Insolvency ordinance: Importance of being earnest–Economic Times–28.11.2017

By Arijit Barman

Last week’s new insolvency Ordinance, barring all wilful defaulters, or incumbent promoters with bad loans for ayear or more, from the auction process to repurchase their asset if they fail to clear all overdues is great polemics. But emotions aside, it may end up bankrupting the banks even more. Auctions have to be ‘thick’. That’s Economics 101. Be it telecom or natural resources or Insolvency and Bankruptcy Code (IBC) proceedings. And only let the markets discover the true value of an asset.

There is a reason why India’s largest lender is worried that he may go bald while taking a haircut on his loans. Punishing the desperate promoters, who would have bid aggressively to hold on to the last remains of the family silver, would mean potentially weakening the competitiveness of the bidding process.

Now, we wouldn’t want collusion among the bidders, would we? And I am not even evaluating their balance sheets or indebtedness in this case. Admittedly, many of our defaulting promoters may have indeed gamed the system, colluding with bankers and misusing the numerous restructuring schemes that have been made available while enriching themselves.

The prospect of taking the country’s unscrupulous crony capitalists to task is equally tantalising. But a blanket ban is a cop-out. Instead, why not let them be in the fray but stack the field against them? For example, make the errant promoter put up an all-cash bid. As a banker-turned-investor for distressed assets friend put it, if the Ruias of Essar or the Singhals of Bhushan Steel make a multibillion-dollar bid, take their cash and pay off the banks. That way, the State Bank of India CEO Rajnish Kumar may have some hair left on his head.

It has been reported that Essar was teaming up with Russia’s VTB Bank to submit a bid to reclaim its own steel plant that is currently under the National Company Law Tribunal (NCLT) hammer. If Essar chairman Shashi Ruia indeed manages to get a credit line from any bank, by giving apersonal guarantee and putting up his personal assets as mortgage, why should we bother? Let his new lenders tighten the noose around him even more while the banks and taxpayers get their money back.

Last heard from Essar House, VTB was willing to bankroll $3 billion, and some other smaller banks had agreed to back up with an additional $200 million, with the promoters to cough up some more of their own funds as equity. Grudging a bid of real money that could be as high as $3.5-4 billion would be nothing short of being churlish. In a worst-case scenario, the creditors will have a base price and competition will be forced to up their counter-offers.

Bans will only create market distortions. My worry is that in the days to come, many of our disingenuous tycoons will hustle to create sharp structures and circumvent the law and cling on to the crumbs of their collapsing business empires.

We have celebrated the spirit of jugaad among our entrepreneurs all the way to the Oxford Advanced Learner’s Dictionary. Remember what happened in the last round of 3G and broadband auctions in telecom?

On Monday, ET reported Bankruptcy Law Reforms Committee member M R Umarji’s critique of the new Ordinance. As of the main architects of India’s bankruptcy laws — even the earlier Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act — he said the new law is obsessed with large borrowers and can adversely affect the fortunes of struggling small and medium-sized enterprises looking at a take two.

Beyond the headline-grabbing Dirty Dozen — the 12 largest corporate defaulters currently facing insolvency proceedings before the NCLT — there are several others that have gone belly up. The A-listers involve only 15% of the system’s $207 billion-impaired loans.

The fact is that there are very few takers for many of them. In some, the promoter is inseparable from the entity. In some, he is a bona fide promoter but struggling due to extraneous factors: policy perversions or punitive judicial responses.

Even then, incumbent promoters are the only one with the bandwidth to turn around. Disallowing them would only hasten their liquidation —unless you want junk bond traders or predatory funds and competitors to shop them at ridiculous bargain basement prices.

Take Murli Industries, an insolvent cement, paper and solvent extraction company. Mint on Monday reported (goo.gl/9op2fc) there was a solitary bidder left in the fray who wants to buy the listed company at 20 cents to a dollar.

What’s worse, in those situations, the banks will hesitate to take the company to NCLT and opt for bilateral private deals, making the entire exercise even more nebulous. We have had enough of those in previous Corporate Debt Restructurings (CDR), or the subsequent Strategic Debt Restructuring (SDR) regime introduced by RBI two years ago, or its variant, the Scheme for Sustainable Structuring of Stressed Assets (S4A).

What’s the point of having a great law that makes the very ones it is meant to protect even more vulnerable? Or, worse, make the law impossible to use?

Around August, some of the biggest global distressed private equity (PE) funds and investors were apparently invited for a closed-door meeting at the finance ministry to recommend ways to strengthen the bankruptcy law’s teeth. Arun Jaitley is believed to have told those investors that unilaterally forcing promoters to sit out would seem partisan. Three months down the line, what triggered such a turn?

The Opposition’s ‘Vikas Gando thayo che!’ (Development has gone crazy!) chorus in Gujarat is getting louder. So, making fat cats the new untouchables may well be perfect pre-election grandstanding.

arijit.barman@timesgroup.com

via Insolvency ordinance: Importance of being earnest

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