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Jul 30
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benefits of economy

How Sitharaman’s Latest Pursuit to Boost Economy Can Prove Beneficial

By Economy, Corporate Law, Others No Comments

Sitharaman’s Latest Pursuit To Boost & Benefits of Economy

Given the dire state of the Indian economy, hopes and livelihoods of billions have been pinned on the government which is often riled up in providing a conducive environment for people from the lowest to the highest strata of society. Pursuant to the economic data, the Indian economy had turned a corner in the month of June after contracting 12% in the first sector, thus a stimulus package to maintain this trend was much needed.

Various sectors including MSMEs, contact intensive sectors like the beauty sector, aviation sector, and hospitality sector were the worst hit by the pandemic. Therefore, there are high expectations, particularly among these particular sectors, that the government will announce some stimulus package to boost the economy, which has been hit by the second wave of coronavirus.

It is to be noted, that last year too, the government had announced a growth-oriented budget which was to be financed by high scale privatization of PSBs. Given, the rotten state of PSBs anyway, such a move was welcomed. The finance minister Sitharaman had announced the government proposal to take up the privatization of two public sector banks (PSBs) and one general insurance company in the year 2021-22.

Additionally, the government had consolidated 10 public sector banks into four and as a result, the total number of PSBs had come down to 12 from 27 in March 2017. After consolidating its financial base, the government has now shifted its focus largely on extending loan guarantees and concessional credit for pandemic-hit sectors and investments to ramp up healthcare capacities.

It is to be noted that there is a reiteration of some steps that were already announced, as the government has pegged the total financial implications of the package. The retrieved steps include the provision of food grains to the poor till November and higher fertilizer subsidies, at ₹6,28,993 crore.

Thus, it can be rightfully stated that the elements of direct stimulus in the package and its upfront fiscal costs in 2021-22 are likely to be limited. Consequently, more stimulus steps may be needed to shore up the economy through the rest of the year.

Additionally, in an effort to stimulate growth, exports, and employment, the finance minister has announced an expansion of the existing Emergency Credit Line Guarantee Scheme (ECLGS) by Rs. 1.5 lakh crore. She also announced a new Rs. 7,500 crore scheme to guarantee loans up to Rs. 1.25 lakh to small borrowers through micro-finance institutions.

Talking about the budget as a whole, the additional burden on the 2021-22 Budget from the ‘three direct stimulus initiatives that are providing free food grains, incremental health projects’ spending, and rural connectivity, would be about 0.5% of the estimated GDP for 2021-22.

Although, as aforementioned, there will be a limited magnitude of direct stimulus, it would be desirable to follow it up with another dose of stimulus later in the year. In other words, this package is focused on stimulating the sagging credit offtake growth through interest rate concessions for priority sectors. Thus, this will immensely help and benefit a number of MSMEs, small borrowers, and entrepreneurs in contact-intensive sectors.

Talking the healthcare system, to state that the healthcare system in India had failed during the second wave would be an understatement. With record-death coffers being buried around the country during such arduous times, it is only fitting that government makes a conscious effort to ramp up the health care sector of the country. Taking into consideration the need for a robust healthcare sector, the finance minister unveiled a fresh loan guarantee facility of Rs. 1.1 lakh crore for healthcare investments in non-metropolitan areas and sectors such as tourism.

Additionally, Rs. 23,220 crore has been allocated for public health with a focus on pediatric care, which will also be utilized for increasing ICU beds, and oxygen supply and augmenting medical care professionals for the short term by recruiting final year students and interns. This has been a welcomed step as in last year’s budget, healthcare had been grossly ignored. Given the peril announcements of a third wave, such an initiative will help ramp up the prominent sector to tackle a coming third wave.

It is to be noted that the success of the enhanced credit guarantee schemes is worth Rs. 2.6 lakh crore for pandemic-hit sectors will hinge on their offtake. Schemes worth Rs. 2.4 lakh crore is significantly spread over the next two to four years. However, as aforementioned, due to the repetition of measures, some of these had already been announced at the time of the Budget, and a portion of their cost has already been factored in.

Although, given the robust numbers, the total impact amount seems large at nearly Rs. 6.29 lakh crore, it is to be noted that a large portion of this is by way of credit guarantee schemes where there is no immediate outflow. Thus, the impact on the fiscal deficit will be limited while the stock markets could give a mild positive reaction.

As aforementioned, the MSME and the travel sector were the worst affected. Further, the woes of these sectors were exacerbated by the imposition of the second lockdown. Given that consumer confidence is at an all-time low, demand will remain subdued.

Thus measure to sustain such MSMEs have been introduced. The balance of Rs. 60,000 crore will be earmarked for the sectors, including a plan to support over 11,000 registered tourist guides and travel agencies so they can survive the second wave’s adverse effects.

Additionally, working capital or personal loans will be provided to people in the sector to discharge liabilities and restart businesses affected by COVID-19. Loans will be provided with a 100% guarantee under the scheme to be administered by the Ministry of Tourism.

Production, according to reports was the worst hit by the second lockdown. Thus, large electronics manufacturers under the Production-Linked Incentive scheme have been granted an additional year to meet their production targets. This is due to the fact that many of them had struggled to sustain or scale up operations due to restrictions and lockdowns to curb the second COVID-19 wave.

Against all odds, the government introduced a stimulus to revive the economy amidst subdued demand and plummeting investors’ and consumers’ confidence. The economy, as opposed to last year, gained impetus in demand; however, this was due to the pent-up demand and festive season that had boosted sales and ultimately the economy. However, pent-up demand, cannot at the moment, revive the economy.

In addition to subdued demand, confidence has taken a hit due to the inevitable third wave. Thus, this emphatically justifies the government stimulus package that was much needed in the economy. The Budget coupled with economic stimulus laid the foundation for a sustainable recovery in GDP growth and welfare improvement thereby continuing the course of reform, despite extreme provocation. It goes without saying that history will record India’s boldness, and benefit from the vision at large.

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Tags: indian economy, economic data, gdp of india 2021, india gdp growth rate, current gdp of india, benefits of economy, gdp of india, economies of scale, india gdp 2021

Jul 30
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fiscal deficits

Are MSMEs Ready For Private Equity, Venture Capital?

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Private Equity and Venture Capital

Instead of funding new factories to manufacture for other countries, smart economies will fund the growth of entrepreneurs. Such is the power that lies in the Private Equity (PE) and Venture Capital (VC) industries. Traditionally, Venture Capitalists and PE players in India have shied from the MSME sector.

The non-corporate structure and small size of the majority of MSMEs in India make the Venture Capitalists and Private Equity Players unwilling to invest in them due to higher transaction costs and difficulties in exiting such investments. However, the VC-PE interest in the Indian MSME sector has witnessed a steady rise in recent times.

A recent Dun & Bradstreet survey was conducted which indicated that 82 percent of the Indian MSMEs got negatively impacted by the disruptions caused by the COVID-19 pandemic. It is no news that the sector to be worst hit by the pandemic was the MSME sector.

Thus, taking into account the intricacy and severity of the situation, last year, the Modi government announced a Rs 50,000 crore Fund-of-Funds. According to the Modi plan, Rs 10,000 crore investment was to be made by the government to facilitate the flow of equity to 25 lakh MSMEs.

However, it is to be noted that the government had expected the remaining Rs 40,000 crores of equity capital to get invested by venture capital (VC) and private equity (PE) firms. Such a move was welcomed by the business diaspora and appreciated by experts as promoting external participation in a fund like this is a smart move.

This is due to the fact that such external participation ensures the professional and transparent disbursement of funds. Thus, perennially capital-starved MSMEs were eager to attract investors willing to infuse monies to fuel business growth. However, all is not as presentable and profitable as it might sound as such kind of money has different commitments and expectations.

MSMEs have been traditionally dependent on banking finance for expansion and working capital requirements. It can be rightfully stated that PE-VC funds are vastly different from advances taken from a bank or NBFC. At the outset, banks or NBFCs provide temporary capital in the form of overdraft facilities, term loans, or invoice discounting options. Thus, once your goals, for which you had raised money, are met, you can safely return the borrowed capital with the pre-agreed interest rate.

However, with the Private Equity option, the lucidity of the temporary nature of capital and easy borrowing would not be easy. Private Equity investors provide permanent capital by buying equity into the business. Thus, the option of raising temporary capital is no longer available as investors usually continue to exist even after you may have achieved the goals for which you had raised this financing. The only exit that can take place is the exit of last resort when a private equity investor accepts an exit for a pre-agreed return.

Although banks have been slowly trying to bridge this gap, stringent reforms from the government are required. The reality hereby is that although this sector plays a vital role in giving a boost to the overall Gross Domestic Product (GDP), it is still overlooked by the government, corporate sector, and the financial sector. Thus, the commendable efforts and support of this sector do not receive the required attention.

But not all is as gloomy as the aforementioned situation might suggest Private Equity investors bring in a lot of good things to the table despite the seemingly dark and dubious picture. Private equity investors actively participate in growing the MSME business and act as a sounding board for the business challenges.

Additionally, PE investors can formalize structures to streamline business operations. How? When required, investors can open doors for business or new rounds of financing. Thus, much good can be reaped from the option of PE investments and VCs.

How can your business attract more private equity investing?

However, it is to be noted that private equity should be used in a profitable way. Private equity should be used for chasing growth as it is the most expensive form of capital for the business. It should not be used in areas that will provide an ROI lower than the cost of this capital which can be detrimental to the business. Thus profitable investment and use of capital wisely in different business verticals are essential as it would give higher returns than the cost of that capital.

As aforementioned, such kind of investment is a daunting task as every external shareholder of the company can question how you run your business. Thus institutionalization of your operations.

Reportedly, a common issue that irks many private investors and keeps them from investing in MSMEs is their dubious recordkeeping. Thus, transparent recording is a rudimentary requirement for better business opportunities and investors’ trust. Providing accurate and periodic reporting to the investors in a mutually agreeable format can go a long way.

It is to be remembered here that further financing can be provided if and only if, the business is clear of any dubious activities. Thus operations require a systematic record-keeping process which should be given paramount importance.

Another way to entice investors is the meticulous and transparent maintenance of business accounts that distinguish personal from professional expenses. Running the show independently and without external ownership, utilizing a company asset for personal reasons is acceptable even if not advisable. However, these activities must stop for the very mere reason that the company assets are co-owned by its shareholders. Using co-owned assets for personal use is not acceptable to private PE and VC investors.

Companies can benefit from viewing partnerships with a social enterprise not only as a way to strengthen the societies where they operate but as a financially and strategically valuable investment. These partnerships have the potential to generate economic benefit for both parties involved, via insights into innovation, access to new markets, and opportunities for risk management.

 

Tags: msme equity, venture capital, private equity, corporate venture capital, venture capital financing, venture capital firms, private equity fund, venture capital fund, private equity firms

Jul 29
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merger control regime

CCI World-Class Merger Control Regime: Fueling M&A Activity in India

By Corporate Law, Others No Comments

CCI World-Class Merger Control Regime: M&A Activity in India

When the COVID-19 pandemic practically shut down global business in March 2020, the M&A world was thrown into an unruly tailspin. Unsigned pending deals were put on hold, in many cases indefinitely. Global uncertainty, stay-at-home orders, nervous credit markets, and rapidly changing industry conditions served as speed bumps to deal-making, if not absolute barriers.

While deal volume made a very strong and perhaps surprising comeback in the second half of the year, 2020 will be remembered as the year of the pandemic, and many lessons will be learned.

On June 1, 2011, India joined the world league with the US and EU as it was the day when merger control under the country’s Competition Act had gone live. This had emphatically given the CCI, the power to review an M&A transaction’s competitive effects, where parties, whether in India or overseas, exceed certain Indian and global asset-size/turnover benchmarks.

There are innumerable advantages of M&A activity in India, especially when it comes to its NPA crisis. With the banking sector reeling under the dead weight of its bad loans, the timely resolution is the key to revival as loss can be mitigated smoothly and timely. This is because the loss of shareholders and depositors is positively correlated with the time taken for banking resolution.

Luckily, M&Ahelps to mitigate this detestable, odious problem with its timely resolution policy. This can be seen as the developments in the cases handled by CCI have been significant and rapid, with 834 transactions notified to the CCI, with 824, or 98.8%, cleared in an average of 20 days, and none prohibited.

How do bank mergers lead to mitigation of the NPA problem in the banking sector?

As it is known, a bank merger is emphatically a merger of two or more banks. The bank reeling under the weight of its bad loan can significantly be merged with banks with, if not insurmountable, at least good profits and good administration. As it is known that banks’ NPAs rise due to their flawed management program, thus integration with a bank with good management can lead to better management and mitigation of the other bank’s crisis.

This implies that when banks are merged, the strong banks can significantly take some measures, in association with other banks’ top management, for improving services. This can include improved recovery measures, transfer of NPA accounts to specially designated branches, named Asset Recovery branch or with permission of top management, subject to legal restrictions, sell NPAs to an organization specialized in recovery at a discount.

Thus, it can be rightly stated that these measures reduce NPAs by recovery by transferring the problem to another organization known as Asset recovery companies or famously known as bad banks or ARC. It is to be noted that the percentage of NPAs is also reduced due to the integrated capital of the two merging banks. Thus, the merger of an indebted bank with a bank of good business and healthy deposits, improvement in good total business can take place.

To top it all, merged banks or big banks will also be able to get access to refinance, which is significantly available to only a few big banks. However, these require freedom for banks to function competitively and utilize the best expertise.

Additionally, a larger bank can manage its short- and long-term liquidity quite better. There will not be any need for overnight borrowings in the call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).

In contrast to the government’s reluctant and unprofitable approach to recapitalization, mergers usually guarantee a larger capital base and higher liquidity, thus the burden on the central government to recapitalize the public sector banks, again and again, comes down substantially. In addition to all the perks aforementioned, the merger can reduce the cost of banking operations and it will result in better NPA and Risk management.

For the bank, retaining and enhancing its identity as a larger bank becomes easier. After the merger, the benefits of the merger are enormous the generation of a brand-new customer base, empowerment of business, increased hold in the market share, and the opportunity for a technology upgrade. Thus overall it proves to be beneficial for the overall economy as well.

How do merger control regimes and increased profits help the economy?

Mergers ensure a better efficiency ratio for business operations as well as banking operations which is ultimately beneficial for the economy. Consequently, it leads to an increase in profitability and helps raise the standard of living, which is crucial for a growing economy like India.

As a matter of fact, the chances of survival of underperforming banks increase significantly and hence customer trust remains intact which is vital for the Economy and the bank which have to maintain their goodwill. The weaker bank gets merged into a stronger one and gets the benefit of large-scale operations.

But is M&A as rosy as it might sound? Of course, every coin has two sides to it so does M&A. It is to be noted that when two entities are merged, the inefficiencies of the smaller bank can also get integrated into the larger bank.

Recapitalization, the preferred solution by the government works for small-scale losses of small banks as recapitalization can revive the capital base of small banks. But if big bank defaults or the giant shaped bank books incur huge losses or high NPAs, it will be difficult for the entire banking system to sustain and for the government to regain control.

Thus, Mergers are important for the consolidation and expansion purposes of banks. Additionally, they are also crucial for the Economy as they are most of the time successful in saving weak banks which fail in meeting expectations or maintaining their bad loans.

But on the other hand, Mergers create a variety of problems that can cause great damage if merging is not executed properly as various cultures are involved in the transition. If merging is needed, it must be executed to lead to an environment of trust and agreement among the people of both organizations.

If people, work culture, and vision are blended amicably, merging will definitely have synergic effects and create a win-win situation. Looking ahead, we expect deal volume to continue to strengthen, particularly as companies spot new opportunities with vaccine rollouts enabling economic recovery and growth. The lessons from last spring’s busted, or nearly busted, deals will continue to live on in new deal terms.

 

Tags: m&a activity in india, m & a activity, merger control regime, m and a activity, recent m&a deals in india 2021, recent m&a deals india, cci world class merger control regime, recent m&a deals in india 2020

Jul 22
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twitter freedom of expression

Twitter and Government’s Ultimate Battle to Uphold Freedom of Expression

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Twitter Freedom of Expression – Twitter & Government’s Battle

Social Media – a buzzword in millennial circles and often the recipient of government’s fury. Although the use of social media platforms such as Twitter and Facebook is undeniable for human conversations, all these developments have also contributed to the advancement of democracy and fundamental rights like freedom of expression, movement, trade, and profession.

However, a single platform cannot become the sole arbiter on fundamentals like freedom of speech, expression, and the likes. As India cracks down on microblogging sites for their noncompliance with India’s newest pursuit to mitigate false information, Twitter finds itself caught in the crossfires.

In recent developments in the case, microblogging platform Twitter lost its status as an intermediary platform along with its coveted legal shield for 3rd party content for failure to comply with new IT rules. India’s wrath has been specifically directed towards Twitter as it is the only social media platform among the mainstream platforms that have not adhered to the new laws.

However, it remains to be seen whether this development will leave a permanent scar or be lifted once Twitter adheres to the new digital rules. The government and Twitter have been at loggerheads owing to the latter’s compliance issues pertaining to rules that mandate platforms to increase due diligence and vigilance with respect to objectionable content and be held accountable for the same.

Pursuant to Section 79 of the Information Technology (IT) Act, an intermediary shall not be held legally or otherwise liable for any third-party information, data, or communication link made available or hosted on its platform. Simply put, this means that a platform is safe from any legal prosecution brought upon due to the message being transmitted from point A to point B as long as a platform acts just as the messenger and without interfering with its content in any manner.

According to the Indian government, Twitter’s act of defiance has been astounding and the platform which portrays itself as the flag bearer of free speech, choose the path of deliberate defiance when it came to the Intermediary Guidelines. This selective adherence to laws didn’t fit well with the government about its, inter alia, fake news mitigation efforts.

In addition to this, Twitter collects data and influences public perception and opinions through algorithms that decide what people will see and listen to. Thus, the platform is known to selectively push content on the basis of user activity, profile, demographic attributes, etc. This has been construed by many as a deliberate manipulation of information flow, albeit under the guise of better user experience, and is considered nothing but colonization of digital space.

It is common knowledge that several social media platforms may have violated governing legislation under the guise of freedom of speech and expression, thus necessitating a dire need for laws that address the evolving problems pertaining to questionable third-party content on social media platforms.

While the Information Technology (Guidelines for Intermediaries and Digital Media Ethics Code) Rules, 2021’ is a “soft-touch oversight” mechanism to deal with issues such as the persistent spread of fake news, abuse of these platforms to share morphed images of women, and content related to revenge porn or to settle corporate rivalries. Evidently, these Rules are neither fool-proof in curbing the root cause of the problem nor keeping up with the changing shades of offenses being committed thereon.

The IT Act and Rules, although well-intentioned, do not bring adequate clarity on the responsibilities of intermediaries along with third parties and users. The policy guidelines were introduced to address content that goes directly against guidance on COVID-19 from authoritative sources of global and local public health information. Thus, Twitter was quite emphatically trying to curb misinformation that is too prevalent in microblogging these days. But misinformation labeling isn’t the only topic that has been the Achilles’ heel of the entire matter.

The new rules dictate that a company like WhatsApp and Twitter should be able to track down the ‘first originator’ of any objectionable article that the Indian government deems threatening to internal security. It goes without saying that striking a balance between Freedom of speech and penalizing intermediaries for overlooking their responsibilities is the need of the hour!

 

Tags: twitter freedom, social media platforms, twitter freedom of expression, socialmedia, twitter facebook news, twitter social network company, freedom of speech twitter, twitter platform, twitter freedom of speech

Jul 21
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crypto investors

Who’ll Blink First in India’s Crypto Standoff?

By Economy, Others No Comments

Crypto Investors – Who Blinks First in India Crypto Standoff

RBI, the Central Bank of India has been in a cold war with the Indian crypto industry. It can be best described as antagonistic and aversive. Being concerned with India’s ability to absorb financial shocks, RBI has time and again tried to unfurl the disadvantages of using cryptocurrencies, however, the industry construed RBIs reaction as hyperbolic!

India, among other nations, has been particularly belligerent towards cryptocurrency, so much so, that it had constituted a high-level intermediate committee to report on various issues pertaining to cryptocurrency. The committee had subsequently in 2019, recommended a blanket ban on private cryptocurrencies in India hurling many crypto investors on the wrong side of the law.

The belligerent attitude of Indian authorities towards digital currency has led to banks emphatically distancing themselves from the crypto community, apparently egged on by the RBI. Working along the same lines as the government, in May, the HDFC Bank had sent a rather threatening email to their customers, warning them against virtual currency transactions. It is to be noted that the email had cited an RBI circular that was published on April 6, 2018.

The circular had reportedly instructed all of the businesses it regulates to cease any involvement with cryptocurrencies. Additionally, such a stringent activity was also conducted by the State Bank of India. Similarly, several large banks, namely ICICI Bank, the country’s largest private lender too stopped providing services to crypto exchanges. It is to be noted that due to the government’s stringent stand on the contentious matter, several cryptocurrency exchanges have reported difficulties with bank deposits and transfers.

Investors’ Woes 

As can be anticipated, the banks’ nefarious emails had prompted an uproar among their customers and crypto investors, with many taking to social media to express their discontent. But why are investors raging with anger? Fear of missing out on high, unpalpable profits that crypto trading offers them. According to a research report by Bloomberg, the technical outlook for Bitcoin remains strong with the price of the cryptocurrency all set to surge around 600% to hit the $400,000 level in 2021.

The government’s repugnant attitude throws a question in contrast to the Indian government are all authorities in India wary of the digital currency? Apparently, not. Recently, the RBI’s circular was struck down by the Supreme Court.

The Court contended in its March 2020 ruling that the RBI had failed to provide sufficient proof, and to detail instances of losses arising from crypto transactions, that might merit such a drastic measure as its de facto ban on banks’ involvement with cryptos. Therefore, it can be rightly stated, that to some extent, pressure is being built on the authorities to at least lift their temporary ban on crypto services.

Crypto Endorsers

It is no news that Elon Musk has been an ardent endorser of the cryptocurrency. While many might presume him to be the crypto guru, many can’t help but grab their aversion towards him due to his cryptocurrency manipulation charades that onsets great volatility in the market. It is to be noted, is due for this very reason, Indian authorities are so averse to the idea of cryptocurrency. The digital currency granting anonymity to criminals for nefarious crimes is considered a safe haven for digital criminals.

But more importantly, it is the inefficiency or the inability to track the real perpetrator of the crime that is the sole reason for India debunking the crypto supremacy. Interestingly enough, loss of revenue is also a big challenge that the government faces. As it is known, the crypto market is unregulated, thus it is often quite arduous or rather impossible to track payments and hence generate revenue through transactions.

Additionally, cryptocurrency being a highly volatile market, which might not be running rationally poses a big risk of a financial bubble that is doomed to burst. As it is known, during the pandemic, when consumer and investor confidence was at an all-time low, the crypto market was booming, rather skyrocketing.

In contrast to individuals, various cities like Miami have also tried to pursue cryptocurrency by conducting state-wise crypto fares in order to court crypto investors in the town. With El Salvador becoming the first country in the world to grant legal tender to the contentious digital currency, pressure to flip the coin in favor of crypto is rising.

But with irrational behavior associated with the market and various comments like “Crypto isn’t the real economy” by Elon Musk and not-so endorsing statements by the former US President Donald Trump, who at best, considers Crypto a farce, both the sides of crypto, at the current moment, are evenly balanced.

While countries like South Korea are implementing a legislative framework to regulate Cryptocurrencies and Crypto exchanges, India, on the flip side, is considering imposing an effective ban on “private” digital assets and digital currencies. Further, the Indian government has indicated to table The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which will effectively ban “private‟ Cryptocurrencies and introduce its own digital currency called Central Bank Digital Currency.

Although India’s stance on regulating cryptocurrencies through state-backed CBDCs regulated by the RBI is worrisome, it doesn’t come as a surprise. Going forward, it is imperative to have a dialogue on stakeholder concerns or risk getting smeared in the litigation quicksand thereby leaving crypto traders in dire straits, resulting in uneasiness in the sector which is destined to accelerate to greater heights in India.

The Achilles’ heel in RBI’s approach is the delusion towards the fact that it is possible to ban cryptocurrencies whereas looking at all the other nations’, it is wise to regulate it and mitigate systemic risks vis-à-vis a blanket, yet ineffective ban. A bill regarding banning cryptocurrencies is still in parliament which if approved, will suffice the RBI’s objective however, it will be interesting to see who wins this battle of the contentious crypto war.      

 

Tags: financial shocks, cryptocurrency investment, crypto long term investment, crypto investors, investing in cryptocurrency 2021, private cryptocurrencies in india, investing in cryptocurrency

Jul 20
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the second wave

The Second Wave in Need of a Second Economic Stimulus

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The Second Wave of Pandemic & Economic Stimulus

A second wave is creeping back in India and is poised to rage across the country through 2021. This wave constitutes an imminent threat to society, with a potentially immense toll in terms of human lives and catastrophic economic impact, exacerbating the financial woes of millions of Indians. With the peak of the second wave yet to come in the coming months, its impact on all spheres of life across the country could be of varying magnitudes.

In theory, the economy should be the last thing on one’s mind in the wake of such a crisis, however, this health crisis quickly snowballed into a catastrophic economic crisis. It goes without saying that our economic performance is largely dependent on the performance of the health sector and the inoculation programme. 

Some experts believe that businesses are better equipped to deal with the economic repercussions of the second wave. When evaluating the long-term impacts on the economy, it is predicted that the impact should be minimised due to government intervention through several steps to check production loss, especially by MSMEs.

Also, companies and consumers have rapidly adjusted to the new normal and the relationship between lower mobility and weak economic activity has been weakening over time, with data ultra-high frequency data for March and early April, released since the renewed lockdowns were announced, corroborating the same.

How did a health crisis translate to an economic crisis? Why did the spread of the coronavirus bring the global economy to its knees? The answer lies in two methods by which coronavirus stifled economic activities. First, the spread of the virus encouraged social distancing which led to the shutdown of financial markets, corporate offices, businesses and events.

Second, the exponential rate at which the virus was spreading, and the heightened uncertainty about how bad the situation could get, led to a flight to safety in consumption and investment among consumers, investors and international trade partners.

Despite fundamental aspects being in order the clutches of the pandemic remain uncharted to a large extent. As a result, many experts believe that the worst is yet to come. Interestingly, the economic decline itself has an adverse effect on health; a reduction in economic activity reduces the circulation of money and, with it, tax revenues.

This then results in a reduction of the finances available for the public-health countermeasures which are needed to control the pandemic. It also hits individuals and families, who may see their income plummet catastrophically and thus may not be able to afford the required healthcare. Depleting financial reserves may also make companies close, with consequences for their owners, employees, and suppliers.

In all obviousness, this setting would have developed very differently in a setting in which there is a workforce with access to free healthcare and income protection than in one in which much employment is casual and people must choose whether to go to work when ill or to starve. The increasingly integrated global economy increases the fragility of this situation. 

In order to tide over the second wave, an introduction of additional economic measures is imperative. As a result, such a stimulus must be tailor-made for the most impacted people and businesses. For instance, states with high COVID cases such as Maharashtra, NCR region, Tamil Nadu and Gujarat also account for nearly 45 per cent of employment in MSMEs and 41 per cent of overall MSME credit.

Notably, stringent lockdowns in the aforementioned states have pushed thousands of MSMEs on the brink of a closedown or have already shut down. In view of this, the Tamil Nadu government announced a special incentive package to promote MSME investments. Other pandemic-hit states should also follow suit and announce incentives for MSME investments to build supply chains under the Centre’s PLI scheme.

An adverse impact can be seen on retail loans disbursed by banks and NBFCs, wherein a large number of informal loans are disbursed by shadow financers. Hence, an economic package tailor-made for the needs of vendors and small ticket personal loans can be implemented by state governments in conjunction with RBI and the Centre.

In addition to this, the RBI window of one-time restructuring of MSME advances should be extended until 31 March 2022. It has been found that MSMEs benefited most from the Centre’s sovereign credit guarantee scheme and so a similar scheme should be announced by states to provide the much-needed liquidity shot to MSMEs.

Furthermore, Maharashtra temporarily reduced stamp duty on real estate to push the demand side upward leading to a marginal revival of the sector. A similar scheme can be announced by states which will revive the real estate sector—one of the largest employers of informal jobs. 

Measures and relaxations offered by the government can be magnanimous, but their effectiveness will be washed out if the inoculation programme remains sluggish. With international financial crises and recessions; unsustainable inequality in income, wealth and across regions; the climate emergency; and the threat of future pandemics, the need has never been greater for balanced economics and systemic change.

Therefore, a speedy vaccination programme coupled with balanced measures introduced by the government will be the best antidote to revive demand and restore our national treasury.

 

Tags: economic impact payments second wave, second economic stimulus, financial woes, catastrophic economic collapse, the second wave, second wave of the pandemic

May 25
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limited due diligence

Limited VS. Exhaustive Due Diligence

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Exhaustive Due Diligence

The term “due diligence” is not defined in Indian law, but it suggests that a buyer should exercise caution. It is an inquiry or verification of the affairs of a business organization conducted by any individual or other business entity interested in taking over, combining, or investing in that former entity.

This is done to prevent foreseeable risks. Every business must conduct legal due diligence and be ready for unwelcome surprises before doing any deal the mergers & acquisitions. There are many processes involved in due diligence including business due diligence, special due diligence, accounting due diligence, and legal due diligence.  Due diligence looks at the past and current performances of the businesses.

LIMITED VS. EXHAUSTIVE DUE DILIGENCE   

As we talk about limited due diligence, we imply it’s confined to a certain level and focused on certain legal concerns, whereas exhaustive due diligence takes into account, encompasses, and evaluates everything about a corporate organization. While considering a merger or an acquisition transaction, the buyer, acquirer, or investor, as the case may be, will have limited knowledge pertaining to the target company other than what is available in the public domain.

 Due to this, the buyer will appoint legal and financial experts preferably lawyers, chartered accountants, or merchant bankers to conduct an exhaustive due diligence process on its behalf. In an exhaustive due diligence process, a vast amount of information is to be reviewed.

The legal due diligence team typically analyses the charter documents, material contracts, employment agreements, and real estate documents. Including corporate compliances, tax compliances, financial documents, insurance contracts, labor law compliances, intellectual property rights, and any litigation proceedings by & against the target company. 

Prospective buyers should gather documentation that reveals the company’s organization the parties need to refrain from the structure. They must also gather information on taxes, strategic fit, intellectual property, material assets, contracts, members, and lawsuits. 

PROS AND CONS

PROS 

  • It aids in the identification and mitigation of the target entity’s risks and responsibilities.
  • It evaluates the value of the target entity.
  • The information acquired following due diligence aids in deciding whether or not the agreement with the target firm is worthwhile.
  • Exhaustive due diligence helps in getting complete or overall information about the target entity.

CONS 

  •  Limited information or inquiry is the main reason for mergers & acquisitions failure.
  • Exhaustive due diligence is a very time-consuming process.
  • Any mistake, omission, or oversight committed at the time of the due diligence process can have adverse effects.

IMPACTS ON INDUSTRY

  • When a business entity confirms deals without doing due diligence or deals with insufficient due diligence, the damages can be dangerous. 
  •  After a merger or acquisition, all financial risks of the target company are transferred to the acquirer company.
  • Once governmental authorities or third parties take action against a targeted firm following a merger or purchase, the acquirer will face substantial legal fights and proceedings even if the acquirer had no involvement in the targeted firm’s non-compliance, fraud, or irregularity. Therefore, strict due diligence and deep investigation into the background of the cases of the targeted company are of paramount importance.

CONCLUSION

A well-executed due diligence process with proper effort is an essential part of a successful M&A deal. Negligence or other improper conduct in this regard will have harmful effects on the deal M&A. A failed M&A deal will create serious financial and legal difficulties and damage the reputation of the parties to the deal.

In order to remove any inadequacies in a due diligence process, it is essential that the process is done by people with the necessary skills and competencies. A well-qualified team with a systematic approach will make sure that the risks associated with the deal are identified and are not transmitted to the consumer.

 Therefore, it is essential for the parties to refrain from being overly enthusiastic or emotionally vested in a transaction that can cause the parties to ignore any negative information and cloud their judgment. The next time you engage in an M&A transaction, you’ll know what to do and how to go with your legal due diligence process, which will provide you with a clear picture of your future with the subject firm.

 

Tags: commercial due diligence, due diligence, due diligence real estate, legal due diligence, limited due diligence, financial due diligence

May 14
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fiscal deficits

Does Our Bias Against Fiscal Deficits Need Rethinking?

By Others No Comments

What is Fiscal Deficit

Fiscal deficits occur when a government spends more money than it receives during a fiscal year. This mismatch, also known as a current account deficit or a budget deficit, is prevalent in today’s governments all over the world.

Over a particular time, a fiscal deficit arises when a government spends more money than it collects in taxes and other sources (excluding debt). To balance the gap between revenue and expenditures, the government borrows, increasing the national debt.

In theory, increasing the fiscal deficit might help a slow economy by providing more money to people, allowing them to consume and invest more.

HISTORY OF FISCAL DEFICIT

Many economists, policy analysts, bureaucrats, politicians, and commentators favor the idea of governments running fiscal deficits, though to differing degrees and under different conditions. Deficit spending is also a key instrument in Keynesian macroeconomics, which is named after British economist John Maynard Keynes, who believed that government spending boosted economic activity and that running large deficits might aid a drooping economy.

In 1789, as Secretary of the Treasury, Alexander Hamilton created and implemented the first real American deficit plan. Hamilton saw deficits as a strategy of strengthening government authority, similar to how war bonds helped Great Britain out-finance France during their 18th-century battles.

This practice has continued throughout history, with governments borrowing money to wage wars when raising taxes would be insufficient or impossible.

IMPACT OF FISCAL DEFICIT ON ECONOMY

The economic repercussions of budget deficits are disputed by economists and policy experts. Some, including Nobel Laureate Paul Krugman, claim that the government spends too little and that the sluggish recovery from the Great Recession of 2007–2009 is attributable to Congress’ refusal to run larger deficits to boost aggregate demand.

Budget deficits, according to some, inhibit private borrowing, distort capital structures and interest rates, lower net exports, and result in higher taxes, higher inflation, or both.

Until the early twentieth century, most economists and government advisers supported balanced budgets or budget surpluses. The Keynesian revolution and the advent of demand-driven macroeconomics made it politically feasible for governments to spend more than they brought in. As part of a focused fiscal policy, governments could borrow money and increase spending. 

The concept that the economy will return to a natural state of balance was rejected by Keynes. Instead, he contended that once an economic slump occurs, the fear and pessimism that it instills in firms and investors tend to become self-fulfilling, leading to a prolonged period of low economic activity and unemployment. 

In response, Keynes proposed a countercyclical fiscal strategy in which the government engages in deficit spending to compensate for the drop in investment and raise consumer spending to stabilize aggregate demand during periods of economic distress.

IMPACT OF FISCAL DEFICIT ON SHORT TERM

Even when the long-term macroeconomic effect of budget deficits is discussed, the immediate, short-term ramifications receive far less attention. However, the consequences vary depending on the type of insufficiency.

If the deficit emerges as a result of the government’s extra spending programs, such as infrastructure expenditure or business grants, the sectors that have chosen to receive the funds to get a short-term boost in operations and profitability.

There is no need for a stimulus if the deficit is caused by less government revenue, whether as a consequence of tax cuts or a decline in economic activity. While the topic of whether stimulus spending is beneficial is disputed, it certainly improves specific industries in the near run.

POSTIVE SIDE OF DEFIECT

Politicians and policymakers use fiscal deficits to fund popular measures like welfare and public works without raising taxes or cutting expenditures elsewhere in the budget. Fiscal shortfalls foster rent-seeking and politically driven appropriations in this way. Many firms support budget deficits implicitly if it means obtaining government advantages.

Large-scale government debt is not universally viewed as a bad thing. Budget deficits, according to some observers, are worthless because the money is “owed to ourselves.” Even if taken at face value, this is a dubious claim, given foreign creditors routinely acquire government debt instruments, and it ignores several macroeconomic variables that work against deficit spending.

Certain economic theories have broad theoretical support for government deficits, as well as near-unanimous support among elected officials. In the guise of tax cuts, stimulus spending, welfare, public goods, infrastructure, war financing, and environmental protection, both conservative and liberal regimes tend to run large deficits.

In the end, voters believe fiscal deficits are a good idea, whether or not they express it explicitly, to based on their proclivity to demand both expensive government services and low taxes at the same time.

NEGATIVE IMPACT OF DEFICIT

Government budget deficits, on the other hand, have been criticized by many economists throughout the years for crowding out private borrowing, distorting interest rates, supporting non-competitive businesses, and increasing nonmarket actors’ dominance. Nonetheless, since Keynes legitimized budget deficits in the 1930s, government economists have favored them.

Expansionary fiscal policy not only underpins Keynesian anti-recession strategies but also serves as an economic justification for what elected officials are naturally prone to do: spend money with minimal short-term implications.

During recessions, Keynes advocated for running deficits and then fixing budget deficits after the economy recovered. Raising taxes and cutting government services is unpopular even in times of prosperity, so this seldom happens. Governments have a tendency to run deficits year after year, resulting in massive public debt.

FINANCING A DEFICIT

All gaps in the budget must be filled. Initially, this is accomplished by selling government securities such as Treasury bonds (T-bonds). Individuals, corporations, and other governments purchase Treasury bonds and lend money to the government in exchange for the guarantee of future payment. 

The first and most obvious effect of government borrowing is that it limits the amount of money available to lend to or invest in other firms. 

This is unavoidably true: a person who lends $5,000 to the government cannot use that same $5,000 to buy private company stocks or bonds. As a result, all deficits have the impact of lowering the economy’s potential capital stock. The concern would be inflation rather than capital decline if the Federal Reserve monetized the debt altogether.

Furthermore, interest rates are directly affected by the selling of government assets to finance the deficit. Because government bonds are regarded as exceptionally secure investments, the interest rates paid on government loans are risk-free investments that practically all other financial products must compete with. 

If government bonds pay 2% interest, other financial assets must provide a higher rate to entice purchasers away from government bonds. This function is utilized when the Federal Reserve uses open market operations to change interest rates within the confines of monetary policy.

FEDERAL LIMITS ON DEFICIT

Despite the fact that government deficits appear to be expanding at an exponential rate and overall debt liabilities have reached stratospheric heights. Even if they aren’t as low as many would want, there are physical, legal, theoretical, and political limits to how far the government’s balance sheet may go into the red.

In practice, the US government’s deficits cannot be covered without recruiting loans. Individuals, corporations, and other governments purchase US bonds and Treasury bills (T-bills) on the open market, agreeing to lend money to the government since they are backed solely by the federal government’s full confidence and credit.

As part of its monetary policy procedures, the Federal Reserve buys bonds. There is a serious fear that if the government runs out of willing borrowers, deficits will be constrained and default will become a possibility.

The long-term consequences of complete government debt are both real and dangerous. If interest payments on the debt become unsustainable through traditional tax-and-borrow income streams, the government has three options. They have three choices: cut spending and sell assets to make payments, print money to cover the gap or default on debt commitments.

The second of these alternatives, a too aggressive increase of the money supply, could result in significant inflation, effectively (albeit inexactly) limiting the effectiveness of this technique.

STRATGIES TO REDUCE DEFECIET

Fiscal strategies such as expenditure cutbacks and tax hikes can help countries lower budget deficits by improving economic development. For example, lowering regulations and lowering corporate income taxes are two measures for raising Treasury inflows.

These strategies strengthen company confidence and stimulate economic growth, resulting in larger taxable earnings and more income taxes as a result of job growth.

Securities such as Treasury bills and bonds can be used to raise funds to satisfy debt obligations. While this offers a payment channel, it also puts the country’s currency in danger of depreciation, which might lead to hyperinflation.

 

Tags: deficit, deficit spending, fiscal deficits, financial deficit, revenue deficit, government deficit, current account deficit, budget deficit

Feb 26
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stay orders

Lapse of Stay Orders and Judicial Delays: A Constitutional Conundrum

By Corporate Law, Others No Comments

Lapse of Stay Orders and Judicial Delays

The constitutional predicament of the Supreme Court’s direction in the case of Asian Resurfacing of Road Agency v. Central Bureau of Investigation (“Asian Resurfacing”) assumes significance because of the controversial dictum regarding stay orders. The direction in its essence is that any order that stays civil or criminal proceedings will now lapse every six months unless it is clarified by an exception of a speaking order.

The major grievance is that every order which is passed by the High Courts while exercising its jurisdiction under Article 227 of the Constitution and Section 482 of the Criminal Procedure Code, is virtually annulled with the passage of time. 

The decision comes into existence due to the indefinite delays that occur because of stay orders granted by the High Courts, which leads to judicial delays and denies the fundamental right to speedy justice. The Apex Court has observed that proceedings are adjourned sine die i.e. without a future date being fixed or arranged, on account of stay. Even after the stay is vacated, intimation is not received, and proceedings are not taken up. 

The concern is that during criminal trials, a stay order delays the efficacy of the Rule of Law and the justice system. The power to grant indefinite stays demands accountability and therefore the trial court should react by fixing a date for the trial to commence immediately after the expiry of the stay.

Trial proceedings will, by default, begin after the period of stay is over. In the case where a stay order has been granted on an extension, it must show that the case was of such exceptional nature that continuing the stay was more important than having the trial finalized.

The High Court may exercise powers to issue writs for infractions of all legal rights, and also has the power of superintendence over all “subordinate courts,” a power absent in the Supreme Court as it was never intended to supervise subordinate courts or the High Courts.  

In the case of Tirupati Balaji Developers (P) Ltd v. the State of Bihar, the Supreme Court recognized that despite having appellate powers, the current directive ordered by the Supreme Court takes a precarious position since the High Court cannot be limited in its exercise of power by any restrictions placed on it by the Supreme Court unless the Supreme Court interprets a statute or the Constitution and prescribes it as a matter of law, which is not the case in the directions issued for Asian Resurfacing. 

There are two perspectives to this: firstly, the directive does not annul “every order” of the High Court merely with the passage of time. It only causes those orders that “stay the trial proceedings of courts below” to lapse with the passage of time, wherein even those orders can be extended as per the High Court’s own discretion on a case-to-case basis.

If this is considered supervisory or unconstitutional, then Appellate Courts will be left with the little prerogative to safeguard the basic rules of fair procedure. Secondly, the directive itself is not applicable to the interim order granted by the Supreme Court as reiterated in the case of Fazalullah Khan v. M. Akbar Contractor. 

It is clear that the demand for justice to be disbursed and a trial to be completed in 6 months is a necessity given the incessant judicial delays and indefinite freezes on criminal cases. Staying trial proceedings for 6 months must be made a thing of the past and should not be stayed for 6 months or more, save in exceptional circumstances.

Allowing trial proceedings to stay for longer than 6 months encourages parties to abuse the process of law and move to an appellate court merely to stall a trial that has an inevitable conclusion. Legal procedures, the appointment of judges, and judicial vacancies all contribute equally to judicial delay, the rot has spread far and wide creating systemic delays in the entire judicial procedure.

Although courts will be bound to welcome the judgment in letter and spirit, some pressing questions remain unanswered. It is unclear why the Supreme Court provided “directions” to the High Courts now when it has been cautious in issuing such directions in the past? Further, if the primary motive was curbing the judicial delays and ushering in a change in the way the judicial system works, why is the Supreme Court not bound by its own directive? 

 

Tags: criminal procedure code, the code of criminal procedure, stay orders, criminal procedure code act, judicial delays, constitutional conundrum

Feb 19
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emi moratorium

EMI Moratorium: Analysing Borrower’s Creditworthiness Amidst The Pandemic

By Labour & Employment, Others No Comments

EMI Moratorium: Analysing Borrower’s Creditworthiness

Financial institutions are focused on risk now, more than ever before. The virus-induced lockdown has raised “Liquidity” and Non-Performing Assets (“NPA”) issues popularizing these buzzwords in financial circles and beyond.

Anticipating a domino effect on loan defaults amongst small to medium-sized businesses, the Finance Ministry in conjoined efforts with Regulators and the Reserve Bank of India (RBI), introduced numerous measures for the maintenance of equilibrium between the market forces of demand and supply during the pandemic.

With the widespread prevalence of the COVID-19 pandemic, they are increasingly recognizing that the rebuilding phase offers a unique opportunity to encourage action on the agenda of survival until the COVID-19 dust settles.

The acute phase of COVID-19 has drawn central banks’ attention from a crisis that was earlier restricted to some states and regions, to a global economic crisis riddled with challenges. The nature of the crisis has revealed basic vulnerabilities around the world, most importantly those surrounding individual borrowers.

The Finance Ministry directed Banks to roll out a loan resolution framework with the Loan Moratorium period ending on August 31st and the festive season around the corner. In doing that the Supreme Court directed that while Banks are free to restructure loans, they cannot penalize individual borrowers availing moratorium benefits.

The apex court held that charging interest on deferred EMI payments under the moratorium scheme during the COVID-19 pandemic would amount to paying interest on interest which is against “the basic canons of finance” and unfair to those who repaid loans as per schedule.

RBI’s move to restructure personal loans accord this benefit to consumer credit, education loans, loans for creation, or housing loans pursuant to a central bank notification.

Specifically, the relief may include “rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of a moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years”; however the exact contours of the resolution plan have not been clearly laid out and remain undecided.

The primary objective of this move at help borrowers on the pretext of mass unemployment, pay cuts, and lay-offs in light of the world’s strictest lockdown, thereby paralyzing economic activity. So a 2-year moratorium that RBI has now permitted under such restructuring proves to be a blessing in disguise for people experiencing cash crunch during the pandemic.

Clearly, it will boost households facing a cash crunch — especially those who lost their jobs or small businesses that are on the verge of a shutdown. RBI has moved consistently and quickly since the start of the pandemic to calm markets, to provide liquidity, and, now, these steps should go some distance in giving relief to the distressed liquidity-starved household.

However, each household should be wary of using this facility. At the outset, a loan moratorium was aimed at helping those in distress and was not meant to be used as an opportunity for the pre-existing defaulters of loan payments. At the other end of the spectrum, the moratorium extension is likely to provide a negative credit outlook for financial intermediaries in the shadow financing industry like Housing Finance Companies and Non-Banking Financial Companies.

Invariably, the deferment of EMIs will have an adverse impact on the cash flows of these financial institutions and test their resilience during the depressionary forces emanating from the COVID-19 pandemic.

Despite the slew of measures announced by the RBI and government to alleviate liquidity woes of financial institutions, these measures may have less impact in the short to medium term, but the operative word being “defer” of loan installments, and not a complete waiver or discount thereof should be of prime importance in the personal finance industry and be availed only if absolutely required.

A growing number of central banks and banking supervisors are starting to work together to progress a global approach and agenda. In doing so, the central banks need to develop a clear strategy for the way forward. A monetary policy needs to be forward-looking.

Given the slowdown in the economy and that the transmission of rate cuts takes time, there is a need for further monetary policy easing. This will also be helpful as uncertainty remains over COVID-19 having a deflationary or inflationary impact on the Indian economy in the medium run.

While the temptation to adopt aggressive measures may be high, crossing the traditional boundaries between fiscal and monetary policies, but are feasible for central banks in advanced economies with high credibility stemming from a long track record of stability-oriented policies. Thus this strong medicine should only be taken with extreme care.

 

Tags: loan moratorium news, rbi moratorium, emi moratorium, rbi loan moratorium, emi moratorium latest news, loan moratorium rbi, loan moratorium, loan moratorium latest news, emi moratorium 2021