In today's Finshots we discuss a few key reforms that could take shape as the parliamentary session kicks in today
The Story
The monsoon session of 2021 is upon us and we could see as many as 23 bills being tabled, discussed, and passed into law. However, some of these merit more attention than others, and we will discuss items that we believe fit our mandate.
1. The Insolvency and Bankruptcy Code (Amendment) Bill, 2021
IBC does a pretty good job while dealing with bankruptcies. At least for the most part. However, considering we’re seeing new cases being logged in each day, it’s almost certain that courts will soon be overburdened. So we need a solution that could help us alleviate some of this burden. And the new amendment is expected to do just that by including a pre-packaged insolvency resolution scheme for Small and Medium Enterprises.
In fact, we spoke out about this in one of our stories a few months ago.
When a company becomes insolvent, lenders have two options. They can drag the company to bankruptcy court and initiate proceedings, or they could devise a rescue plan internally. Now the first option is codified within the IBC. The courts appoint a neutral person to oversee the resolution and all the lenders get together and work in conjunction with the professional to resolve matters. Meanwhile, the management loses control of all day-to-day affairs and the neutral party is left to manage operations. However, this whole rigmarole is a drag on the courts.
A better option — at least intuitively is to “pre-pack” a solution before you approach the courts. That’s to say that maybe we can have a process where lenders work with the management internally before submitting a resolution plan to the courts. This way, the courts won’t be overburdened and the management can even retain control of their companies.
Hopefully, with the new amendments, we will see a faster and more optimized outcome when companies go bankrupt.
2. The Electricity (Amendment) Bill, 2021
Touted as a major reform in the power sector, the legislation will offer consumers the freedom to choose between power distributors and will also allow private players to compete with legacy Discoms. Meaning you will no longer have to put up with a single provider. Instead, you can pick and choose as you like. Also, the amendments will seek to tightly enforce renewable power purchase obligations i.e. distributors will have to purchase a certain amount of power from renewable sources or face strict penalties.
3. Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021
We all know how a few troubled banks have ruined depositors in the recent past. And considering the Finance Minister had already promised to offer some extra protection, we were bound to see some changes. And if the amendments go through without a hitch, bank deposits will now be insured up to ₹5 lakh as opposed to ₹1 lakh earlier.
4. The Coal Bearing Areas (Acquisition and Development) Amendment Bill, 2021
With this legislation, the government wants to make it easier to procure land that harbors coal deposits. In fact, if the bill passes, coal and mining rights could easily be leased to private sector companies as well. Hopefully the new amendments helps us make the most out of our coal assets.
5. The Factoring Regulation (Amendment) Bill
When a company desperately needs cash, it can mobilize these funds in a number of ways. It could borrow money, it could bring in new investors or it could dabble with something called invoice factoring. For instance, if you're a company and you’ve raised an invoice, you know there’s a payment due. However, your customers may have the leeway to settle the invoice at some future date and you may have to struggle for cash in the meantime. With invoice factoring, you can sell your invoice at a discount to a third party and raise money immediately. Granted you’re taking a small hit, but you’re doing it in an attempt to get as much liquid cash as you can right now. The third-party will eventually collect payment when the invoice is due, but that’s of no concern to you because your problems are sorted.
And you can see how this can be a quick and easy way for companies to raise capital. However as of today, this business is tightly regulated, and the amendments hope to change that. If everything works out, we could soon see hundreds of Non-Banking Financial Corporations (NBFCs) dabbling with invoice factoring as opposed to the seven NBFCs we have today.
All in all, we could see several key reforms take shape in the next few months. However, that doesn’t mean everything is hunky-dory either. There is the conspicuous absence of bank privatization bills and there is no mention yet of any legislation surrounding cryptocurrencies. We were supposed to know how the government was going to treat these digital assets, but so far, we’ve had little clarity on the front.
In any case, we hope that the other reforms do kick in. Until then…
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