The government’s handling of bad loans and bank frauds is likely to be a powerful campaign tool in the 2019 election and this alone should ensure that it is handled well.
The government has done well in putting in place a strong Insolvency and Bankruptcy Code (IBC) that has already delivered a few major successes like Bhushan Steel (where lenders got 65% of the total outstanding and almost the entire principal). In a couple of other cases, like Binani Cement, Essar Steel and Ultratech Cement, a bidding war by potential buyers is driving up potential recovery. But high recoveries are still an exception and limited to a few large cases in sectors such as steel and cement which are currently witnessing a boom.
For every relatively successful resolution, there are many others that are stuck in the same morass of litigation, corruption and fixing that has created the mountain of bad loans that are threatening the very existence of several public sector banks (PSBs). So, while Piyush Goyal celebrated his temporary charge of the finance ministry with tweeting about the Bhushan Steel resolution, there was complete silence from the establishment when Alok Industries was acquired by Reliance Industries and an arm of JM Financial at just over Rs5,000 crore, with an 84% haircut on outstanding dues of Rs29,500 crore.
This recovery is only slightly better than the shock of the first brazen case of Synergies Dooray Automotive, where lenders recovered less than 5%, and it is speculated that the buyer is connected to the original promoters. It is no surprise then that the All India Bank Officers Confederation (AIBOC) has issued a strong objection to the Alok Industries sale. The union says, Alok has 250 stores in India under the brand name H&A, a 100% owned subsidiary in the Czech Republic, and its 2017 balance sheet reported tangible assets of Rs16,763 crore. With total current assets at Rs32,709 crore against liabilities of Rs21,717 crore, how can the value dive to Rs5,050 crore? One needs to see if AIBOC’s objection makes any difference to the sale.
On the other hand, the government’s seriousness in recovering bad loans certainly played a role in ‘fugitive industrialist’ Vijay Mallya’s five-page letter offering to repay dues of over Rs13,000 crore under a court supervised process. Given Mr Mallya’s ability to work the judicial system to his advantage, it remains to be seen if this is just a tactic to avoid extradition by the United Kingdom. Mr Mallya’s pugnacious tone and his references to India’s ‘criminal agencies’, suggests that he is not giving up the fight.
Over 500 companies have been referred to the NCLT (National Company Law Tribunal) under the IBC; several hundred of these will not find takers and have to be liquidated at a fraction of their outstanding loans. The recoveries in case of giant debtors such as Lanco, Videocon and Orchid Pharma are also likely to be very low while the most controversial of all—the Essar group—is still to be resolved.
That top industrialists in India have actually lost control over companies that were used like milch cows for decades is extremely significant. Remember the popular view that India has sick industries but rich promoters? But, if low recoveries under the IBC are not followed up with action to recover thousands of crore rupees looted by industrialists, who continue to flaunt obscene wealth, the whole exercise may be pointless. They will be back to their game of exploiting banks through new companies.
Problems on the Ground
Last week, I interacted with at least three resolution professionals (RPs), with very diverse backgrounds, who paint an alarming picture of the pressures they face and their constant battle to thwart the corrupt nexus of promoters-bankers-auditors. On paper, the RP is very powerful. He prepares an information memorandum and invites applications to ensure maximum bids/applications.
It is the job of the RP to ensure that applicants get all the corporate data that they seek including inspection of assets. They are also empowered to keep out ‘related parties’ or proxies of promoters, or turn a blind eye to it as part of the banker-auditor-promoter-RP nexus. Since the 'Committee of Creditors' has the power to accept or reject any bid without assigning reasons, it is easy for the bigger lenders to push through bad deals as long as they get enough support to meet the now-diluted consensus under the IBC.
This nexus works in various ways. Banks in cahoots with promoters want pliant RPs who will do the promoters’ bidding by manipulating the selection criteria. Several large lenders have created an informal alliance with top law and audit firms; they game the criteria with demands that ensure that only the big four firms will qualify.
One RP says, “Top law firms have informally tied up with bank managements to render end-to-end services. Under such arrangements, they get loyal interim resolution professional (IRPs) to take questionable steps which compromise RP’s independence. The RPs go by directions of these law firms who also forge deals with interested parties who can be promoters/others. The firms also have a cosy relationship with the top brass of banks.”
I had the opportunity to see one such request from a top PSB, where a potential RP, with excellent qualifications and experience (a long stint as a banker and later as head of an ARC— asset reconstruction company), was forced to respond by saying, “I do not fit in the criteria set by you. These will suit the big four.” Now, if someone with over three decades of experience as a banker and head of a successful ARC with one successful resolution behind him does not meet the criteria, it is evident that the criteria are flawed, either out of ignorance or mischief.
Two other RPs who I spoke to have similar experience as heads of companies; one has had a brilliant global career in banking and consumer finance after a stint in a multinational consumer products in India. And, yet, it is not that lenders are pursuing him for these skills. A third, more maverick RP, who headed a small software company, has even faced threats instigated by entrenched promoters. His appointment got through only due to a relatively minor lender who was dead serious about recovery. Two of the RPs I spoke to have won over the company’s employees to create a feedback loop. In one case, the promoter even tried to pressure the operations manager to sell off critical plant & machinery and swallow the money, when the RP was overseas for a week. The attempt was scuttled because the manager contacted the RP who asked him to document the orders he had received. What can be done to stop this match-fixing, or adverse selection, right at the very start?
1. Bar the Lenders: The best way to break the nexus is to disallow lenders (after all, they are the ones responsible for making bad loan decisions, in the first place) from selecting RPs. At present, companies who initiate the resolution process get to appoint the interim resolution professional (IRP) and the fixing often starts at that stage itself; as promoters work with favoured lenders to be the first to file for resolution. Although the IRP can be replaced, this does not necessarily happen. Banks, which have been in cahoots with promoters, also do not want forensic audits and investigations that may expose their role. This can be stopped by reducing their say in appointing the RP.
2. Random Selection: The Insolvency and Bankruptcy Board (IBBI) recently sought expression of interest from RPs for cases where the applicants have not proposed a name. It received over a thousand applications. The appointment of all RPs should be done by IBBI through this process and cases can be assigned through random selection using a computerised programme. RPs with a record of quick resolution and higher recovery must get a priority for bigger loan cases through a transparent ranking system.
3. Encourage Whistleblowers: The entire area of bad loans is so murky and the stakes so high that IBBI must have an active whistleblower process in place for those working with companies under resolution to report dubious deals or attempts by promoter-proxies to bid for assets. This will be an additional check on the RPs themselves.
4. Not the Lowest-cost Bidder: IBBI should also focus on the issue of costs and fees of the RP and the team that helps prepare the information memorandum and handle the bidding process in the 270-day period prescribed under the IBC. The process of selecting the lowest bidder is often counterproductive and will only lead to fixing and corruption. IBBI needs to fix a formula for paying the costs and fees of an RP to ensure their independence.
5. Ban the Promoters and Finance Head: Finally, most RPs say that the previous owners or promoters continue to attend office and attempt to meddle with the RP’s work. They need to be banned from the premises along with the chief financial officer, who failed to do his job. If the government is serious about ensuring that recovery of more than 12% to 15% of public money, largely leaked as loans by PSBs, is to be recovered, it needs to act now, to ensure fair dealing in lesser known cases that do not make headline news.
What is happening is nothing but 'Organised Looting' of public fund.
Remembering your efforts during April-1992, to expose the 'Securities Scam' done by Harshad Mehta.
must be strongly protested the loot.
The new law and the agencies have created a new environment that one does not know who is joing hands with whom to short-change the lenders. If lenders also become a party to the game, promoters will have the last laugh despite good intentions of the Government.
It's nothing but intelligence and smartness at play.
I have always believed that wrong side of intelligence dominates this Yuga spoiling good efforts of a few.
IBC draws from the evolved British bankruptcy and recovery code, and also Swedish code which entails compulsory bidding. Reforms in IBC since November 2017 have curbed the gaming propensities substantially. The 5-ways suggested in this article are robust and I am already seeing movements by IBBI in this direction. I am sure IBBI will take cognizance of these, and implement all of these very fast.