by Harish Gupta, National Editor, Lokmat Group
In Britain, the law to register a joint stock company, instead of waiting for a Royal charter, was enacted in 1844. The same year saw the Joint Stock Companies Winding-up Act that could bring a company to an end and liquidate the assets.
India inherited so much of its financial processes from its colonial masters yet it remained a laggard in the handling of failed businesses, thus crippling the banks’ resolve to find new borrowers. Sadly, having an economist prime minister trained in Britain didn’t help much. In 2014, India’s toxic loans stood at Rs 13 lakh crore ($195 billion), or a good $20 billion more than the GDP of New Zealand. The government of Dr Manmohan Singh collapsed under a cloud of controversy about sweetheart deals in licences for natural resources, and the consequent ruining of banks.
This is the background to Prime Minister Narendra Modi’s daring Insolvency and Bankruptcy Code 2016 (IBC) which ought to have come a couple of decades earlier—but better late than never. It is the first step in clearing the mess in which the economy is stuck, in which 240 of the top 500 borrowers belong to the stressed or Elevated Risk of Refinance (ERR) categories. These 240 entities, in their turn, hold about 42 per cent of the total outstanding debt of Rs 28.1 lakh crore. Rather than criticising the Prime Minister for “going slow” on reform, it is time his critics asked if the economy could be back in motion without unclogging the money pipes to and from the banks.
However, the IBC architecture is complex. It requires armies of Insolvency Professionals (IP) National Company Law Tribunal (NCLT) and the regulator, the Insolvency and Bankruptcy Board of India (IBBI). These professionals will be directed to takeover a troubled company and run its affairs with as much authority as its CEO. And they will of course remain in consultation with a Committee of Creditors. But it is the IP who has to decide the way forward—with either a saving formula (“resolution”), or liquidation. It is different from the existing (and ineffective) business rescue or winding-up procedures, like BIFR and SICA. What is lacking in them is the speed element, which puts IBC in a different league. After being assigned by IBBI, the Insolvency Professional must send his report within 180 days, with an extension of 90 days if the creditors have no objection. But that must lead to the final solution. Its novelty is charmingly spectacular in a city like Mumbai where the pre-Independence textile mills, all falling irretrievably sick in the Sixties, took almost half-a-century to let their creditors sell off the land for residential buildings, offices and shopping malls.
Led from the front by the Prime Minister, his administration’s urgency to clean up the credit market is evident from the beginning. Last week itself, the Reserve Bank of India, with prodding from PMO, sent a list of 12 stressed accounts to bankers for urgent resolution through IBC. The holders of these ‘dirty dozen’ accounts, with names as familiar as Jyoti Structures, Monnet Ispat, Bhushan Steel and Essar Steel, account for 25 per cent of the current gross Non-Performing Assets (NPA). In India, as in Britain, the process of insolvency resolution has historically been biased on rescue. But, with a rigid time line for resolution or liquidation, IBC leaves no room for dodgy promoters to keep dawdling over airy-fairy rescue plans. In a way, it wouldn’t have allowed liquor baron Vijay Mallya to spend years in India on the excuse of trying to ‘save’ his bankrupt KingFisher airline, and then flee to England.
The IBC is superior to anything similar in existence in the past. It exhibits a clear understanding of the real-life situations prevailing for asset quality to deteriorate in stages, from doubtful to outright bad. The PSU banks, host to most of the stressed assets, are manned by a crop of cautious bankers who’d give the difficult borrower one more chance before reporting his account to RBI as an NPA. Such extreme step also involves a personal risk. Sniffing a banker-client corrupt linkage, the CBI may knock at the very banker’s door one day. Under the new IBC, however, criminal proceedings are not permitted to interfere with the resolution of the existential problems of an insolvent company. This should give bankers the spirit to report a loan that doesn’t seem right before it gets rotting.
Still, what is not clear yet is the government’s readiness with the IBC architecture. While IBBI, the regulator, may develop the required personnel and skill sets with time, the NCLT will have a tough time. Its mandate is to hear cases earlier dealt with by the Company Law Board (CLB), in addition to the new IBC cases. In March 2015, the CLB had 4,200 pending cases. All this will now go to NCLT, plus 4,000 IBC cases annually. The latter number may multiply with old BIFR and Debt Recovery Tribunal (DRT) being channeled to NCLT. This may raise workload on the NCLT benches quite sharply, with its solution being large scale fresh recruitment of NCLT judges, many of whom are required to be technically knowledgeable.
The Indian business professionals—executives, shareholders, lawyers, finance experts—have a mindset coloured by the past culture of being reckless with bank loans. It led to the joke of a borrower visiting his banker in a rickety Maruti 800 to negotiate a loan, but, after defaulting, returning to the bank to restructure the debt, but in a Mercedes this time. One hopes Modi’s IBC will restore parity between the size of the debt and the length of the defaulter’s car.
