ET spoke to industry watchers to gauge their views. Leave aside some large loopholes, consensus seems that the Ordinance will stop dishonest promoters. Anil Bhattar, COO of Radisson Consulting, a firm specialising in bankruptcy cases, says, “Dishonest promoters, viewed the Code as a means to settle debt cheaply and regain control of business. Section 29A may help to prevent such practices.”
That said, a section of respondents believes Section 29A of IBC could hurt “honest” promoters of debt-stressed companies (trapped in unfavourable business cycles). Several clauses in the Ordinance would adversely affect the fortunes of companies that are genuinely looking for a second chance, they argue.
“One of the objectives of the Code, as stated by the Bankruptcy Law Reform Committee, was to draw the line between malfeasance and business failure; to give debtors a second chance but penalise those who act with mala fide intent in default. Section 29A, at some levels, goes against that spirit,” says Dinkar Venkatasubramanian, partner at Ernst & Young, a consulting firm. “But it will keep away wilful defaulters — and rightly so,” Banking industry’s stressed loans were over 12% of their total assets in December 2016, resulting in a cracking of the whip.
RBI put out its first list of 12 defaulters (monikered ‘the dirty dozen’) to be tried under the new bankruptcy law in June. The quasi-judicial National Company Law Tribunal (NCLT), overseeing bankruptcy proceedings, has admitted over 300 cases relating to corporate loan defaults.
However, says a top fund manager whose funds have done well lending to debt-stressed companies, “the day a company is dragged to NCLT, promoters are seen as thieves. All debt-stressed promoters are seen as wilful defaulters. This is not right… companies fail across the world. Promoters alone cannot be blamed.”
While a large majority of financial services industry believe, defaulting promoters are unmitigated villains of this debt-mess, a few out there view it differently. Their reasons go back to the days of the Lehman Crisis, global economic meltdown and years of policy perversions and inertia.
In the latter half of 2008, the world was staring at a “possible, protracted economic slowdown” after the collapse of banking behemoth Lehman Brothers. But promoters of large Indian companies felt they were “relatively insulated” from global shocks. This was their mistake — a gross misreading of global macros.
The equities head of a foreign brokerage says of Indian companies, “Take, for instance, road-paving companies; they bid for road projects at crazy valuations, assuming robust economic growth, increased government spending and higher vehicular traffic. Banks went along with companies’ projections and loaned without any risk consideration.”
But government had more pressing issues at hand. It was staring at wide deficit budgets between 2011 and 2013. Public spending was slashed and by end-2014, 346 out of 773 projects lagged behind schedule, triggering a cost overrun of `2.16 lakh crore. “When the government stopped spending, companies didn’t have enough money to service their debt (taken to fund capex),” says the research head of a leading domestic broking outfit.
Then there were legal tangles, such as mining bans that severely impacted steel, engineering and construction firms. “Companies such as Essar gold-plated their capex. They got all their projections wrong… They could’ve set up a smaller plant, at much lower cost. In a way, they simply misused bank debt,” says the corporate business head of PSU bank.
With irregularities around spectrum and coal block allocation, approvals to expansion stopped even as economic conditions weighed heavy on Indian promoters.
THE WAY FORWARD
Though this was nothing new for India, which sees one big debt stress every decade, a panacea was needed. “Till about a year ago, we did not have a legal framework to curb corporate loan defaults. IBC fills that gap now,” says Saurabh Mukherjea, CEO of Ambit Capital. Section 29A gives more teeth to IBC but has weaknesses. “On the practical side… it may encourage back-door entry of dishonest promoters using clean frontmen,” says Rajesh Narain Gupta, managing partner, SNG & Partners, a law firm.
“The real problem lies with those set of promoters who have suffered genuine losses, without their being fraudulent in any manner. This category may also include many SMEs and SSMEs,” he warns.
Jyoti Singh, insolvency & disputes partner at Phoenix Legal, feels, “If (H) clause (that bars all resolution applicants who have executed an enforceable guarantee) stays, then 98% of Indian promoters will not be able to submit resolution plan, even if they don’t fall under other restrictions. In India, banks ask promoters for personal guarantees while approving loans.” Most bankers ET consulted supported Section 29A. Amendments are targeted at those who abuse the system, they opined.
“These promoters were given a long rope and warned several times that they would lose their prized asset if they don’t regularise their accounts,” says the former MD of a leading PSU bank. “There is a worry about good promoters having to pay the price for wrongdoings of a bad promoter… But the situation had reached a stage where we can’t do much. Promoters should not be allowed to regain their business at the cost of banks taking a steep haircut.”
(Additional reporting by Sangita Mehta)