On 25th June, Moneycontrol reported that the government may review the bankruptcy code as public sector banks (PSBs) have begun to accept haircuts as high as 94% to let off the biggest corporate defaulters. Well, it is long overdue. These ridiculous haircuts, or loan waivers, are over and above the massive loan write-offs by PSBs to reduce the embarrassing mountain of bad loans of over Rs10 lakh crore, which are funded by the people through the exchequer. Indian banks wrote off Rs1.53 lakh crore worth of loans in the financial year (FY) 2021 and Rs1.45 lakh crore in FY2020.
Our banks don’t care. Collectively, as a committee of creditors, they seem to have zero individual responsibility, accountability or conscience, at a time when ordinary people are struggling to earn a livelihood. When it comes to resolution of listed entities, there is also no consistency. And, with the Securities and Exchange Board of India (SEBI) having abdicated its responsibility, it is also a perfect opportunity to fool swarms of retail speculators who are ‘playing’ the market like in a Casino.
Things have turned so embarrassing that even industrialist Harsh Goenka protested in a tweet, tagging the prime minister (PM), that went viral. “Promoters stash away money on the side, take the company to the cleaners, get 80-90% haircut from bankers/NCLT—that’s the new game in town. A lot of institutions cleansed by the government—NCLT next please @PMOIndia. We can’t have our hard earned public money being stolen!” he said.
Promoters stash away money on the side, take the company to the cleaners, get a 80-90% haircut from bankers/NCLT - that’s the new game in town. A lot of institutions cleansed by the government - NCLT next please @PMOIndia. We can’t have our hard earned public money being stolen!
There is anecdotal evidence of how the defaulter-promoter of a controversial resolution has made so much money, with the surge in stock prices of his shares, that he has rented an additional floor in the same super-luxury apartment where he already owns a duplex. But bankers have accepted a massive haircut which is eventually paid by the ordinary citizen.
The All India Bank Employees Association (AIBEA) also voiced a protest about the outrageous settlement with Siva Industries with this poster below. According to market reports, the ‘settlement’ was facilitated by a powerful ideologue close to the ruling party.
Why, even the National Company Law Tribunal (NCLT) has been questioning the dubious acceptance of massive haircuts in the case of Siva, Sterling Biotech and Videocon.
The Insolvency and Bankruptcy Code (IBC), like the Goods and Services Tax (GST), was touted as a game-changing legislation by a strong government to staunch the haemorrhaging of bank loans. The Siva settlement and mishandling of several high-profile cases shows that things are sliding badly.
Seven years later, the government has made no headway in its much-publicised attempt to bring back big defaulters who fled India. While there is slow progress in diamantaire Nirav Modi’s case, the Mehul Choksi episode was a fiasco with a charter aircraft sent to bring him back returning empty (at whose cost?). Jatin Mehta of Winsome Diamonds (earlier Su-Raj Diamonds) is so well-connected that he is not even pursued seriously.
Similarly, the Sandesaras of Sterling Biotech are running a booming oil business in Nigeria while absconding from India. They are negotiating a 60% write-off of Indian loans, our banks are bending backward to accommodate them and even Interpol alerts for their arrest are being quietly withdrawn—a fact that becomes known through legal proceedings abroad. So gross is the mishandling that there is now a lot of sympathy for the flamboyant Vijay Mallya, whose total outstanding looks small in comparison.
On 23rd June, the Enforcement Directorate (ED), in an unusual press release, announced that it had handed over Rs9,371 crore belonging to Vijay Mallya, Nirav Modi, Mehul Choksi to PSBs (Rs9,371 Cr Seized Assets of Mallya-Choksi-Nirav Modi Transferred to Banks: ED) out of a total loss of Rs22,585.83 crore. This is pitiful in the face of massive haircuts accepted by banks and suggests the need to re-examine their basic understanding of corporate lending. It is also time to hold some bankers personally responsible for fraud and malfeasance.
This article that I wrote in March 1998 would reveal how decades of complicity had ballooned the total borrowings of Videocon to Rs64,838 crore and it is being sold off at a 95.85% haircut with no consequences to banks or the promoters. The liquidation value of the entire group of 13 entities is just a little more than its borrowings in 1998.
If the government wants to change the rules, it is important to examine successes and failures, instead of merely lurching from one experiment to another. The PM must note that action against only six big defaulters has led to significant recovery. Corporate circles say there was a clear directive in these cases not to yield to corporate pressure no matter how much legal firepower was deployed by them. Even here, banks are not pursuing defaults in other group companies after one big successful resolution. We tend to forget that all these loans also involved very significant write-offs.
Data on IBC’s performance puts the extent of haircuts in 2021 at 60% of outstanding, which indicates good times overall for large corporate defaulters, while small borrowers are decimated by the recovery process. The write-offs are estimated at Rs6.5 lakh crore with recovery of 1% of the outstanding in some cases.
What Has Worked: IL&FS
Just as some big defaulters have been dealt with kid gloves, similar sympathy was evident in the case of Ravi Parthasarathy, founder and long-term chairman of Infrastructure Leasing & Financial Services (IL&FS). He was finally arrested on the basis of a private complaint, while the government remained perplexingly frozen.
Interestingly, the resolution of the gargantuan, 347-company IL&FS group is doing a lot better over three years than what the Reserve Bank of India (RBI) has managed with Punjab and Maharashtra Bank Cooperative Bank (PMC Bank) or PSBs and investigation agencies are doing with scores of other mega defaulters. In October 2018, the government appointed banker Uday Kotak as chairman of a new board (mainly retired bureaucrats) to handle the resolution. It was backed by expensive but crack teams of lawyers and auditors whose success rate now appears better than that ofbanks and regulators.
Here is some data put out by IL&FS. The 347 companies in the group have been reduced to 167 and are expected to drop further to below 100 by the end of the year. This was done by shutting down or selling off a large number of foreign and local subsidiaries. Anyone who has closed a company in India would know the herculean effort and red tape involved in getting this done in less than three years.
Uday Kotak has said that he expects to recover 60% of the total outstanding of nearly Rs100,000 crore; the new management has addressed Rs43,000 crore and expects recovery to touch anywhere between Rs61,000 crore to Rs63,000 crore. In case of IL&FS, every decision has an excruciating process and is ratified by the NCLT after clearing it through a retired judge, or fought in court.
Only last week, IL&FS recovered Rs1,925 crore from a Haryana government outfit after a long-drawn battle and expects to get more in the same case. In my view, much of the success of IL&FS is not due to bureaucrats on the board but because Uday Kotak’s reputation is on the line forcing him to carry this monkey on his back. Now compare this with what RBI, PSBs and SEBI have been doing in just three specific cases.
1.Dewan Housing Finance Limited (DHFL), a single entity with a smaller outstanding of Rs87,000 crore and a dubious recovery of just Rs37,000 crore, that has been challenged by secured depositors and small investors who are being callously short-changed when the recovery potential from existing projects is estimated by market sources at over Rs10,000 crore. Why couldn’t banks have negotiated a better deal for all when there was another bidder offering similar amounts in this case? Appointing a monitoring panel after the case is badly messed up is clearly too late.
2.Siva Industries, which owed Rs4,863 crore, has been pulled out of insolvency accepting Rs316 crore settlement of which only Rs5 crore will be paid upfront. The controversial C Siva Sankaran gets to keep the company and be eligible for more borrowing. Even NCLT has questioned the deal.
3.In contrast with the complex IL&FS, RBI only managed an ‘in-principle’ approval to Centrum Financial Services and BharatPe to take over PMC Bank. The resolution comes with multiple riders, is risky, and it will be a long time before depositors get to see their money. Had the central bank been open to ideas and a lot more proactive in protecting depositors, a far stronger solution could have been found a lot earlier.
If the government is serious about making defaulters pay and retain the faith of taxpayers, it needs to change the resolution process which is already ridden with corruption. Videocon, Siva, DHFL and PMC Bank needed to be handled better, without leaving small investors in the lurch. An IL&FS-like action, with credible people in charge, was possible with PMC Bank and Yes Bank, but was ignored. Meanwhile, SEBI is showing signs of waking up after exposing retail investors to massive speculation in companies whose shares were to be delisted by its failure to stop trading immediately. But that is the subject of another column.