Month: April

INTRODUCTION

In recent years, the volume and intensity of cross-border
investment, trade and commerce have become the key indicators for defining the
developmental growth index of a sovereign state. The Government of India has
implemented a myriad legislations and policies to attract investments and make
it easier to do business in India.

A key impediment of doing business in India has been the
difficulty of enforcing contracts and the time taken by courts and tribunals to
give determinations. An effective and efficient dispute resolution mechanism is
critical for instilling confidence in investors and to achieve the goals of a
growing economy.

Against this backdrop, the Government of India (GoI) after a
period of almost 20 years, in the year 2015 made much-needed amendments to the
Arbitration and Conciliation Act, 1996 (the 1996 Act) to ensure that
arbitrations are quicker and smoother. The amendments were indeed
path-breaking, since some of the amended provisions went well beyond what the
law in even arbitration-friendly countries provided for. These included
disclosures of impartiality (adopting the International Bar Association’s
Guidelines on Conflicts of Interest in International Arbitration, in the Act
itself) and providing for strict timelines within which an arbitration is to be
completed.

However, the GoI and the stakeholders in the arbitration
process felt that various provisions required clarifications or amendments. The
GoI, which has been closely watching the situation, was eager to provide
necessary support to the legislative framework for arbitrations in India.

A high-level committee under the chairmanship of Justice B.N.
Srikrishna, former judge of the Supreme Court of India, was constituted by the
Central Government to submit a report on how to achieve the goal of making
India an arbitration hub, to explore the lacunae in the effective
implementation of the 1996 Act and the Arbitration and Conciliation
(Amendment), 2015 (2015 Amendment) and also to provide a robust scheme of
legislation aligned with the letter and spirit of the UNCITRAL Model Law and
the Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(the New York Convention).

Based partly on the report of the high-level committee, the
Arbitration and Conciliation (Amendment) 2019 Bill (the Bill) was framed and
placed before both the Houses of Parliament for approval. Both Houses swiftly
approved the Bill and the Arbitration and Conciliation (Amendment Act) 2019
(2019 Amendment) was passed. The 2019 Amendment received Presidential assent on
9^th August, 2019 and by a Gazette Notification dated 30^th
August, 2019 bearing No. S.O. 3154(E) (Gazette Notification), certain
provisions, namely, section 1, section 4-9 (both inclusive), sections 11-13
(both inclusive) and sections 15 of the 2019 Amendment were brought into force.
Some of the other provisions are yet to be notified. The speed at which such
amendments were passed and came to be implemented makes GoI’s intention to
support arbitrations clear. But has the GoI been successful? Some of the
amendments have given rise to mystifying questions which will be explored in
this article.

KEY
AMENDMENTS UNDER THE 2019 AMENDMENT

Definition of arbitral institution

Section 1(ca) inserted by the 2019 Amendment provides for the
definition of ‘arbitral institution’ to mean ‘arbitral
institutions designated by the Supreme Court / High Court under the Act’.
This would mean that the established arbitral institutions such as the
International Court of Arbitration (ICC), the Singapore International
Arbitration Centre (SIAC), the London Court of International Arbitration
(LCIA), etc., would have to necessarily be designated to fall within the scope
of the definition of arbitral institution under the amended 1996 Act. This
section has been notified under the Gazette Notification. However, it is
unclear how arbitral institutions of the world will be designated and what
criteria will be required to be met to be recognised under the 1996 Act.

Arbitral appointments u/s 11

Sub-section 3A, inserted by the 2019 Amendment, empowers the
Supreme Court and High Court to designate arbitral institutions graded by the
Arbitration Council of India (ACI) u/s 43-I to make arbitral appointments. It
further provides that in cases where the High Court concerned does not have any
graded arbitral institutions within its jurisdiction, the Chief Justice of such
High Court is empowered to maintain a panel of arbitrators to discharge the
functions within the meaning of ‘arbitral institution’ under the amended 1996
Act. The arbitrators shall be entitled to fees as prescribed under the Fourth
Schedule of the amended 1996 Act.

The 2019 Amendment provides an explanation to sub-section 14
of section 11 that the rates as per the Fourth Schedule shall not be applicable
in cases of international commercial arbitration and in arbitrations (other
than international commercial arbitration) where parties have agreed for
determination of fees as per the rules of the arbitral institution. It may be
inferred from this that parties can agree to determination of fees by an
arbitral institution which is designated by the Supreme Court / High Court.
However, what happens in cases where an arbitral institution is not designated
with the Supreme Court / High Court remains unanswered.

The amendment also states that such panel of arbitrators as
maintained by the High Court is subject to review by the Chief Justice of the
High Court concerned. Although it may seem that the intention behind the
amendment to section 11 is to popularise institutional arbitration in India,
however, the intervention and excessive supervision may hamper party autonomy.
These provisions have not been notified as yet. There are several
representations pending with the GoI to revisit these provisions.

TIMELINES

The 2015 Amendment introduced a timeline of 12 months from
the date an arbitrator entered reference to complete the arbitration. This was
extendable by six months by consent of the parties. Further extensions could be
granted only by the courts.

The 2019 Amendment now provides that an arbitral tribunal has
to render an award within 12 months from the date of completion of pleadings
u/s 23(4) in cases of domestic arbitrations. Section 23(4) has been introduced,
providing a timeline for filing of the pleadings as six months from the date of
the arbitrator/s receiving notice of appointment. It may be noted that this
provision does not take into account the timelines for filing counterclaims and
defence thereto, rejoinders and sur-rejoinders. This provision has been
notified under the Gazette Notification. There could be challenges in some
cases, especially since there are times when parties seek additional time to
permit settlement talks, even once an arbitrator is appointed. The 12-month
timeline does not apply to international commercial arbitration. It is not
clear why international commercial arbitrations have been excluded from such
timelines and such distinction between domestic and international arbitrations
seems artificial. It is unlikely that foreign parties choosing arbitration in
India would appreciate this, since they would also desire that the arbitration
is concluded within the timeframe.

The Delhi High Court in its recent judgment in the matter of Shapoorji
Pallonji & Co. Pvt. Ltd. vs. Jindal India Thermal Power Limited¹
 has clarified that the new
timelines set out in the 2019 Amendment would be applicable not only to
arbitration proceedings which have commenced after the 2019 Amendment, but also
to arbitration proceedings which are pending as on the date of enactment of the
2019 Amendment. This will add to additional uncertainty, since there may be
pending arbitrations in which pleadings have not been filed within six months.

Amendment to section 34

The amendment to section 34 provides that the challenge to an
arbitral award could be established only on the basis of the record of the
Arbitral Tribunal.

The amendment was a welcome step to ensure speedy disposal of
challenges by losing parties, wherein the parties seek to produce new /
additional documents and lead evidence before the courts at the stage of
challenge to an award, thus fundamentally trying to re-open the arbitral
dispute itself. However, in September, 2019 the Supreme Court in Canara
Nidhi Limited vs. M. Shashikala²  clarified the legal position that a challenge
u/s 34 ‘will not ordinarily require anything beyond the record that was
before the arbitrator and that cross-examination of persons swearing into the
affidavits should not be allowed unless absolutely necessary.’ It will be
interesting to see how this judgment is used further as it provides for an open
field for the practitioners to adduce additional evidences, by proving that
their case falls within the exceptional circumstances contemplated under the Canara
judgment.

CONFIDENTIALITY

The issue of confidentiality pertaining to arbitral
proceedings has been debated extensively in international arbitrations. The
1996 Act did provide for confidentiality to be maintained in cases of
conciliation, but not in arbitration. In international arbitrations, the
parties have the option to apply the confidentiality provisions under the
International Bar Association (IBA) Guidelines and Rules; however, the IBA
Rules and Guidelines can only act as a soft law. The insertion of section 42A
provides the disclosure of the arbitral award to be made only where it is
necessary for implementing or enforcing the award. It is a welcome move to
provide statutory backing to the concept of confidentiality in arbitral
proceedings and ensuring that the stand taken by the Indian legislation is akin
to the international best practices. However, the interplay between the ACI’s
power to keep a depository of arbitral awards and confidentiality provisions is
something to be seen in future.

Protection afforded to an arbitrator for action taken in
good faith

Under the newly-inserted section 42B of the 2019 Amendment,
immunity is now provided to the arbitrators against liabilities for acts
performed in their capacity as arbitrators, so long as they are in good faith.
This section should act as an incentive for more people to act as arbitrators.

Arbitration Council of India

The 2019 Amendment sought to insert an altogether new Part
‘1A’ to the 1996 Act for the establishment and incorporation of an independent
body corporate, namely, the Arbitration Council of India (ACI) for the purposes
of grading of arbitral institutions as per the qualifications and norms
contained in the Eighth Schedule (as inserted vide the 2019 Amendment) which
includes criteria relating to the infrastructure, quality and calibre of
arbitrators, performance and compliance of time limits for disposal of domestic
or international commercial arbitrations, etc., formulating policies and training
modules to adept professionals in the field of arbitration and ADR mechanisms.

Section 43C(1) provides that the ACI shall be composed of a
retired Supreme Court or High Court judge, appointed by the Central Government
in consultation with the Chief Justice of India, as its Chairperson; an eminent
arbitration practitioner nominated as the Central Government Member; an eminent
academician having research and teaching experience in the field of
arbitration, appointed by the Central Government in consultation with the
Chairperson, as the Chairperson-Member; Secretary to the Central Government in
the Department of Legal Affairs, Ministry of Law and Justice and Secretary to
the Central Government in the Department of Expenditure, Ministry of Finance,
both as ex-officio members; one representative of a recognised body of
commerce and industry, chosen on rotational basis by the Central Government, as
a part-time member; and Chief Executive Officer-Member-Secretary,
ex-officio.

The Ministry of Law and Justice has, in its press release
dated 12^th February, 2020, enlisted the draft rules prepared to set
in motion the proposal of the ACI and has invited comments from various
stakeholders on the following:

(1)   The
Arbitration Council of India (the Salary, Allowances and other Terms and
Conditions of Chairperson and Members) Rules, 2020;

(2)   The
Arbitration Council of India (the Travelling and other Allowances payable to
Part-time Member) Rules, 2020;

(3)   The
Arbitration Council of India (the Qualifications, Appointment and other Terms
and Conditions of the service of the Chief Executive Officer) Rules, 2020;

(4)  The
Arbitration Council of India (the Number of Officers and Employees of the
Secretariat of the Council and the Qualifications, Appointment and other Terms
and Conditions of the officers and employees of the Council) Rules, 2020.

This provision has received vastly
differing views from the arbitration fraternity. On the one hand, it is said to
enhance the use of institutional arbitration over ad hoc, as well as an
attempt to ensure that there is some quality control over institutions and
arbitrators. On the other hand, stakeholders have taken the view that being
accredited by government officials amounts to regulation and excessive control
of arbitrators. This is all the more significant, given that the government is
one of the largest litigants in India. The provisions relating to the ACI have
not been notified yet.

The Eighth Schedule

One of the biggest benefits for
parties opting for arbitration rather than a court process to dispute
resolution is the right to nominate an arbitrator of their choice. This gives
flexibility in the process and often parties can nominate domain experts to
determine a particular matter, rather than someone who may be a qualified
lawyer or a retired judge but who may not be as well versed in the subject
matter of the dispute. The 2019 Amendment has introduced an Eighth Schedule
setting out the eligibility requirements for the accreditation and
qualification of an individual as an arbitrator. These provisions have not been
notified as yet.

RESTRICTING FOREIGN LAWYERS?

While such accreditation and
qualification of individuals acting as arbitrators may, at first glance, seem
attractive as a measure for quality control, some of the eligibility criteria
are highly restrictive and will infringe on a party’s right to appoint an
arbitrator of its choice, keeping in mind the nature of the dispute.

Some qualifications under the Eighth
Schedule require an arbitrator to, inter alia, have knowledge of the
laws in India such as the Constitution of India and the labour laws. Such
knowledge may not have any connection with a dispute at hand, such as, say,
whilst determining a matter relating to a contractual dispute governed entirely
by foreign law.

The Eighth Schedule also speaks of
appointment of advocates having ten or more years’ experience and being
registered under the Advocates Act in India. This throws open the question
whether this would potentially restrict foreign lawyers from acting as
arbitrators in India. This may prove to be an issue in a contract in disputes
having smaller value. A lawyer of ten or more years’ experience may charge an
amount that is a substantial portion or even more than the amount in dispute.
Besides, the ban on foreign qualified lawyers acting as arbitrators would be
contrary to the ethos of international arbitration and could discourage foreign
parties from seating their arbitrations in India since they would be prevented
from appointing an arbitrator of their choice. This may be more significant if the arbitration itself is
governed by foreign law (although seated in India).

Of the changes and standards
introduced under the 2019 Amendment, the Eighth Schedule by far contains the
most restrictive provisions which might take a toll on the promotion of
arbitrations in India. In the interest of promoting India as a hub for
arbitration, it is hoped that the government will reconsider this amendment
and, inter alia, allow foreign lawyers to act as arbitrators.

Insertion of section 87

When
the 2015 Amendment came into force, there was a huge debate as to whether the
amendments would apply retrospectively or prospectively. This was ultimately
settled by the Supreme Court in Board of Control for Cricket in India vs.
Kochi Cricket Private Limited and Ors³. Interestingly, the
GoI had filed an affidavit in the matter stating that its intention was to have
the 2015 Amendment apply only to arbitrations invoked after the 2015 Amendment
came into force. However, in the judgment, despite the position of the GoI stated
on affidavit, on an interpretation of a plain reading of the language used in
the 2015 Amendment it was ultimately held, inter alia, that the 2015
Amendment applied to applications which were pending in various courts
challenging an award in an arbitral proceeding which commenced before the
enactment of the 2015 Amendment. The judgment also went on to analyse and hold
exactly which section of the amendment would apply to ongoing arbitrations and
proceedings arising therefrom and which amendments would apply to arbitrations
invoked after the 2015 Amendment came into force.

The 2019 Amendment attempted to undo
the position held in the above judgment. The 2019 Amendment provides that,
unless otherwise agreed by parties, it shall not apply to:

(a)   the
arbitral proceedings commenced prior to the 2015 Amendment;

(b) the
Court proceedings arising out of or in relation to such arbitral proceedings
irrespective of whether such court proceedings have commenced prior to or after
the commencement of the 2015 Amendment.

MAKING INDIA AN ARBITRATION HUB?

It was further clarified that the
2015 Amendment shall only apply to arbitral proceedings that have commenced on
or after the introduction of the 2015 Amendment and to court proceedings
arising out of or in relation to such arbitral proceedings.

However, in the matter of Hindustan
Construction Company Limited & Anr vs. Union of India⁴
the Supreme Court has now held that section 87 of the 2019 Amendment is
manifestly arbitrary and unconstitutional. This judgment goes on to clarify
that the 2015 Amendment, in its original form, shall be applicable as held in
the Board of Control for Cricket in India matter.

Observing the latest arbitration
trends in India, there is not an iota of doubt that the GoI is leaving no stone
unturned to try to make India an arbitration hub. However, the continuous
change in the position of the arbitration law has left many questions
unanswered. Some well-intentioned amendments also have underlying issues that
need to be revisited.

It
is also noteworthy that the Constitutional validity of the 2019 Amendments is
under challenge before the Supreme Court in Writ Petition (Civil) No. 76 of 2020
filed under Article 32 of the Constitution. The main challenge is to the
provisions relating to the qualification required to be an arbitrator and the
mandatory requirement for the Arbitral Institutions to register themselves
before the High Courts and the Supreme Court of India. This petition is subjudice
before the Supreme Court. It would be interesting to follow the developments in this matter as they might
lead to defining the arbitration regime in India.

shailesh.kwebmaker

HISTORY

The Indian
banking industry is centuries old. A peep into its recent past is replete with
milestone events of change. Notable among them, starting with social control
over banks, have been nationalisation of commercial banks; identification of
priority sector for lending; an annual credit plan; diversification of
institutions and setting up of the Exim Bank to focus on export financing;
regional rural banks to introduce the hybrid of commercial bank strength with
local government participation; the creation of local area banks; micro-finance
companies; and so on. Clearly, banks have been an important tool to facilitate
the development of the Indian economy for decades. Foreign direct investment
norms in the banking sector were relaxed and the cap raised to 74%. The
financial needs of the rapidly-growing economy were catered to by government
banks, private banks and foreign banks, with a major share taken by government
banks. The Reserve Bank of India (RBI) issued guidelines for banks and ensured
compliance of BASEL-I norms in a phased manner between 1991 and 1999.

The growing economy needed more
finance and advanced banking. The ever-increasing need for strengthening of the
banking sector was further underlined as Lehman Brothers collapsed in the
Sub Prime Crisis (it filed for bankruptcy in 2008 – the largest in US
history). Around that time, commercial banks in India were in the process of
implementing BASEL-II norms which were completed by March, 2009. With the
advent of Information Technology, the retail industry boom and modernisation of
communication and data transfer, there have been rapid changes in the way
people and corporates do banking. The most recent development in the banking
business was in 2016 when RBI approved ten entities to set up small finance
banks.

Reserve Bank of India is the
regulatory body of Indian banking. With the adoption of BASEL norms, the
functioning of Indian banks is more standardised and in line with international
practices.

PRESENT SCENARIO

There have been various business strategies
in corporate lending followed by bankers. Banks with large balance sheets have
shown an appetite for taking large exposures and have been also daring to play
long term. On the other hand, Non-Banking Financial Corporations (NBFCs) have
exercised quick entry and timely exit compromising on collateral covers but
snatching from banks the opportunity of making good profit margins. Whatever
the form of these loans, all of these are asset-backed financing models.

By and large, all public sector
banks in India are disbursing loans (long–term, short-term loans, working
capital loans / cash credits) on the basis of assets as security. For term
loans, the primary security are assets like property, plant, equipment (fixed
assets) owned by the company. For short-term loans and working capital loans,
normally stock and debtors (current assets) are the primary security. The
liquidation value of an asset is the primary focus and projected cash flows are
the secondary focus. Cash flows are part of project proposals; however, such
inflows are not linked directly to loan eligibility or repayment / servicing
frequency and mode. This involves a lot of documentation and mortgage of the
asset in the name of the banker till the loan remains outstanding.

Post-disbursal, borrowers submit
periodic performance reports and provisional financials to the bankers as per
agreed terms. This information is not real-time information and in many cases
there are delays in submission of these documents. Banks lack the advanced
analytical tools and bandwidth to assess these reports regularly on a real-time
basis. Non-performance of an asset, i.e., borrower account, gets noticed quite
late when risk exposure is already very high. Increase in non-performing assets
is worrisome not only for the banker but for the economy at large as public
funds are at stake.

One may find that the practice of
asset-based lending has not helped us in timely identification of likely
non-performing credit and immediate reconstruction to put them back on track. A
question therefore arises whether it is time to go for alternate methods of
credit appraisal and adopt international best practices in banking in general
and lending in particular.

PROPOSED CHANGE

Assets don’t help companies to
repay loans. Often, the disposal of assets, primarily immovable property, poses
great difficulty in selling. It’s their cash flow that makes a difference. The
need for mitigation of risk is inherent to the banking business – new
technologies, policies and strategies are adopted from time to time for this.
Under the new mechanism, banks would be able to prioritise their fund
deployment programme. The public sector major, State Bank of India (SBI), has
announced that it will shift to the cash flow-based lending model beginning April,
2020. Other PSUs will not lag behind in following suit; some banks are already
doing it for a portion of their products.

Banks in India have traditionally
lent to companies against their assets. Cash flow-based lending is widely
considered to be a more efficient and safe way of mitigating risk as it reduces
discretion on the part of the lender. The new framework for loan sanctions will
apply to large companies as well as small enterprises.

THE MECHANISM

Cash flow-based lending (CFL)
envisages a shift in the bank’s appraisal system from traditional balance
sheet-based funding to a more objective appraisal system of leveraging the cash
flows of the unit. In CFL, loan requirement is based on actual revenue
generation and capacity to repay. Further, the repayment schedule is based on
the timing of the entity’s cash inflows. Company’s cash conversion cycle is
calculated. Based on cash conversion cycle, the ability of the borrower to pay
back the loan is calculated. With better negotiated terms with vendors / creditors,
the cash conversion cycle will shrink; and with increase in credit period to
the customer, the cash conversion cycle will be longer. While 25% of the
working capital gap (the difference between assessed gross working capital
assets minus gross working capital liabilities) is met by the company, banks
fund the remainder. Most of the working capital finance is in the form of cash
credit, a system where companies freely draw (and service interest) within a
certain limit or drawing power fixed by the lender. Drawing power is arrived at
on the basis of inventory volume minus margin therein. Cash flow lending, then,
is essentially lending to repeated asset conversion cycles and payback is
dependent on the firm’s ability to generate (and retain in the business)
sufficient cash over a number of years of profitable operations to make
required interest and principal payments on the loan. The loan amount as well
as mode of repayment is adjusted with cash inflows based on the cash conversion
cycle. Documented cash flows and the credit rating of the borrower will play an
important role.

A system of determining monthly /
quarterly utilisation limits for credit drawings can be fixed. Actual drawings
should be confined to determine limits. Deviations are not allowed and, when
allowed, they are always with approval from higher levels. The quarterly
monitoring system should ensure no diversion of bank credit for purposes other
than the sanctioned purpose.

NATURE
OF CHANGE IN BASIS OF LENDING

India’s government-owned banks
are likely to change the way they lend. Since the 1970s, public sector banks
have given out most working capital loans and short-term loans required for the
day-to-day operations of a business. Public sector banks have a more than 55%
share of the loan market. These loans were disbursed on the basis of the net
current assets of corporate borrowers. This is considered as a flawed system
that is believed to have resulted in over-funding to some and under-funding to
others. A system which does not focus on entity cash inflows as the primary
basis of loan availment and mode of repayment, often results in delayed
repayments, thus adversely affecting the NPA ratio. The outdated practice may
soon change with the country’s largest lender State Bank of India proposing a
transition from an ‘asset-based lending’ model to ‘cash flow-based lending’, a
mechanism that, among other things, may reduce diversion of funds by borrowers
and enable banks to assess the ability of borrowers to service loans on time.
The shift will require borrowing entities to share their cash flow statements
more frequently with banks.

NATURE OF LOAN PORTFOLIOS

Except for
some seasonal industries such as sugar, public sector banks arrive at a
company’s working capital requirements by considering the difference between
the borrower’s current assets (receivables, raw material stock, finished goods)
and current liabilities (payables like loan interest, taxes, payment to vendors
and workers). While 25% of the working capital gap (the difference between
assessed gross working capital assets minus gross working capital liabilities)
is met by the company, banks fund the remainder, although in many cases they
end up funding more. Most of the working capital finance is in the form of cash
credit, a system where companies freely draw (and service interest) within a
certain limit or drawing power fixed by the lender. Such asset-based lending
ignores the manipulation of the actual value of the assets pledged.

In a country like India a major
portion of the short-term loan portfolios of PSU banks consists of Cash Credit
(CC) accounts. As mentioned above, these loans are disbursed on the basis of
current assets as primary security. These assets themselves are not cash but
there is always conversion time in which these assets will generate cash. On a
broader basis, there would be the cash conversion cycle of every company. These
types of loans are most suited for cash flow-based funding. This is further
suited for MSMEs (Medium, Small and Micro Enterprises). Cash flow-based lending
envisages a shift in the banks’ credit appraisal mechanism and monitoring
system from the traditional balance sheet-based funding to a more objective
appraisal system. In CFL, loan requirement is based on actual revenue
generation and capacity to repay. Furthermore, the repayment schedule is based
on the timing of the MSME’s cash inflows. The advantages of CFL are that the
loan amount and repayment are based on the MSME’s actual cash generation,
reduction in credit risk, reduced monitoring costs for banks, reduction in
turnaround time and ability to serve entities that don’t have adequate
collaterals.

CHANGE IN ASSESSMENT OF BORROWER
BUSINESS

The primary focus in assessment
of business will no longer be the asset base of the balance sheet. The primary
focus will be cash inflows and the cash conversion cycle. Assets will be only
secondary support. Proven past cash flow generation data and credit ratings
will play an important role. Various databases and information available on the
cloud platform will be considered for data analysis. TransUnion CIBIL data will
by and large be considered a reliable source. Nowadays this data is available
at one’s fingertips, thanks to linking of the data base of PAN, Udyog Aadhaar,
Credit Cards. This data is more reliable and available independently for
verification.

IMPACT

Banking disbursement is expected
to rise. As asset backing is no more a primary criterion, companies not having
a large fixed capital base or real estate but having past record of operations
and margins can now avail cash flow-based loans. Various Startups which are in
the category of service sector will be benefited as these cash flow-based
funding loans will be available to these units, thereby increasing the size of
the disbursement portfolios of banks and financial institutions.

IMPACT – On NPA and bank balance
sheet

As mentioned earlier, due to lack
of expertise and bandwidth to assess various financial data real time, the
monitoring was not very effective. Since there was no direct linking of the
timing of cash inflows, the cash conversion cycle and repayment mode and
frequency, there used to be delays and at times diversion of funds, too. With
the shift to cash flow-based funding, these drawbacks will no more result in
NPAs growing without any control as drawings can be stopped when cash flows are
affected. The framework is already available for analysis of data. Databanks
are ready with authenticated data linked to the borrower and access to such
information is available to bankers. Loan amount and repayment frequency when
tied up with cash inflow working and timing, loan disbursal will be more
scientific and will cover the cyclical nature of business. All these will
facilitate timely servicing of loans, thereby improving overall NPA ratio.

IMPACT – On borrowing cost

Since the primary security is
future cash flows based on past records and credit ratings, there is no
tangible security in many cases. The cost of borrowing will tend to be higher
than asset-backed lending. With favourable performance and consistency in
repayment, this cost will also tend to ease out for standard portfolios.

IMPACT – On sectors

Service-oriented businesses with
minimum fixed or tangible capital with proven business model Startups – which
do not have any past record but are in a tie-up with payment gateways for
capturing sales inflows which can be reliably assessed for funding.

Financial Technology Companies
which provide various financial solutions to traders and service providers for
capturing the data real time and for producing various complex reports needed
for assessment will be benefited and the impact will be positive.

INTERNATIONAL PRACTICE

Cash flow-based financing may be
a recent development in India; however, all over the world this is a settled
method of financing, specially to small and medium enterprises, or to
organisations which do not have collateral but have a strong margin business
model, or organisations which do not have past track records and hence
appraisal risks are high; in such cases also, cash flow-based funding is in
vogue.

Key Features:

Lending to finance an entity’s
permanent (long-term) needs, seasonal needs;

Usually medium-term, with loan
terms of up to seven or eight years in most cases;

Covenants in the loan agreement
are often included as a ‘trigger’ to signal to the lender a deteriorating
situation so that corrective action may be taken.

While there are pronounced
advantages in CFL over asset-based lending, the emphasis is on the process of
the lending method. This presupposes a dedicated and purpose-oriented
policy-making personnel equally supported by an alert team of front-end staff.

CONCLUSION

From the foregoing paragraphs one
may conclude that the rapid growth of the Indian economy needs to be
continuously supported by an efficient system of banking dedicated to lend with
care and identify the potential risk much in advance; and also to mitigate the
risk by suitably hedging with a cash flow-based lending in place of asset-based
lending with all its limitations.

shailesh.kwebmaker

Geopolitics has been historically
shaped by multiple events in history. Wars, conflicts and occasionally
haphazard events have changed how nations have achieved and lost power on the
international stage. The international system after the Cold War ended has been
characteristically driven by the United States-led global order. The Western
institutions, collectively known as the Bretton Woods system, have been major
institutions shaping the global financial order. In the dying stages of the
Cold War, China’s rise was seldom seen as that of the next big global power fit
enough to challenge the US presence in Asia. The post-Cold War era also saw the
formation and development of the European Union. The diffusion of power and
geopolitics from central power to multiple regional power centres led to the
formation of the multipolar regional order.

Frictions between countries were
commonplace in Asia; an ascendant China was not only challenged by US presence
in the region, but also by the rise of India throughout the 2000s. However,
since the mid-2000’s, the rise of China and the debate on the uneasy decline of
US power in Asia has displayed itself in multiple events and forums across the
region, often with countries such as India and groupings like ASEAN having to
pay the price for choosing sides. The recent episode involving a trade war
between the US and China over supremacy in the technological space exposed the
limits of the structure and tipping points between both the countries in the
region. Eventually, the end of this war was followed by COVID-19, a ‘Black
Swan’ event which has had a huge impact on the global economy and geopolitics.

‘Black Swan’ events are an extremely
negative event or occurrence that is impossibly difficult to predict. In other
words, such events are both unexpected and unpredictable. As the world deals
with the COVID-19 pandemic which has seen 15,361 deaths till 23^rd
March, 2020, reports have indicated faults at multiple levels in controlling
the issue at the right time. While China’s suppression of the information has
surfaced in recent understanding, the drop in its consumption levels has
severely impacted the global economy. Businesses have been clearly hit. Major
among them have been aviation and tourism. The drop in travel and bans on
flights have impacted the two industries, leading to a complete shutdown of
some sectors within these areas. Major global airlines have cut anywhere
between 80 to 90% of their capacity on the backs of travel bans and the lack of
passengers as a result thereof. Some economies reliant on tourism have been
badly hit.

Nevertheless, crisis times call for
astute diplomacy and capitalisation of the issues at hand. Several issues could
be noticed on how states handled the crisis and their response, and how global
markets and the uncertainty were taken advantage of by a few countries. While
China reached the peak of the crisis, global markets had started to respond by
closing down to the outside world systemically. Crashing markets and impacted
supply chains followed by reduced demands were indicative of the coming crisis.
One of the key impacts of the slowing economy was felt in the oil markets. The
reduced demand from China and the rest of the world has led to tumbling prices.
The OPEC, which coordinates and sets global oil prices, fell out with Russia.
This fallout between Russia and Saudi Arabia has sent oil prices crashing,
leading to historical lows, possibly benefiting bigger global consumers.

Japan, which had been continually
struggling to keep its economy afloat, reported one of the slowest growth rates
in many years due to domestic policies. Just staying above the line going into
recession, due to the slowdown caused by the virus, Japan may very well be
heading into an economic crisis. Recent discussions also highlight that Japan
would most likely be postponing the Summer Olympics which could have provided a
great boost to its economy.

Similarly, some other countries have
not failed to showcase their power through diplomacy. India, which has till now
done some of the most extensive relief operations in all affected regions by
bringing back stranded citizens, has also extended its hand to the South Asian
region which has fallen apart after the failure of the South Asian Association
for Regional Co-operation (SAARC); the joint effort call was heeded by all
(except Pakistan). Similarly, India also lifted the ban on the export of all
kinds of personal protection equipment, including masks, and cleared some
consignments of medical gear placed by China, a move seen as a goodwill
gesture; such diplomatic signalling is seen positively as an extending reach in
times of crisis. India’s ability to get back its citizens from Wuhan is also a
demonstration of this extended positive reach.

In the global sense, as the crisis’s
epicentre moves to Europe where the death toll has now overtaken that of China,
and the United States’ healthcare system has showcased its total unpreparedness
to tackle this epidemic, China’s reviving supply lines will surely find a
future market to sell its goods. India, with its developed pharmaceutical
sector, should capitalise on this situation. However, the US lobbies which are
averse to generic substitutes have always scuttled any ideas for the lucrative
markets. China’s companies, including its retail giant Alibaba, have already
started to send across protective medical supplies to all South Asian countries
(excluding India) as well as some countries in Africa. The inability to rely on
existing Western donor systems which have been increasingly challenged by China
since the last decade, may turn out to be a silver lining for China.

The
future of the global order remains uncertain; the COVID-19 crisis has struck at
a time when leaderships have been challenged domestically all over the world.
While the United States is in election season, China’s vulnerability to a
crisis has put a question mark on the strengthening of the power base of
President Xi Jinping within China and that of its ruling Communist Party.
However, India’s handling of the situation has helped quell some negativity for
now about the ongoing domestic issues in the country. Nevertheless, once the
dust settles, the gravest impact would be felt in Europe. As the region was
already battling a refugee crisis, deaths relating to Coronavirus would add a
burden on the regional economies. The inability to rebuild from the economic
impact would invariably shift the burden on the emerging powers within the
grouping, forcing an already delicate line in the grouping; the region’s
economic engine Germany has already recorded no growth in the coming year. The
negative growth rate and the developing internal political crisis within the
country do not hold a positive outlook.

shailesh.kwebmaker

Nandurbar is one of Maharashtra’s
smaller districts by area (5,955 sq. km.) and its forest cover, according to
the India State of Forest Report, 2019, is just over 20% of its area; which
means that about 1,196 sq. km. of Nandurbar is forest. Far away from Nandurbar
is the district of Kokrajhar in Assam, which has about 1,166 sq. km. of forest
covering a smaller total area (3,296 sq. km.).

For all those who prefer seeing the
wood for the trees, the more forest a district has, the happier it must be.
There are a host of reasons why this is so and many of these reasons have to do
with the idea of ‘environment’, both as the presence of and manifestation of
what in English is called ‘nature’, and also as the provision of many of the
basic materials that are central to our lives.

Our Indic conception transcends
‘environment’ entirely, for our tradition regards the earth as Bhudevi,
whose consort Vishnu incarnates from age to age to rid her of the
accumulation of demonic forces. He does this out of love for the earth and its
inhabitants.

As guardians and practitioners of
this tradition, those who live close to and within the forest tracts of
Nandurbar and Kokrajhar would be the ideal persons to inform us about the worth
and value of the forest to their lives. To even the partially observant
traveller, India’s tribal and rural societies – wondrously variegated though
their individual cultures may be – take much of their identity from the forest
and from nature.

The forest supplies them with
firewood and timber for construction, it is home to the animal and bird prey
they seek for their cooking pots; the forest contains the medicinal plants and
herbs that indigenous and local medicinal traditions depend upon; fruits are
plentiful, cattle are watchfully allowed into the forest to seek the remedies
they are preternaturally aware of; and the forest is home to the wild relatives
of the grasses we call cereals and to the great majority of our vegetables.

If we compare this list of what the
forest supplies its residents with with another list, that of what contemporary
industrial society supplies its residents with, then there is no contest about
which list is the longer one. However, the most elementary materials on both
lists are none too different from each other. What is different is that the
non-forest list supplies each and every one of its items for a fee.

That fee embodies several important
concepts. There is extraction or collection of the primary material (wood, for
example, in the form of whole, uncut logs), movement of the primary material to
a place where some initial transformation to it can take place (such as a saw
mill), movement of the transformed material to a consumption centre (such as a
town or city), further transformation (sections for door and window frames, for
furniture, shaping into ordinary household goods, shaping into crafts items and
curios), final purchase and use in a wholesale or retail transaction.

These concepts communicate with us
in today’s world not as the transformation of a material, not as a reminder of
the origin of a material, but through a number we call the cost that is
connected to either the extraction of a material, the transformation of a
material, or the marketing of a transformed material to its final consumers.

These costs, whether considered once
depending upon where, in this chain of transformation, you stand, or whether
considered two or three times by those tasked with analysing an industry based
on a primary material, satisfy the current frameworks we employ to describe how
value is understood, multiplied and given economic substance. But they are
utterly unable to convey other kinds of valuing, especially the kind that the
tribal societies of Nandurbar and Kokrajhar use when they regard primary
material from their forests.

What are these other kinds of value?
From the point of view of the holders of knowledge about the primary material
in all its aspects, values associated with the forest in their living vicinity
are cultural, social, spiritual and pertain to health and well-being. Their
knowledge relates not to the market worth of a cubic metre of wood and how much
price value can be added to that block of wood by transforming it into a
contemporarily styled cabinet, or an objet d’art. Their knowledge
relates to the numerous physical conditions that need to be maintained and
balanced so that trees in the forest, just as much as the forest’s flora and
non-human residents, continue to be nourished.

The manner in which our system of
national accounts is framed, there is no scope whatsoever for knowledge of this
kind to be recognised, let alone to be valued even if imperfectly. Yet it is
becoming clearer with every passing year that such a valuation is needed. The
clarity comes because several biophysical and geophysical changes are becoming
more intense.

There is the diminishing of
biodiversity, which means fewer species than before. There is the expansion of
the human settlement footprint, which encroaches on nature’s territory, and in
doing so alters natural rhythms (such as when a wetland is filled in to become
a city suburb). There are the effects of climate change and variation, which
affect crop cycles as much as coastal towns or snowfields.

The science that monitors these
changes has led to some sophisticated models being created which, in turn, lead
to estimates of risk (and the corollary, prescriptions for the mitigation of
risk) and therefore estimates of the costs of not acting to reduce risk. This
is where cost sets that can apply to the bewildering complexity of our natural
world make their appearance. A domain dedicated to this nascent art has been
named, too: it’s environmental-economic accounting.

India’s official statisticians have considered
how to ‘cost’ (or ‘price’) nature since the mid-1990s, when experimental
accounts which included ‘nature’s value’ were drawn up for a few states. The
activity has languished at that level since. Had they looked at our wisdom,
they may well have found inspiration, for the Shiva Purana explained to
us that during Kaliyuga, our present age, one of the many signs of
growing chaos is that the merchant class ‘have abandoned holy rites such as
digging wells and tanks, and planting trees and parks’ (II.1.24).

Now, however, India’s obligations to
the large number of multilateral treaties and agreements which have to do with
environment and biodiversity broadly, as well as the effects of climate change,
and moreover to the United Nations Sustainable Development Goals, are running
into the inherent limitations of the system of national accounts that, so far,
excludes nature and knowledge systems associated with nature.

The accounting fraternity in our
country possesses experience and wisdom aplenty, for they know the daily pulse
of a huge and astonishingly variegated economic web. As our companies and
industries learn to lighten the environmental footprint of all their
activities, their need to adopt methods to measure, cost, assess and plan for
the environmental consequences of those activities will only increase.

Yet
it is not for us to adopt, in the name of standardisation, an ‘international’
method that values nature. Rather, what is called for is an Indic
conceptualisation of nature which suits our civilisational economic trajectory
and which is rooted in our scriptures. ‘Heaven is my father; my mother is this
vast earth, my close kin,’ says the Rig Veda (1.164.33).

By taking up such a challenge –
conceiving and imparting a new accounting literacy that sensitively interprets
the wisdom of our rishis and sants to temper the demands of our
era – the accounting fraternity will contribute considerably to renewing our
homage to Bhudeví.

shailesh.kwebmaker