UPSC Exam Comprehensive News Analysis Oct14

TABLE OF CONTENTS

A. GS1 Related
B. GS2 Related
POLITY AND GOVERNANCE
1. Sanitation workers go hi-tech as govt. goes slow
C. GS3 Related
ENVIRONMENT
1. Sunday Special Article - Crop Residue Burning
2. Plant to convert e-waste into bio fuel to be made operational soon: Harsh Vardhan
3. Human–leopard conflict in the Himalaya
HEALTH
1. Zika virus cases in Rajasthan rise to 55
D. GS4 Related
MOB JUSTICE
1. Manipur’s women march, urge an end to ‘mob justice’
E. Editorials
ECONOMY
1. Was debt pile-up overlooked? (defaults by the IL&FS)
F. Tidbits
G. Prelims Fact
H. UPSC Prelims Practice Questions
I. UPSC Mains Practice Questions 

A. GS1 Related

Nothing here for today!!!

B. GS2 Related

Category: POLITY AND GOVERNANCE

1. Sanitation workers go hi-tech as govt. goes slow

Context

  • With governments and municipalities slow to move toward mechanised cleaning of the sewage system even in the face of rising death rates — an average of one person has died cleaning sewers or septic tanks every five days since January 2017 —the safai karamchari community is taking the initiative to provide alternatives.
  • Sanitation workers have joined hands with family members of those killed while cleaning sewers and septic tanks to set up limited liability partnership companies in Delhi and Hyderabad, backed by the Safai Karamchari Andolan (SKA) movement. Other groups are in the process of registering companies in Haryana, Uttarakhand and Punjab.
  • “In many cases, municipalities do not take the initiative, so we are now working on giving loans to self-help groups and SKA-backed enterprises to buy equipment and machines,” said National Backward Classes Finance and Development Corporation managing director K. Narayan.

Related concept – Manual Scavenging

  • The practice of manual scavenging,officially banned since decades in India, continues with impunity in several States.
  • The latest Socio-Economic Caste Census data reveals that 1, 80, 657 households are engagedin this degrading work for a livelihood.
  • Maharashtra, with 63,713, tops the list with the largest number of manual scavenger households, followed by Madhya Pradesh, Uttar Pradesh, Tripura and Karnataka, as per Census data.
  • Mahatma Gandhi said that “Everyone must be his own scavenger.”
  • “Open defecation free” not only means that there are no visible faeces in the environment, it also means that every household and public institutionuses safe technology to dispose of the same.
  • The Social Justice Ministry, which is in charge of this subject, mostly deals with the issue of compensation post deathsand rehabilitation of the handful identified as doing this job.
  • Ministries such as Housing and Urban Affairs should be looking into the complete mechanisation of sewage cleaning,which is the only way to eliminate the practice of getting people to clean it manually.
  • Bio-toilets:Bio-digester toilets are designed to convert human waste into gases and manure.
  • The zero-waste biodigester technologyuses psychrotrophic bacteria to break down human excreta into usable water and gas. Once applied, the bacteria can work for a lifetime.
  • Waste from toilets are sent to a giant underground bio-digester tankwhere anaerobic digestion takes place.
  • The best feature of this toilet is that it totally does away with manual scavenging, is low on maintenance and installation cost and can be adapted to any geo-climatic conditions of the country.

C. GS3 Related

Category: ENVIRONMENT

1. Sunday Special Article – Crop Residue Burning

Context

  • As autumn sets in, farmers in Punjab have begun harvesting the kharif paddy crop and preparing the fields for the winter crop.
  • And as has been the practice, despite official injunctions, paddy stubble is being set on fire, raising fears of a spike in air pollution across the northern States, including the national capital New Delhi.
  • Aggravating the problem is the retreat of the southwest monsoon, setting off north-westerly winds which blow into the plains, carrying the smoke from the stubble.
  • In an effort to solve the problem of stubble without burning, the State government has provided agro-machines and other equipment, including mulchers and choppers, at subsidised rates to farmers and cooperative societies.
  • However, farmers and agri-experts feel the number of machines is inadequate. Besides the high cost of using them, given the rising costs of diesel, will not serve the purpose of putting an end to stubble burning, at least during the ongoing harvesting season.

Crop Residue Burning

  • Stubble burning refers to the use of a controlled fire to clear the crop residue that remains in the paddock after harvest and could more accurately be called ‘crop residue burning.
  • It is mainly carried out in Haryana and Punjab.
  • Open burning of husk produces harmful smoke that causes pollution. Open burning of husk is of incomplete combustion in nature. Hence large amount of toxic pollutants are emitted in the atmosphere. Pollutants contain harmful gases like Methane, Carbon Monoxide (CO), Volatile organic compound (VOC) and carcinogenic polycyclic aromatic hydrocarbons.

What is combine harvesting?

  • Combines are machines that harvest, thresh i.e separate the grain, and also clean the separated grain, all at once.
  • The problem, however, is that the machine doesn’t cut close enough to the ground, leaving stubble behind that the farmer has no use for.
  • There is pressure on the farmer to sow the next crop in time for it to achieve a full yield. The quickest and cheapest solution, therefore, is to clear the field by burning the stubble.

   Why do Farmers Burn?

  • Cost Factor: The straw management equipment is costly and process is time consuming. Also, the cost of stubble management is not taken into account while determining the minimum support price (MSP).
  • Increasing mechanization of agriculture: Stubble problem was not as severe when paddy was harvested manually because the farmers use to cut it as close to the ground as possible. Due to mechanization the crop residue that remains in the field is of larger quantity. Labour costs are very high now
  • Those who want fodder have to get the stubble removed manually or use specialised machines to do the job. But that is costly.
  • Time Factor: Delay in sowing means yield decline, this leaves very little time to clear the farm for sowing.
  • Unlike wheat stalks that are used as animal fodder, the paddy straw has high silica content that animals can’t digest.
  • Since farmers need to sow wheat within a fortnight of harvesting paddy, they burn the straw to save time, labour and money.

Analysis of the issue

  • The assured irrigation-based agriculture of north-west India produces a large quantity of wheat and paddy to ensure food security of the country. This region produces an equally large quantity of crop residue.
  • During late October to middle November, the whole of the north-west region appears to be burning and the sky is filled with gases injurious to health.
  • This makes children and the elderly prone to sickness, which often proves fatal in many cases. With decline in visibility due to smog, road/rail accidents also take place frequently, snatching away thousands of lives.
  • Due to high levels of pollution in the air, the National Green Tribunal (NGT) has been issuing directions to governments of Punjab, Haryana, Uttar Pradesh and Rajasthan to take concrete steps to check this menace.
  • The governments have been issuing orders to fine those farmers found burning crop residue. But, until now, these orders have been largely defied by farmers who find no other alternative to burning.
  • They hold the view that alternatives are costly. Zero tillage technology through the use of Happy Seeder machines or mixing of crop residue in the soil through mulching requires purchase of costly machines beyond their reach. The operation of these machines requires tractors with stronger horsepower than those possessed by most of the farmers.

Paddy Straw as a Resource

  • Punjab, Haryana and western Uttar Pradesh produce nearly 40 million tonnes of paddy straw annually.
  • Punjab alone produces 22–23 million tonnes of paddy straw which is mainly burnt (CRRID 2018).
  • This precious raw material, when burnt, causes pollution, environment degradation, and warming of temperature, leading to accidents as well as afflicting people with breathing-related diseases.
  • This is avoidable as paddy straw can be used for the production of energy, thereby generating employment and incomes for farmers.
  • At the same time, productivity of soil can be maintained, environmental pollution can be contained and consequently, ill health of the people and smog-related accidents can be avoided.
  • There are several uses suggested by experts to convert crop residue, which is an important resource.
  • There are four uses for paddy straw and other crop residues, such as generation of power, production of cardboard and packing material, production of ethanol by fermentation, and bio-compressed natural gas (CNG). In addition, the agricultural research system has been working on building new machines to mulch paddy and other crop residues in the soil itself to increase fertility.

Way Forward

  • It needs to be noted that the whole region is water-stressed and groundwater tables are falling at alarming rates. Production of paddy is the major factor causing water shortage in the region.
  • Agricultural experts are stressing the need to reduce this crop from at least 20% of sown area. The supply of paddy straw should not be calculated at present rates in the near and distant future, for the policy towards utilisation of paddy straw as a resource has to take this aspect into consideration.
  • A common agency like the National Institution for Transforming India (NITI) Aayog, can play this role better by involving different ministries and experts. The states need to be given a solution acceptable to all the stakeholders. In order to tackle this problem, there is a need to take a relook at the national policy on biofuels, and budgetary allocation of machinery subsidy in light of the emergence of new and efficient technologies for bio-CNG, ethanol, and manure production.

2. Plant to convert e-waste into bio fuel to be made operational soon: Harsh Vardhan

Context

  • A plant to convert plastic waste into bio-diesel will be made operational by January-end at the Indian Institute of Petroleum in Dehradun, said Environment Minister Harsh Vardhan at an International E-Waste Day event on Saturday. This bio-fuel can be used in any diesel vehicle, an official said.

What is e-waste?

  • Electronic waste, or e-waste, is a term for electronic products that have become unwanted, obsolete, and have reached the end of their useful life. It refers to all items of electrical and electronic equipment (EEE) and its parts that have been discarded by its owner as waste without the intent of re-use

E-Waste -The magnitude of the problem:

According to United Nations’ “Global E-waste Monitor”, 2017:

  • Globally, 44.7 million metric tonnes of e-waste was generated in 2016 and only 20% was recycled through appropriate channels. China was the top e-waste producer in the world, generating 7.2 Mt.
  • India generated about 2Mt of electronic waste in 2016. According to the report, India’s electronics industry is one of the world’s fastest growing industries and plays an “important role” in the domestic generation of e-waste. The report also highlighted the issue of imports of electronic waste to India from developed countries.

International Conventions

  • Basel Convention on the Control of the Trans-boundary Movement of Hazardous Waste, 1992 (entered into force).
  • Rotterdam Convention, 2004.

Swachh Digital Bharat:

  • The programme seeks to create awareness among the public about the hazards of e-waste recycling by the unorganised sector, and to educate them about alternate methods of disposing of their e-waste.
  • The general public is encouraged to participate in the programme, by giving their e-waste to authorised recyclers only.

E-Waste Disposal and Recycling Practices in India:

  • Around 90% of the recycling of E-Waste in India is done by the non-formal/unorganized sector. Non-formal units of e-waste recyclers are distributed all over India.
  • Informal units generally follow the steps such as collection of the e-waste from the rag pickers, disassembly of the products for their usable parts, components, modules, which are having resell value. The rest of the material is chemically treated to recover precious metals and non-recoverable materials are disposed in landfills.
  • Organized recycling units are very few in India. Unlike the informal sector, the organized sector uses environmentally sound methods to recycle e-waste.

Way Forward

  • There is a need to strengthen the domestic legal framework to address the issue of unregulated imports of e-waste
  • Steps should be taken to formalize the informal sector by integrating it with the formal sector.  Government should introduce vocational training programs to rightly skill the current unorganized sector employees to ensure their smoother transition to working with organized sector
  • Governments must encourage research into the development of better environmentally-sustainable e-waste recycling techniques
  • There is urgent need for a detailed assessment of the E-waste including quantification, characteristics, existing disposal practices, environmental impacts.
  • There is need of more recycling facilities and development of infrastructure to handle e-waste effectively. The government should encourage Public-Private Partnership for establishment of e-waste collection, exchange and recycling centres.
  • There is need of an effective take-back program providing incentives to producers.
  • Mass awareness programmes should be initiated to encourage consumers to reuse/ recycle electronic products and also educate them about the environmental and health hazards of e-waste.

3. Human–leopard conflict in the Himalaya

Context

  • Human–animal conflict is common in the Himalaya like any other region where wildlife and people live together. A study of patterns of leopard attacks here reveal that some areas are high-risk zones requiring urgent conservation measures for the safety of both man and beast.
  • The foothills of the eastern Himalaya in northern West Bengal — called the dooars, a landscape comprising tea plantations and forests — alone have witnessed more than 700 leopard attacks on people between 1990 and 2016. In the western Himalaya (Pauri Garhwal in Uttarakhand), numerous leopards have been killed in retaliation to the human deaths and injuries they have caused.

What is Human–Wildlife Conflict?

  • It refers to the interaction between wild animals and people and the resultant negative impact on people or their resources, or wild animals or their habitat.
  • The conflict takes may results into loss of life or injury to humans, and animals both wild and domesticated.

What does the law say about this?

  • Hunting is illegal as per the Wildlife (Protection) Act, 1972.
  • Protected wild animals can be put down, when authorised by the chief wildlife warden, only if they are a danger to human life.
  • While animals that are habitual man-eaters need to be lawfully removed or killed, the operations should be precise, surgical, and state-run, and not theatrical and vengeful.
  • On December 2016 judgment of the Uttarakhand High Court expressly forbade the display of a dead body of wild animals in print or electronic media.

Causes of this conflict

  • Expansion of human population into animal habitats; there by natural wildlife territory is displaced.
  • The availability of natural prey/food sources is reducing
  • The new resources created by humans in the form of crops draw the wildlife resulting in conflict.
  • Competition for food resources also occurs when humans attempt to harvest natural resources such as fish and grassland pasture.

Solutions

  • Land should be organized in such a way that both animals and humans have the space they need.
  • Key wildlife areas have to be protected without negatively affecting the human needs.
  • Proper insurance/compensation mechanism
  • practical field-based solutions has to be given priority
  • Role of different stakeholders has to be considered – local community, NGOs, governments and international organizations.
  • Modern techniques like Strobe Lights, Natural Barriers, Disguise, corridors, mappings can help in handling the conflict in more smoother manner.

Way Forward

  • The only answer to this is robust fieldwork that seeks to optimise solutions.
  • Crop and livestock insurance schemes need to be made friendly and workable, and wild animal avoidance behaviour needs to be widely disseminated.
  • The forest department needs to look into cases of conflict in a fair, quick, and consistent manner. This will need to be backed by a sensitive ear towards other problems that people may have specific to a place or habitat, such as difficulty in protecting livestock.
  • As anthropogenic pressures on wilderness areas grow, precise, place-specific solutions are no longer a choice, but a necessity.

Category: HEALTH

1. Zika virus cases in Rajasthan rise to 55

Context

  • More cases of Zika virus were detected in Jaipur on Saturday taking the total number of infected people to 55, a Rajasthan Health department official said.

Zika Virus

  • Zika virus is the virus that causes the infection known as zika fever or zika virus disease.
  • The virus is a member of the Flaviviridae virus family and the genus Flavivirus.
  • It was named ‘zika’ because the virus was isolated for the first time in the Zika Forest which is in Uganda.
  • The zika virus is related to the yellow fever, dengue, West Nile and the Japanese encephalitis viruses.
  • The zika virus, because it is a Flavivirus, is icosahedral and enveloped. It has a single-stranded and non-segmented, positive-sense RNA genome. It belongs to the Spondweni serogroup.

Changes in the regimens to treat patients with MDR – TB

  • In a recent Rapid Communication, the World Health Organisation (WHO) made important changes in the regimens to treat patients with multidrug-resistant TB (resistant to isoniazid and rifampicin).
  • Two of the injectables (kanamycin and capreomycin) previously used for treating MDR-TB patients are to be replaced with a fully oral drug regimen. And bedaquiline drug, specifically developed for treating MDR-TB patients, has been included in the fully oral regimen. The injectables have been removed as they cause hearing loss (ototoxicity) and have increased risk of treatment failure and relapse.
  • The changes in the MDR-TB regimen apply to both adults and children, though limited data are available for children. The new WHO guidelines for MDR-TB treatment will be released later this year.

What is AMR?

  • Antimicrobial resistance occurs when microbes (bacteria, viruses, fungi and parasites) become resistant to antimicrobial drugs (such as antibiotics, antifungals, antivirals, antimalarials, and anthelmintics).
  • As a result, the medicines become ineffective and infections persist in the body, increasing the risk of spread to others.
  • Microorganisms that develop antimicrobial resistance are sometimes referred to as “superbugs”.

What causes Antimicrobial Resistance?

  • Misusing antibiotics breeds drug resistance among the bacteria that normally live in our bodies – even though these bacteria are harmless, they can pass resistance on to other, more dangerous species.
  • Antibiotic resistance occurs when bacteria change in some way that reduces or eliminates the effectiveness of drugs, chemicals, or other agents designed to cure or prevent infections. The bacteria survive and continue to multiply causing more harm.

Red Line Campaign on Antibiotics 2016

The campaign was launched to:

  • Raising awareness about how to identify a drug that should be dispensed only with a prescription from a licensed doctor.
  • Limiting the practice of self-medication.
  • Making the public aware of the potential harms that may result from the misuse of antibiotics.

D. GS4 Related

Category: MOB JUSTICE

1. Manipur’s women march, urge an end to ‘mob justice’

Context

  • For many nights over the past month, Manipur has been witnessing torchlight processions in the valley districts, with the mostly women marchers demanding, among other things, an end to mob violence directed at those accused of crimes.
  • Over the last few years, at least three persons in Manipur, and two in neighbouring Nagaland, have been victims of mob lynchings.
  • Pishakmacha, a middle-aged woman activist said, “We demand an end to mob crime in this State.”
  • Renubala, a young housewife from Thoubal district who is also participating in the marches said, “A man is not guilty unless a court says so. The government should prevent such mob trials and the beating to death of people. The family members of the accused persons also end up being banished from the locality for ever.”
  • On September 19, Manipur’s cabinet decided to introduce ‘The Manipur Mob Violence Control and Prohibition Bill, 2018’ in the Assembly. Chief Minister N. Biren has said that mob violence will never be tolerated or condoned.

Mob Justice

  • Mob justice is the verdict of the crowd by subverting the legal procedures and institution in situation of great injustice and mass suffering.
  • This is totally against the law of the land, detrimental to society and catastrophic to personal and cultural liberty.

Role of an administrator in case of mob justice

If the mob is out for social justice we should help by arranging proper place to hold protests and engaging in dialogue with them and come to solution by consensus. Though particular action would depend on situation and context but few precaution which can be taken by administrator are:

  • Take away the accused from scene, preferably in police protection.
  • Talk with leaders of community or gathering, persuade them to not take law in their hand and warn them of possible legal consequences for same.
  • Assure the gathering of strict, severe and immediate action. The taking of accused in custody can be first step in such situation.
  • Overall administration should use his persuasive skills (using logic, reason and emotions) to convince crowd and disperse the gathering at earliest.

Conclusion

  • We may be tempted to come to sudden conclusions regarding such cases. Justice delayed is justice denied no doubt but swift justice may not always be accurate. Evidences may be planted and witnesses may be bribed framing an innocent person.
  • The Indian Judiciary emphasizes on “even if a hundred culprits go free, not a single innocent man should be punished“. Sentences for such crimes are often severe, and it is our moral obligation to ensure that these sentences are handed to only the deserving.

E. Editorials

Category: ECONOMY

1. Was debt pile-up overlooked? (defaults by the IL&FS)

Note to the Students:

This editorial coverage is takes into account the recent issue of a series of defaults by the IL&FS holding company and group outfits beginning in August, 2018 which set off a market-wide contagion.

Students are advised to go through this article as it has a relevance from the perspective of the GS-3 Paper (Indian Economy).

  • Here we have suitably signposted the Editorial Analysis into multiple headings.
  • “Larger Background”: This particular section talks about the broader background of the issue, taking into consideration specific points that may have been featured in previous editions of The Hindu. The thought process behind including this section is to give a ‘storyline’ approach to an aspirant when he/she goes through this topic.

  • “Editorial Analysis”: This particular section gives an insight towards the specific points covered in the specific editorial that is the subject of our study.

  • “The Way Forward/Concluding Remarks”: This sections gives aspirants concluding points that are taken from the article in question as well as some forwarding looking points taken from other articles, as and when required.

The important aspect to note here is that the issue being discussed in the news assumes priority over just the article.

Background:

  • Infrastructure Leasing & Financial Services Ltd. (IL&FS) was set up in 1987 by the legendary M.J. Pherwani (former chairman of Unit Trust of India, National Housing Bank, etc.) to finance and promote infrastructure projects in the country.
  • This holding company is now a financial behemoth with assets of over Rs. 1,15,000 crore and a  debt of Rs. 91,000 crore.
  • IL&FS Finance, which is a group company of the holding IL&FS company, defaulted in late August on a commercial paper repayment. This development was followed by a default by IL&FS on repayment of a Rs. 1,000 crore deposit to Small Industries Development Bank of India (SIDBI).
  • Pursuant to this, a series of defaults by the holding company and group outfits followed. These defaults ran into the weeks leading up to the annual general meeting of IL&FS on September 29, 2018.
  • Infrastructure Leasing & Financial Services Ltd. (IL&FS) is listed as “systemically important” by the Reserve Bank of India. The company has over Rs. 1,15,000 crore of assets and Rs. 91,000 crore of debt. Thus, it is too big to fail. This is further underlined by the fact that interlinkages between IL&FS and other financial sector entities such as banks, mutual funds and infrastructure players are too strong and the company would have taken them all down with it if it were allowed to fail.

A Note on IL&FS:

  • IL&FS is a holding company that operates through 169 other companies.
  • These 169 other companies are either subsidiaries, group companies or joint ventures with others. It has been in the past and is currently as well, associated with landmark projects.
  • A few among these projects include the tunnel under the Zoji La Pass, Delhi-Noida toll bridge, Gujarat International Finance Tec-City (GIFT) and a host of road, power, water and port projects.
  • Three of IL&FS’group companies are listed on the stock markets.
  • These group companies are IL&FS Investment Managers Ltd., IL&FS Engineering and Construction Company Ltd. and IL&FS Transportation Networks Ltd.
  • IL&FS was originally promoted by the Central Bank of India, Unit Trust of India and HDFC. Orix Corporation of Japan, Abu Dhabi Investment Authority, LIC and SBI joined in as co-promoters later.

How did this crisis take place?

Essentially, the company borrowed many times its equity. This figure is rumoured to be between 10-18 times its equity. This money was borrowed to fund its infrastructure projects, most of which bring in returns over 20-25 years.

To compound matters, IL&FS’s borrowings were all repayable in the short to medium-term of roughly 8-10 years.

The chokepoint for IL&FS came from the fact that its projects were stalling and not being completed due to various reasons. These reasons ranged from:

  1. statutory approvals not coming in
  2. problems of land acquisition and
  3. projects simply becoming unviable as it happened in the case of power plants.

Further, with returns from these projects not coming in, IL&FS was forced to borrow more. Lenders pulled the plug leading to trouble for IL&FS.

It is important to note that assets and receivables were exaggerated in the financial statements and the top managers took home large pay-outs and continued to pay dividends to shareholders despite the financial situation. An investigation has been ordered by the Serious Fraud Investigation Office.

A Look at Certain Specifics:

    • Recently, the Centre moved to supersede the Board of Directors.
    • The decision to change the management has ushered in the appointment of experienced people, such as Uday Kotak, who has rich experience in the finance sector; G.C. Chaturvedi, former bureaucrat and non-executive chairman of ICICI Bank; and G.N. Bajpai, former chairman of the Securities and Exchange Board of India and the Life Insurance Corporation. It is believed that these appointments should lend confidence to lenders and investors.
  • The Life Insurance Corporation of India is the largest shareholder in IL&FS with a 25.34% stake, followed by Orix Corporation of Japan with 23.54%.
  • The Centre has explicitly stated its intent, which is to “ensure that needed liquidity is arranged for IL&FS from the financial system”.
  • By doing so, the Centre has sent out an unambiguous message to the markets that it will not allow the company to fail.
  • It is believed that any rescue plan for the company obviously had to begin with replacing the existing management that was responsible for mismanaging its affairs.
  • Currently, the problem appears to be one of liquidity and not solvency.
  • It is believed that this is a classic case of over-leveraging, and an asset-liability mismatch caused by funding projects of 20-25 years payback period with relatively short-term funds of 8-10 years.

Certain Questions that Remain:

  • In conclusion, there are some important questions that need to be answered.
  • If IL&FS was a systemically important company, how did its over-leveraging escape the notice of the Reserve Bank of India?
  • What did the periodic inspections of the company by RBI reveal? How did the developing situation pass the attention of shareholders? Did they look the other way since their dividends were serviced?
  • Finding answers to these questions is as important as rescuing IL&FS.
  • Finally, it is felt that there is a need for long-term finance sources for infrastructure projects.
  • Currently, the LIC and some insurance companies are the only domestic sources and they too do not lend beyond 10 to 12 years.
  • Thus, the Centre and the RBI should look at ways to deepen the debt markets where infrastructure players can borrow long-term.
  • Moreover, it also needs to be analysed as to how a company listed as “systemically important” managed to fly under the radar with misgovernance. It is important to note that the debt pile-up due to over-leveraging did not happen overnight.

Editorial Analysis:

  • Experts believe that much before the crisis at Infrastructure Leasing & Financial Services (IL&FS) came out into the open last month, mutual funds were comfortably holding bonds – commercial paper, debentures, structured obligation – issued by the company amounting to nearly Rs. 3,500 crore.
  • Further, IL&FS was a tiny part of the overall debt exposure of mutual funds to NBFCs and other brokerages, which was pegged at Rs. 11.25 trillion as on September 30, 2018.
  • This is a little over 51% of the total assets under management (AUM) — Rs. 22.04 trillion — of mutual funds in India.
  • However, everything changed when two IL&FS group entities were downgraded early in September that directly put around Rs. 1,000 crore worth of debt papers at risk.
  • Since this development, questions have been repeatedly raised about the quality of assets that fund houses are holding and whether they need to act on them.

Why weren’t red flags raised?

It is important to note that while all fund houses have an internal valuation policy for debt instruments, it typically gets triggered only after a security is downgraded by rating agencies such as CRISIL and ICRA.

    • Once the instruments fall below investment grade, it is the call of the fund houses to value it. It is the Securities and Exchange Board of India (SEBI) which mandates that once a non-government security falls below investment grade, it has to be valued at a discount of 25% to its face value.
    • Although there is a valuation policy in place, a fund house can choose to decide whether or not it wants to gradually mark down the asset or just write it off.
    • Fund houses typically choose to write it off when the downgrades or defaults are swift and sudden.
  • It is important to note that any mark-down or write-off impacts the net asset value (NAV) of the scheme and hence fund houses prefer to gradually mark down securities where there is a risk of delay in payment or even default.

Why is the rescue important?

    • It is important to note that on a standalone basis, the IL&FS may constitute a small portion of the overall debt assets of mutual funds, but a default creates a ripple effect for all NBFCs.
  • Such a ripple effect is created for all NBFCs as the cost of funds goes up with mutual funds becoming wary of buying such securities.
  • According to industry players, NBFCs have already seen the cost of funds going up by 20-30 basis points in the last one month. A direct quantifiable impact is visible in the stock markets wherein many of the listed NBFCs have seen their value erode by more than 50%, compared to their recent highs.
  • In conclusion, it is important to note that if IL&FS had been allowed to collapse, it would have impacted the whole NBFC industry. It would have hit sectors such as:
  1. housing finance,
  2. capital market fund raising,
  3. margin financing and even
  4. retail loans to a large extent.

It is important to note that a recent report by the government sent to the Ministry of Corporate Affairs (MCA) said a default by IL&FS could have significant repercussions, including widespread redemption pressures, sell-off in the debt market, liquidity crunch and 1,500 smaller NBFCs shutting shop for lack of adequate capital.

The government further said that avoiding a default would require a combination of measures of asset sales, restructuring of some liabilities and fresh infusion of funds by investors and lenders. Currently, the RBI is believed to be looking at strengthening the regulatory framework to avoid asset liability mismatches by NBFCs.

A Look at the Current State of Affairs:

    • A new board of Infrastructure Leasing & Financial Services (IL&FS) was appointed by the Centre on October 1, 2018. This was done  after it secured the approval of the National Company Law Tribunal (NCLT) to supersede the previous board.
    • The previous board was  accused of ‘mismanagement’ and ‘compromise of corporate governance norms,’ leading to financial issues.
  • The State Bank of India, which also happens to be the country’s largest lender, has also stepped in to support with liquidity as it decided to triple its target for loan purchase from NBFCs to Rs. 45,000 crore for the current financial year.
  • The government also stepped in to address the governance issues at IL&FS.
  • Based on a report of the Ministry of Corporate Affairs, which indicated serious deficiencies in IL&FS, the holding company, and its subsidiaries, the government moved the National Company Law Tribunal to dismantle the board and bring in new members to avoid a collapse.
  • The board is expected to submit a resolution plan by October 31, 2018.

Who’m does the board comprise of?

    • The stewardship of the new board, has been entrusted to Uday Kotak, executive vice-chairman & managing director of Kotak Mahindra Bank.
    • Mr. Kotak will join hands with Vineet Nayyar, who has been named vice-chairman & managing director.
    • Vineet Nayyar had played a role in the rescue of Satyam Computer Services after its founder Ramalinga Raju admitted to a massive accounting fraud.
    • The newly constituted board also includes former banking secretary G.C. Chaturvedi and former SEBI chairman G.N. Bajpai.
  • G.N. Bajpai had also served as chairman of Life Insurance Corporation of India, which is also the largest shareholder in IL&FS.
  • Nand Kishore and Dr. Malini Shankar have been roped in as the other directors, while C.S. Rajan’s name was added on October 3, 2018 after seeking fresh approval from the NCLT.

The Way Forward:

    • The biggest challenge for the IL&FS board is to raise funds in quick time so that fresh defaults can be avoided.
  • One possible way to get money is to sell assets.
  • However, a more permanent way of getting funds is to raise equity capital.
    • Capital can be raised through a rights issue.
  • It is important to note that the proposal for a rights issue was mooted by the previous board too, but they were unable to convince the large shareholders.
    • Another option is to sell stakes to a new promoter. Again, that was also mooted by the previous board, but some existing shareholders could not agree on valuations. So the new board has its task cut out.
    • As Uday Kotak, the newly appointed chairman of IL&FS, indicated, the crisis is much bigger and more complex than it was initially thought.
  • An example to illustrate this is the fact that the new board found that there are 348 entities in the group, significantly larger than the 169 entities it was aware of. This itself underscores the task at hand.
  • It is also to be seen if the new board, which the government has thrown its weight behind, could convince the shareholders for more fund infusion.

F. Tidbits

Nothing here for today!!!

G. Prelims Fact

Nothing here for today!!!

H. Practice Questions for UPSC Prelims Exam

Question 1. Which of the following statements regarding mangroves vegetation is/are correct?
 

  1. Mangroves require less solar radiation.
  2. Mangroves help to impede water flow and thereby enhance the deposition of sediment
  3. Leaves are thin and contain salt secreting glands.
  4. According to State of Forest Report 2017, moderately dense mangroves constitute the largest part.

Options:

  1. 1 and 2 only
  2. 2 only
  3. 2, 3 and 4 only
  4. All of the above

See

Answer
Question 2. Consider the following statement about Biosphere Reserves in India:
 
  1. There are 30 Biosphere Reserves in India.
  2. The Nilgiri Biosphere Reserve was the first reserve from the country to be included in the World Network of Biosphere Reserve.

Select the correct answer using the code given below.

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

See

Answer
  
Question 3. Which of the following criteria a region must meet to be qualified as Biodiversity 
Hotspots?
 

  1. It must contain at least 0.5% or 1,500 species of vascular plants as endemics.
  2. It has to have lost at least 30% of its primary vegetation.

Select the correct answer using the code given below.

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

See

Answer

I. Practice Questions for UPSC Mains Exam

  1. Throw light on the significance of the thoughts of Mahatma Gandhi in the present times. (150 words)
  2. Why is Indian Regional Navigational Satellite System (IRNSS) needed? How does it help in navigation? (150 words)

Also, check previous Daily News Analysis

 

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