigate the gargantuan effects of the pandemic-induced depressionary forces on the shadow financing sector, the government must introduce a dark horse to soothe its long-term woes and not a mere quick fix.

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National Education Policy 2020

The National Education Policy 2020 may provide a runway for the education sector to take off despite the challenges posed on account of the pandemic. The announcement of the NEP attracted criticism from industry experts, but it may place India on the global map as a sought-after educational haven of the world. The National Education Policy 2020 replaces the old education policy which was framed in 1986 and ushering in an era of new educational reforms.

This is the first policy that seeks to unshackle students from the tyranny of administrative constraints with multiple-choice, multidisciplinary learning, and multiple chances. However, the policy has been scrutinized and dissected by industry experts and thus has witnessed conflicting views.

The policy aims to create a robust digital infrastructure in the education sector that ensures uninterrupted learning even during unprecedented circumstances. The National Education Technology Forum (NETF) will be established for ensuring that the technology is integrated adequately and efficiently into the education process and to ensure the enhancement of access to education to all sections of the society even in these tumultuous times.

Various contours of this policy aim to radically improve the Gross Enrolment Ratio in higher education and to achieve the objective of 100% youth literacy. Moreover, the said policy has also been predicted to reduce the social and economic gap between students, which has magnified in wake of the pandemic.

A system that promotes meritocracy, equal opportunity and equity is good, but there lies a gap between theory and practice. In addition to this, the NEP elucidates the need for homeschooling and multi-language learning whereby until the 5th grade and in exceptional circumstances, no later than 8th grade, the model of education shall be in the mother tongue/local language of the student.

Despite the all-encompassing façade of the new policy, its success shall be put through a skeptical lens with rising concerns for the students during higher education and in their professional journeys. It is particularly problematic in light of the right of the people to move from one state to another since the inter-state movement shall result in the change of the local language and the mode of education.

The policy has also been criticized due to the legal complexities surrounding the applicability of two operative policies namely The Right to Education Act, 2009 and the New Education Policy, 2020. Certain provisions such as the age of starting schooling will need to be deliberated upon, in order to resolve any conundrum between the statute and the recently introduced policy in the longer run.

Against this backdrop, it is pertinent to note that past attempts at parliamentary legislation under the erstwhile regulatory setup have not been successful.

The failure can be attributed to the role of regulators and the intended legislative changes being out of alignment, as in the case of the Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010, which lapsed; and the proposed Higher Education Commission of India (Repeal of University Grants Commission Act) Act, 2018 which remained did not reach the Parliament.

The contours of NEP are expected to revise the regulatory avatar of the Higher Education Commission of India (“HECI”) being set up with a wide role in Indian higher education. The HECI is likely to have four verticals under its umbrella, including

a) the National Higher Education Regulatory Council, intended to be a single point regulator for the higher education sector;

b) the National Accreditation Council, which will deal with the accreditation of institutions;

c) the Higher Education Grants Council, which will be tasked with carrying out funding and financing of higher education; and

d) General Education Council, the final vertical, is expected to have a more academic based-role, as it will frame expected learning outcomes for higher education programs. Foreign universities coming into the country will also fall under the purview of this framework.

While the Universities Grants Commission and the All India Council for Technical Education have played a major role in this direction until now, questions pertaining to the role of the UGC and AICTE remain unanswered under the new policy.

It is evident that NEP 2020 provides a fresh canvas to paint on and opens up avenues for home-schooling and foreign universities alike, in India. For the new policy to succeed a combination of a staunch intent to move out of comfortable doldrums and facilitate increased involvement of foreign universities and increased literacy levels is a must.

While this objective is expected to see a significant regulatory overhaul for its successful implementation, it would lay a successful path ahead for institutions as well as the student community and place India on the map as an educational haven.

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Repayment Of AGR Dues

The COVID-19 pandemic has demonstrated the importance that telecommunications infrastructure plays in keeping businesses, societies, and governments, connected and functional. However, telecom companies have been laden in debt in recent years, and their network resiliency has been tested despite challenges posed by the current pandemic, propelling them further into the dark hole of debt.

Amongst the slew of challenges, the telecommunications sector was already grappling with the issue of payment of Adjusted Gross Revenue (AGR) when the pandemic hit the world. Recently, the Supreme Court reserved its order for deciding the deadline for the payment of Adjusted Gross Revenue (“AGR”) related dues of the telecom companies like Idea, Vodafone, and Bharti Airtel payable to the government.  

In particular, Vodafone Idea owes a mammoth Rs 58,254 crore out of which it has only been able to pay Rs 6854 crore, while Bharti Airtel is relatively in a better position than the former.

With respect to the issue of the appropriate timeline for the repayment of the AGR dues, the court refuted the suggestions by telecom companies of 15 to 20 years for repayment of their dues, on the grounds that 15-20 years was an unreasonably excessive amount of time considering the fact that telecom players have still been financially stable even during these tumultuous times.

In fact, it is believed that the telecom sector to a large extent has not been adversely affected and has been witnessing profits even during these times due to increased data usage resulting from work from home trends. This is particularly pertinent in the backdrop of the catastrophic financial impact emanating from the COVID-19 pandemic.

However, in consideration of the larger picture, huge repayment amounts and intense competition within the telecom sector can be detrimental to the survival of Vodafone Idea. If telecom companies are required to pay the AGR in full or without any deferment, it is bound to take a severe toll on the telecom’s financial wellbeing.

In the event of inadequate revenues and cash for payment of license fees, telecom companies may be forced to consider increasing debt to meet demand. However, given the current situation, lenders willing to extend financial assistance will be limited and the cost of borrowing may be higher as opposed to the pre-COVID era, creating a vicious cycle.

During these critical financial times, no bank would be ready to grant guarantees or loans for such a magnanimous amount, which essentially increases the plight of Vodafone Idea because of the fact that even to borrow loans from the banks, they would have to pay a significant amount of money upfront which could possibly push them to the brink of exiting the market.

The court’s concern was majorly attributable to the uncertainty associated with granting such an extended period and the possibility that Vodafone Idea might become insolvent in any case.

The rationale of the Supreme Court in relation to profits may be deemed accurate in part; however, there is no denying the fact that ghosts from the past still haunt the telecommunication sector in India, such as massive AGR repayment dues. Therefore, the changing customer preferences of higher data usage may fill up the Vodafone’s bags sooner than otherwise, and enable it to pay back to the government in light of the judgment delivered last year.

However, the overhang of AGR dues is likely to hurt Vodafone’s Idea, pushing it to the brink of insolvency, which may impact the competitiveness of the telecom market and ultimately leave monopolistic prowess in the hands of Reliance-Jio.

Therefore, while the Supreme Court makes a decision on the adequate timeline for the repayment of AGR dues, spectators can only hope that the repercussions of a potential exit by the major market players can be extraordinary, like the present times.

So it is imperative that the competition watchdog and government collectively provide regulatory relaxations to the telecom players within a reasonable time frame to mitigate deleterious consequences on the competitive dynamics of the industry!

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Digitization in Indian Judiciary

The spread of the influenza-like infection plummeted without an alert carrying the world to an extraordinary halt. One fine day, the boundaries overseeing our regular activities were redesigned exemplarily. The world wound up in a smooth situation, with an obscure infection that radiated in China’s Wuhan city arriving at most nations over the globe.

The administrations struggled to cope with the rising number of cases and deaths. As a measure, regions began enforcing lockdowns. India has been no special case for the continuous undertakings. By mid of March, the nation found itself in the clutches of the pandemic, and four months later, it finds itself at the no.3 spot for most cases as the figures inch closer to the 1.2 million mark.

Under the progressing improvements, with the announcement of the COVID-19 as a pandemic, the Indian legal executive ended up in a fix. At first, with the expanding fear of the spread of the infection in the nation, the activity of the courts in the country adopted the necessary preventive measures. There was a breaking point put on the section of lawyers alone in the court excepting disputants, except if called for by the court.

The premises were being disinfected, the temperature of all ingoing staff was being checked, and social removing was being rehearsed overwhelmingly. In any case, the declaration of the lockdown fundamentally implied that the courts must be closed in the wake of the rising contaminations. In the given situation, could equity be let to endure while the world was destined with the spread of an obstruct infection? Maybe not.

If the courts were to be shut uncertainly, sitting tight for standardization of the circumstance, the result presumably would have caused unrecoverable harm.

The courts would have been troubled over-limit prompting further overabundances and postponement during the time spent administering equity. The effect of such a shutdown would be grave on fundamentally two fronts, the criminal equity framework and matters identifying with life and individual freedom of people.

It is the obligation of the court to secure the privileges of the residents, in all the unstable circumstances may be. Remembering such cardinal contemplations, the conceivable way out to adjust the wellbeing worries just as proceed with the way toward apportioning equity was shown up by the shrewd salvage looked for from the ‘E-Courts Project’.

This denotes the beginning of another time throughout the entire existence of the Indian Judiciary. There was a significant update in the whole court structure with the procedures currently being done by video conferencing and the coming of the e-documenting system.

At a fundamental crossroads, the possibility of virtual courts should be commended as a hearty system concocted to moderate the obstructions got by the pandemic.

There are a few advantages of hearing by means of video conferencing including no prerequisite of physical nearness wherein parties do go miles to be available face to face under the steady gaze of courts and simultaneously, it will be cost and time viable for the gatherings’ point of view just as the legal executive.

Above all, this will decrease the carbon impression. Video conferencing ought to be made discretionary in all courts across the nation for a wide range of issues. Digitalization will lessen the humongous number of pendency of cases under the steady gaze of courts and will be a successful solution for deferred equity.

Openness is the center capacity of the conveyance of equity. The nature of settling in the court will not be of utility if equity can’t be gotten to by individuals in any case. Thus, the current emergency would be an extraordinary open door for the digitalization of Indian courts.

It can likewise help diminish a gigantic excess of cases under the steady gaze of the courts. In the present-day situation, there can be numerous troubles looked at in the down-to-earth ramifications of virtual courts.

Numerous individuals and disputants may confront trouble in exploring a digitalized equity framework that could be controlled by some pragmatic preparation.

Besides, it is a desperate need that the National Informatics Centre make a stage that incorporates highlights of video conferencing and e-recording to supplant the utilization of any outsider exclusive programming for the release of basic open capacities like mediation.

As it were, making a cutting-edge equity stage will be brimming with difficulties yet note that this is the initial move towards digitalization of the court framework in a progression of many.

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Business Resumes and Unemployment Drops

The transmission pace slowed down but did not really aid in the flattening of the curve as compared to other nations. Instead, a full-year economic contravention was observed as a direct decade leaving millions of people jobless. The unemployment rate peaked during this lockdown period, being the highest in the urban areas.

With the brunt of the lockdown becoming unaffordable, the government ordered the first phase of reopening the country while people strive to learn to live with the virus until the vaccine arrives. 

With the lifting of the lockdown, a new ray of hope was offered to witness a surprising strength in India’s labor market as the economic activities started reviving. Most of the offices, shops, and self-employment avenues reopened after much struggle. And, as a result, a lot of jobs were restored that were earlier lost. A sharp fall in the unemployment rate was also witnessed with a drastic improvement in the unemployment crisis.

A massive gain in employment in rural areas also caught attention recently.  Due to the lockdown and the chain of events, the vulnerable section of the society, especially the migrant laborers were deprived of their daily wages and were compelled to face economic deprivation.

As a result, a flock of migrant laborers moved from megacities to their villages. To provide some relief from the adversities, the government increased the allocation of MNEREGA funds for the rural workers. The sudden boost in MNREGA activities resulted in alleviating the unemployment stress.

However, this unemployment drop is mostly because of casual work and self-employment activities growth. Demand for work under the national rural employment schemes has gone up after the unlock. The formal sector is still facing unemployment and recovering completely from the COVID-19 pain will take a much longer time.

There is a rise in non-wage work. Workers who were earlier employed in wage employment have returned to their villages after facing hardships due to the lockdown.

In villages, these workers are now either in casual work or agricultural work. Recently, the Joint Action Committee (JAC) of the unemployed youth associations made a demand to the state government to fill around 2.5 lakh vacancies in the government sector.

The committee has also demanded that until these vacancies are filled up, the government should provide unemployment allowance to the youths who have registered with Telangana State Public Service Commission for jobs.

India is amongst the worst-hit countries facing two challenges right now, slowing down the transmission along with handling the worst economic crisis. A massive spike of cases is expected in July and it’s going to be hard over a couple of months. It is yet to see whether the unlock 1.0 and the resuming of business will prove to be a relief to the economy or a disaster to human life.

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