In less than three years since it was promulgated, the highly touted Insolvency & Bankruptcy Act (IBC) is going the way of a dozen previous statutes that failed to fix our ‘bad loans’ problem. As always, regulators and courts have contributed to delays and confusion.
The Rs42,000-crore bid by Arcelor Mittal for Essar Steel, which would have given the Modi government much to trumpet about, has run the gauntlet of multiple court proceedings over the past 600 days but is unlikely to get past the Supreme Court (SC) before a new government is installed at the Centre.
India’s apex court itself is facing its worst credibility crisis, with a three-judge bench set up to investigate allegations of fixing by corporate houses and charges of sexual harassment against the chief justice.
In May 2019, when the IBC completes three years of existence, about 40% of the 1,484 cases admitted for insolvency proceedings have been completed. Of these, only two cases—Bhushan Steel acquired by Tatas, and Electrosteel Steel by Vedanta—allowed lenders to recover significant sums. A few more steel and power companies could have been successful; but, like Essar Steel, they are still winding their way through the legal obstacle race. In most other cases, the recovery by lenders is 25% or much less.
But the problem is not with the IBC process alone. The bigger issue is compromised lenders, political interference and confused regulators who remain silent when they should act and obstruct when they ought to facilitate genuine resolution. A leading banker is fond of saying, ‘regulation can be rule-based or based on principles—in India it is neither—it is person-based’.
There are many examples of how this works, going back over the decades. But let’s look at two recent examples and compare government response, because we have been vociferously told, time and again, that ‘phone-banking’ is dead and this government believes in being hands-off and result-oriented.
The Latest in Crony Capitalism
Jet Airways is the classic case of crony capitalism; but Naresh Goyal’s gamble of arm-twisting the government into bailing him out again, failed. The wily Mr Goyal probably thought that the government wouldn’t risk the negative publicity and bad optics of 20,000 jobs lost when the election process had already begun. He got that right. Led by Rajnish Kumar, chairman of State Bank of India (SBI), the lenders had, indeed, structured a dubious deal which would have allowed Mr Goyal to re-enter Jet, after pretending to step down to facilitate a Rs1,500-crore cash injection, where banks acquired a 51% shareholding by converting one rupee of debt.
The deal, proudly stitched together by SBI, was pure hogwash. Jet Airways, as it is now clear, has hardly any assets to justify the Rs8,500-crore debt that mainly public sector banks (PSBs) have lent, over the years. Many of its aircrafts are already secured through a first charge by other lenders, including the US Exim Bank. So what was the basis on which banks were planning to inject another Rs1,500 crore with nothing to collateralise? Why wasn’t Mr Goyal being asked to bring in more money? We, the people, have no answers. I now learn that constant phone calls from Delhi were pushing bankers to agree to this solution; but many of them dug in their heels and refused to sign off on fresh loans without written instructions. When nothing was forthcoming in writing, Jet Airways bit the dust—right in the middle of a high-voltage election.
Let’s not forget that the Jet Airways’ situation was no different from that of Kingfisher Airlines, where IDBI Bank, probably succumbing to calls from Delhi, had lent money to Vijay Mallya against the non-existing good will of his airline brand. Kingfisher Airlines went belly up in 2012; but in 2017, under this very government, the former IDBI chairman and three
other bankers were arrested. No banker was willing to risk a similar situation this time, doesn’t matter if PSBs stand to lose over 80% or more of the money that Jet Airways owes them.
Shree Renuka Sugars
Now, let us look at Shree Renuka Sugars and how its promoter Narendra Murkumbi handled a bad situation. Once the poster child of the farm sector with global ambitions, the company piled up debt as well as losses after its international expansion soured and the sugar industry hit a bad patch. In 2014, the promoters brought in Singapore-based Wilmar International, a top Asian player in the agri-business, which acquired 27%. The promoters remained in control of Shree Renuka Sugars.
However, the market regulator, SEBI (Securities and Exchange Board of India), treated it as a significant acquisition and asked both promoters to make an open offer to other shareholders. In 2017, the Murkumbis agreed to exit, to find a solution to the huge outstanding debt problem. As part of the deal, Wilmar invested another US$118 million and guaranteed the debt of Rs2,700 crore. Now, SEBI demanded another open offer on the grounds that there was a change in management control. This was done and entailed an outgo of another Rs800 crore or so.
The debt restructuring was completed on 9 March 2018. Wilmar now owns 58% of the company, while Mr Murkumbi is non-executive director, with his family owning less than 1% of the equity. Under the 12 February 2018 circular of the Reserve Bank of India (RBI), this restructuring and change in control would have ensured that the account was no longer a non-performing asset (NPA) on the books of banks, since it was servicing its debt obligations on schedule. In fact, RBI inspectors had gone into the deal in detail in FY17-18 and found no problem with it.
(Note: The relevant portion of the 12 February circular read: “In case of change in ownership of the borrowing entities, credit facilities of the concerned borrowing entities may be continued/upgraded as ‘standard’ after the change in ownership is implemented, either under the IBC or under this framework. If the change in ownership is implemented under this framework, then the classification as ‘standard, shall be subject to the following conditions.” All the conditions laid down were met in this case.)
So, here was a promoter who, unlike Mr Goyal, voluntarily relinquished control, in the interest of the company and his own debt obligations and facilitated a clean and amicable change of management. He also made two open offers, unlike Spice Jet, where, in a similar situation SEBI granted the new promoter, Ajay Singh, a discretionary exemption
from making an open offer and did not even examine the deal closely.
Yet, typical of India, this wasn’t good enough for our regulators. On 22nd March, RBI, without any provocation or new development suddenly wrote to all banks asking them to declare Shree Renuka Sugars as an NPA, on the grounds that there was no management change and Wilmar was already in the picture when the loans were bad. It also wanted them to initiate recovery proceedings.
But wasn’t Wilmar brought in precisely to mitigate the bad loan issue? Also, if there was no change in management, why did SEBI ask the company to make a second open offer when its stake went up to 58% and it stepped in to guarantee loans? When there is a formal mechanism for coordination and cooperation between regulators, what explains the divergence in views between two powerful regulators, or RBI’s capricious action?
Also, remember, RBI has been complicit in the massive rise in bad loans of Indian banks, and was also sleeping over the rising debt of a systemically important group like IL&FS (Infrastructure Leasing and Financial Services), yet, it has the temerity to make a capricious U-turn in the Shree Renuka Sugars to harm a potential turnaround on specious grounds. RBI’s irresponsible action affects the business and borrowing prospects of Shree Renuka Sugars and also hurts banks, investors, employees and farmers; but who will hold RBI accountable?
A defiant RBI even had a top official, Arun Pasricha, issue a media clarification. He ignores the sequence of events at Shree Renuka Sugars and writes, “As Wilmar was a party to the default by virtue of holding 38.57 per cent of the equity of Shree Renuka Sugars, it stands disqualified as an acquirer under the IBC.” Wouldn’t it have been wonderful if RBI had exercised such strict, one-sided, diligence to rein-in IL&FS, which ran as a one-man fief under Ravi Parthasarathy, before it collapsed? Where was its wisdom and intervention, even recently, when banks were hatching a strange bailout of Jet Airways?
According to media reports, an angry Wilmar had planned to drag RBI to court; but the company has denied these reports. Any litigation in India is long-drawn, expensive and, often, self-destructive; and dragging the regulator to court is even worse.
As I said earlier, Indian regulators do not operate on principles or rules; so their actions differ from one entity to another. Will RBI dig in its heels again and set itself up for another defeat in court or show the sagacity to re-examine its flawed action for the greater public good?