“We don’t mind haircut, but we don’t want to be bald,” quipped State Bank of India (SBI) chairman, Rajnish Kumar, to make the point that the Bank was willing to take a discount while resolving bad loans, but wouldn’t be willing to accept a deep discount that leaves them with nothing. On a facetious note, a few months from now, the state of the chairman’s hair should tell us whether the much-discussed amendment to the Insolvency and Bankruptcy Code (IBC) has worked or failed. But the issue is deadly serious.
On 23rd November, the President of India gave his assent to an ordinance amending Section 29A of the IBC barring wilful defaulters, guarantors and others connected with them from bidding to retain control of companies facing insolvency proceedings. The quick amendment has triggered a barrage of criticism from lawyers, consultants, accountants, commentators and, of course, corporate defaulters themselves, who are in a fix after having lined up plans to retain control of their companies.
The IBC and its amendment are far from perfect and some good companies going through bad times may get caught in its crosshairs. But the first resolution under the IBC of a company called Synergy Doorays ended with lenders talking a 94% cut and speculation that the management retained indirect control. It would have been politically disastrous not to plug the loophole and allow this story to be repeated with bigger defaulters. Especially when the government has sanctioned Rs2 lakh crore of public funds this year to recapitalise public sector banks (PSBs), which is just a fraction of the gross bad loans of PSBs that stand at
Rs6.84 lakh crore and are growing.
The amendment barring defaulting promoters from bidding to regain control has led to a chorus of voices making the astonishing argument that those who have already extracted repeated debt restructuring and interest write-offs, who brazenly diverted funds to profitable new business, who have not hesitated to pressure bankers with their political connections and who have been caught bribing bank chairmen, will now make higher bids for their companies. In effect, they will be allowed to vitiate an open bidding process that may ensure a change in management for the first time.
Newspapers quote Neeraj Singhal, promoter of Bhushan Steel, saying that existing promoters will bid aggressively to retain control because of their “emotional attachment with the assets that they built.” But they make no mention of the fact that he was arrested in 2014 by the Central Bureau of Investigation (CBI) for bribing the Syndicate Bank chairman. Or that his companies, Bhushan Power & Steel, along with Bhushan Steel, have a combined outstanding debt of Rs1 lakh crore and the company is under investigation by the Serious Frauds Investigation Office (SFIO). Bhushan Steel’s plants have seen serious interest from Indian and foreign bidders. Isn’t it time to try out a new management?
The big question for every apologist of defaulting management is this: how would the wilful defaulters, or, ‘dubious promoters’ (according to Sajjan Jindal’s tweets) find the money to buy back their companies? And, if they were capable of raising these funds, why haven’t they repaid banks before being pushed into insolvency proceedings? The answer is simple. Most intend to game the system, again, in tried and tested ways by leveraging personal wealth built abroad. Here are some strategies that have been adopted and successfully used for decades in India.
• In the late-1990s, a large corporate group when forced to sell some assets as part of a restructuring deal, got an international trading company to purchase 51% of its equity in a steel manufacturing facility. This was the first time that the trading company was getting into manufacturing. It openly smacked of a backdoor deal; but even bankers celebrated it as a reduction in debt. Five years later, when the heat was over and the furore over its bad loans had died down, the group was able to borrow freely again; it bought back the equity. The backdoor arrangement was known to the industry and bankers. The foreign company had refused to answer my queries about its sudden interest in manufacturing, only in India.
• Around 2003-4, the same conglomerate, which had repeatedly negotiated massive write-off by banks since the late-1980s, emerged as a big player in new businesses such as telecom and IT services. Once again, a large European bank stepped in as a 50% partner to help it acquire a huge US call centre; it smacked of a backdoor deal guaranteed by the group’s overseas assets. This company went on to raise large funds overseas and make further acquisitions under the benign watch of the UPA government. The European bank, which managed the overseas fund raising, quietly slipped out of the picture and finds no mention when the company was finally sold recently to pare the group’s massive debts.
• Shockingly, another bidder for this call centre was the front company of another Indian industrialist who had fled to the US after the Ketan Parekh scam. Did bankers and our political leaders know about these machinations? Undoubtedly, they did. But India’s crony capital system ensured their silence. The shenanigans of another high-profile industrialist, who is into power, telecom, films, finance and defence, are already well known—including his cooption of foreign banks and reputed foreign institutional investors to add credibility to high-profile foreign tie-ups that tend to vanish after a media splash.
Do we want another round of such chicanery? Our saintly commentators say that if Russian and European bankers want to bailout dubious Indian promoters, why not take their money? Well, simple! Over the past 30 years, we have seen that this money is eventually repaid out of funds extracted from Indian banks or the Indian taxpayers. The correct argument would be to question the basis on which global bankers are willing to back Indian defaulters when our own banks are at a standstill. After all, hasn’t this government promised a crackdown on Indian wealth stashed overseas? Illegal wealth never sits idle in tax havens—we have a slew of marquee financial sector institutions that are willing to offer funds or be a front for the Indian business of the companies against the security of assets stashed overseas. It earns them a fat fee. Are our commentators, lawyers or consultants so naïve and unaware, or are they on the gravy train themselves?
Public patience is wearing thin with the loot of people and institutions. Large realty companies, whose cases have landed up in the Supreme Court, show that the judiciary has also turned impatient at their attempt to cheat home-buyers. The immediate problem originated with the UPA government which, during the global financial crisis in 2008, asked banks to bailout the sector. Instead of forcing them to repay loans after the crisis had blown over, they were allowed to keep prices high and pile up inventories, leaving banks saddled with massive bad loans. They soon began to cheat buyers as well. Mainstream media was a tacit partner in this loot as the biggest beneficiary of their massive advertising budgets. The gullible investors lost their life’s savings.
So, yes; the IBC and its amendment may not be perfect; but it is time to experiment with tough measures for ‘dubious’ promoters. One would expect that bankers, who have generously supported political cronyism so far, will also go the extra mile for genuine promoters who may be seeing a down cycle and temporary issues. The IBC does not envisage throwing every borrower under the bus at the first sign of trouble—in fact, it is the last resort. There are several other measures available to promoters including an RBI-mandated committee that approves of debt recast.
On 28th November, Financial Express reported that the “Stressed Assets Stabilisation Fund (SASF) formed in 2004 to recover IDBI Bank’s bad loans has settled certain cases with haircuts of more than 90%, a public accounts committee (PAC) has found.” This included the completely dubious Malavika Steel. We surely do not want to see that happening again and again!