Modi: IBC Ordinance: Modi government just walked into a trap that it unwittingly laid for itself – The Economic Times–01.12.2017

‘Defaults’, ‘wilful defaults’, ‘big corporate’, ‘Vijay Mallya’, ‘NPAs’, ‘nexus with banks’, ‘60 years of bad loans’, ‘bailout’ — phrases liberally used to score political points, have wafted into conversations and are now part of the lexicon and the consciousness.

Amid breathless reportage on Mallya, images of disgraced bankers hauled up by enforcement agencies, and huge, cathartic losses disclosed by high-street banks, many felt that the wheels of justice turn slow but grind fine.

THE TRAP

Indeed, never before had the Centre and Reserve Bank of India pushed so hard to salvage lost loans from corporate borrowers — many of whom are to be squarely blamed for the recklessness and profligacy that have turned companies into basket cases.

But while driving home the message forcefully, government functionaries and members of the ruling party have played the game to the hilt — they have, in the process, politicised the problem to a point where any solution now has to first pass the political test. Having painted defaulters as creations of the UPA regime, a solution can have no room for pragmatism or give any hint of compromise.

It’s a trap that the government had unwittingly laid for itself. It has now walked into it. On one hand, after vilifying the defaulters, it is politically embarrassing to let promoters, who are often blamed for the losses and default, to regain control of insolvent companies. On the other hand, banning promoters in the resolution process could mean the end of the road for many small and mid-sized companies looking for a lifeline.

Now, having passed an Ordinance that makes it almost impossible for a promoter to win back an insolvent company, how will New Delhi strike a balance? The government has to find a way to wriggle out of the hole — with a solution that is commercially workable as well as politically acceptable. But how?

THE WAY OUT

Here’s the best that New Delhi can probably hope for: The newly formed 14-member committee set up to review suggestions for improving the bankruptcy and insolvency process could come out with recommendations that would soften the features of the Ordinance, so that the final Act passed by the Parliament is as not as harsh on promoters as the Ordinance is today; the final Act could also give the committee of creditors (in the insolvency process) a clear discretion to let promoters with fewer blemishes take back companies and revive them.

But not all would be lucky. By the time the Act (converted from the current Ordinance) is passed, the fate of some of these companies, and their promoters would be decided. For the government, it would be a win-win if at least some of the “dirty dozen” promoters — of the first set of 12 companies which were referred under the insolvency proceedings — are made to pay for their past: either forced to wash their hands off the company or cough up a substantial amount to remain in the race to take it back.

The insolvency petitions against them were filed about six months ago. In a month or so banks will have to decide whether to change the management or push them into liquidation. The Ordinance, which will be alive for the next few months, could be used to fix errant promoters and set some ‘examples’.

Once done, the stage could be set for a review of the code and pave the way for a more realistic law. The committee, which would probably have its first meeting in a fortnight, comprises senior bureaucrats, legal eagles, bankers, deal makers, and a few members of the original insolvency panel. It was formed to make the law more efficient.

There is no harm if it delivers more than what was expected of it. There would be no complaints. By then, New Delhi would have made its point.

via Modi: IBC Ordinance: Modi government just walked into a trap that it unwittingly laid for itself – The Economic Times

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