Neither will the exiled promoter of a defaulting company be allowed to regain control nor will banks have the liberty to toss him a sweetheart deal or a lifeline. Even if the bankruptcy of a business is brought about by industrial upheavals or turbulent markets — and not by the loot and profligacy of its promoters — it’s goodbye to men who once called the shots.
The old order must change. Men who presided over the decline (and did not pay bankers for a year or more) do not deserve a second chance. This is the new rule of the game for insolvent companies looking for buyers who could turn them around.
It’s a politically powerful signal. It’s a blunt and unforgiving message. And it makes sharp headlines even if it doesn’t necessarily make great business sense for banks who have to salvage sunk loans by selling an insolvent company — preferably to a buyer who is willing to pay the most.
Banks, which are often — and sometimes unfairly — blamed for years of loose lending and their nexus with business houses, were probably not even consulted in deciding the terms of the Ordinance. Having lost the credibility that financial institutions once enjoyed, they are now left with little discretion. All they can do is obey inflexible rules that the government sets for them.
There are companies and assets which would only attract the promoters or founders due to the nature of the business, complications, and legacy; these promoters may even be willing to fork out premium to get back on the board of directors.
Before the Ordinance, most bankers would have been willing to cut a deal and accept a haircut on loans as long as such promoters were not perceived as corrupt or categorised as `wilful defaulters’; in other words, as long as there was no evidence or forensic audit show they had diverted funds to other group companies or personal accounts, or the company they ran had failed to service loan despite posting operating profits.
Today, they can’t – thanks to the Ordinance that makes it virtually impossible for banks to deal with most of the original promoters.
Even though Indian banks have not exactly displayed great lending acumen, they should have been given the discretion (in choosing promoters who are not swindlers), simply to pave the way for quicker resolutions and help the Bankruptcy Code take off. The Ordinance should have simultaneously given bankers the freedom and protection to reject a top dollar bid from a promoter who may not figure in the list of `wilful defaulters’ but is nonetheless dodgy and do not enjoy a great reputation.
But banks, it seems, have lost the trust that could have let them retain that choice. (However, the flip side to the Ordinance is that it spares some bankers the ethical and financial dilemma while evaluating a bid from old, familiar clients.)
By shutting the doors to promoters of all hues, and by somewhat doing away with the difference between wilful and ordinary defaulter, banks would for first time treat an individual and corporate on a par.
If a person loses her job – irrespective of whether the employer is hit by Chinese dumping, or she is found incompetent – lenders are quick to react. The borrower has to beg, borrow and starve to cough up EMIs to avert a foreclosure and save her family the trauma of homelessness. Such a fear of losing a prized and possibly only asset did not haunt a promoter group as long as it could escape the tag of a `wilful defaulter’.
Not anymore. The tycoon, like the EMI man, knows the price of dropping the ball.
The Ordinance can be misinterpreted as an exercise of political grandstanding. In reality, it’s a righteous, simplistic solution to an old complex problem.