An industrialist, who has keen interest in the resolution of bad loans, told me that banks are no longer keen on the shining new bankruptcy law—Insolvency and Bankruptcy Code (IBC)—to recover bad loans. He says that banks prefer to find other solutions because of long delays and endless litigation, often leading to an outcome that is no better than what could have been achieved through negotiation.
According to him, the government has told bankers to work hard to avoid the liquidation route, because that fetches a pittance. So, banks now prefer to negotiate with promoters and are turning a blind eye to bids from absconding promoters or their front companies.
This indicates that the bankruptcy law will rapidly go the way of all previous legislations and debt recovery mechanisms that failed to help lenders recover bad loans. And, bankers in collusion with borrowers, supported by politicians, will ensure that banks will keep writing off bad loans and the exchequer will bail them out through repeated recapitalisation.
In other words, you and I will continue to pay for the massive bad loans of big industrialists, farmers and anyone else whose outstanding debt is condoned by the our politicians.
Bad loans of Indian banks are estimated at Rs10 lakh crore or more. Moreover, banks have been routinely cleaning up their books through massive ‘technical write-offs’, knowing full well that there will be almost no recovery in most cases. This is done as a tax-saving measure with full support from the finance ministry. Such write-offs are massive.
Gamed from the Start
Despite assertions of having rooted out corruption, many corrupt bankers have been complicit in gaming the IBC from the very beginning. In November 2017, the Insolvency and Bankruptcy Board of India (IBBI) published detailed guidelines on how creditors should evaluate bids. It asked the committee of creditors (CoC) to carry out due diligence to ensure that each resolution plan is viable, to avoid plans that may ‘lead to liquidation, post-resolution’, and ensure that persons submitting the plan ‘are credible’. This guidance was promptly ignored.
As Debashis Basu wrote in November 2017, “One of the many flaws of the badly drafted IBC and the whole new bankruptcy architecture is that it did not take into account the very Indian possibility that promoters (and others) will try to game the system in many obvious ways.” In September 2017, he had written about how the bankruptcy process was gamed from the very first resolution of Synergies Dooray Automotive Ltd.
However, all these clues were buried under the orchestrated hoopla and social media celebration by government ministers after the bidding wars leading to few successful resolutions such as Bhushan Steel, Monnet Ispat & Energy, Electrosteels and Binani Cement. Barring the keen interest among leading industrialists to acquire Essar Steel and Bhushan Power , the average recovery, in most cases, is below 25% and there are simply no buyers for many basket cases.
Of the first 12 accounts referred to bankruptcy proceedings, Bhushan Steel, Electrosteels Steel, Jyoti Structures and Alok Industries found buyers. Lanco Infratech and ABG Shipyard have gone into liquidation, while Amtek Auto also seems headed that way.
Essar Steel, Bhushan Power and Jaypee Infratech are embroiled in endless litigation. The only serious bidder for Jaypee Infratech, which owes Rs9,782 crore to creditors, is State owned NBCC Ltd, which has made a complex and conditional bid that does not seem to give lenders much hope of recovery.
The lenders of Era Infrastructure Engineering (debt in excess of Rs17,000 crore including subsidiaries/special purpose vehicles) are still struggling to find a workable resolution, since the group has arbitration awards with regard to the money owed to it by various entities, including the National Highway Authority of India.
IBC seems headed the way of many other failed laws such as SICA, BIFR, SARFAESI and others; of the 1,484 cases admitted, only 40 have been closed.
Let’s take a look at specific cases that are likely to derail IBC.
Liberty’s Games: London-based Liberty House, headed by Sanjeev Gupta, was one of the big movers & shakers in the bankruptcy business three years ago. It was always rumoured in business circles that Liberty House had no plan to hold on to the companies after getting them cheap. Now, Sanjay Gupta has messed up the resolution process and obstructed serious bidders in his three winning bids for ABG Shipyard, Amtek Auto and Adhunik Metaliks.
ABG Shipyard: On 25th April, NCLT (National Company Law Tribunal) ordered the liquidation of ABG Shipyard after Liberty House failed to pay up the small upfront fee on its Rs5,200-crore bid. ABG Shipyard owes a massive Rs18,245 crore to a consortium of 22 lenders, led by ICICI Bank. They would be lucky to recover even Rs2,200 crore, on liquidation.
Amtek Auto: Liberty House won Amtek Auto with an offer of Rs4,400 crore in July 2018. After it failed to pay up, NCLT’s Chandigarh bench recommended prosecution and allowed it to withdraw the bid after imposing a cost on it. On 4th May, IBBI filed a criminal complaint against Liberty House under Section 74(3) of IBC which, provides for prosecution and punishment including a jail term of up to five years and a penalty of up to Rs1crore.
Sanjeev Gupta and three top executives have been summoned by a special court for ‘wilful’ breach of the resolution plan and asked to be present at the next hearing on 11th July. Liberty House, in turn, has accused the resolution professional and Amtek Auto’s previous owners of misrepresenting facts in the information memorandum. It remains to be seen if it can make the claim stick, when it has reneged on two other bids.
Adhunik Metaliks Ltd: Here, too, Liberty House has missed multiple deadlines to pay up the Rs410 crore as an upfront cash payment. It hasn’t officially withdrawn its bid, but finds varied excuses to delay the payment. Adhunik Metaliks owes Rs 5,371 crore to lenders. Here, Liberty House has certainly derailed a proper resolution because Adhunik had other serious bidders wanting to acquire the company.
Sterling Biotech: As we have written earlier, here is a group that is under investigation by multiple agencies, including the Central Bureau of Investigation (CBI) and enforcement directorate (ED), for fraud, diversion of funds, money laundering and other offences. The four promoters --Nitin, Chetak and Dipti Sandesara and Hitesh Patel -- are absconding from India. And, yet, bankers, led by Andhra Bank, attempted to withdraw the two main group companies from the resolution process.
The Sterling group owes over Rs15,600 crore to its financial and operational creditors. While the flagship Sterling Biotech owes over Rs7,500 crore to lenders, sister concern Sterling SEZ owes over Rs8,100 crore. The Sandesaras, who are facing criminal investigation, had the gall to make an offer, from their safe hiding place overseas, to settle their loans by paying less than 45% of what they owe the banks. In two separate cases, NCLT has severely reprimanded the resolution professional as well as bankers for failing to make full disclosures to the court.
In Sterling SEZ, NCLT had first allowed the withdrawal from insolvency, but later recalled its order on 26th April and directed government to take punitive action against the senior officials of the lenders for misleading the Tribunal with a withdrawal plea.
The brazenness of the Sterling proposal and the alacrity with which banks attempted to accept it is all the more controversial because the Sandesara family is perceived to be close to the ruling government and the controversial CBI special director Rakesh Asthana.
Ushdev International: In what is considered a Liberty House-like case, a Singaporean bidder wants to acquire Ushdev International, a steel trading firm that ran up a fat debt of Rs3,450 crore. The company was founded by late Vijay Gupta and promoters held a 54% stake.
On 6th May, NCLT’s Mumbai bench asked the potential investor to submit an affidavit with regard to his offer to pay Rs200 crore upfront to acquire the company. At least one leading bank has objected to the move. They expect the company to fetch Rs900 crore, on liquidation. While we wait to see what happens next, business circles believe this is just a proxy bid. It will be a travesty of the IBC, if industrialists get to retain control with nearly 2/3rd of their debt wiped out. Although and amendment to the IBC is supposed to prevent promoters from bidding for their companies, Indian businessmen have been working hard to game the system and appear to be succeeding, going by the next case.
Gemini Communications: According to a report in BloombergQuint, National Company Law Appellate Tribunal (NCLAT) may have permitted a backdoor re-entry by the promoters in Gemini Communications Limited. The NCLAT order in this case says, “A scheme of compromise must be considered first at the liquidation stage before the assets of the company can be liquidated. But it hasn’t explicitly stated whether such a scheme can be proposed by promoters, who are barred to participate in the resolution process even at the liquidation stage under the IBC.”
The promoters of Gemini have reportedly offered Rs30 crore as part of the compromise, as against the liquidation value of Rs3 crore. Although Section 29A of IBC, explicitly bars promoter of defaulting companies from bidding, a couple of Supreme Court judgements are being cited by legal experts to justify this in compromise cases.
If the promoters of Gemini Communications manage to force such a compromise, Essar Steel is bound to fight for similar treatment. The Ruias are already in the Supreme Court using every possible argument and loophole to stop Arcelor Mittal from acquiring the company. As in most cases mentioned above, nobody is asking about the source of their money or their failure to pay up until the company was on the verge of being acquired.
The initial success of IBC was mainly due to the Modi government’s determination to bring crony capitalists, who have defrauded the banking system, to book. In less than three years, that determination seems to have eroded substantially. The fate of the Act now depends on the composition and leadership of the new government that is voted in, on 23rd May. The way the Act has been diluted by strange judgements, multiple amendments and collusions with bankers, it will take Herculean political will to make IBC work any better than the previous failed laws.
IBC is an iterative process unlike other laws. If it doesn't work, iterate and improve it with an ammendment. Stuff like GST and IBC will evolve organically, through amendments, because there's no way of knowing how it'll work unless it's put into practice.
The feedback from the public is extremely important for it to work. And that's precisely what the North Block is intent on doing. And honestly, they're responding to criticism rather well. GST has been tweaked here and there based on feedback.
IBC will take sometime to develop. One of the consequences and outcomes of IBC, I feel, will be development of bond markets, amongst other things. Let's see how this one pans out. It'll be interesting.
Anyone gaming the system/bad faith, must have criminal consequences to give the law some teeth. Otherwise as you say, inconsistencies between gemini and essar. Above all, the law and treatment must be even handed and fair with minimal or no discretion. If the assets get sold for less, so be it.
Wonder how the new govt will deal with it. If its a coalition govt, chances of successfully dealing with it are remote.
But the main problem might be the handling of the NCLT and the courts, which are poor quality in India unlike the UK or the USA.
The RBI and the Banks are interested in protecting the solvency of banks and their customers. Hence it would much rather seek recovery rather than exposure and punishment. Politicians and Bureaucrats have neither the experience nor the inclination to learn anything beyond their immediate objectives.
Let me give you a case from my own experience to illustrate the Banker’s view:
I remember, way back in 1977, when I was still a Management Trainee officiating as Branch Manager of Punjab National Bank, Kota Industrial Estate, for a very brief while during half yearly accounts closing. We had an enormous loan to a Mini Steel Plant on our books and the Mini Steel Plants were in bad trouble at the time.
As I went though the accounts for half yearly closing I noticed some heavy disbursements from the Medium Term Loan sanctioned to them by Head Office. They covered an invoice for a Vickers-Sperry Hydraulic jack, and a Thyristor Control Panel. (An EOT Crane had also been sanctioned under Term Loan but had not as yet been availed). The cheques, both to the same supplier, had been cleared through State bank of Bikaner and Jaipur and Punjab and Sindh bank respectively. I thought to myself that a supplier of such expensive equipment in a small place like Kota should be on my books rather than anybody else’s so I took a walk in the very hot Sun of April to the Bazaar to locate the vendor. There was no such vendor and no such address. I then visited the two Banks that had cleared the cheques and requested, under the clearing house arrangements and Bankers Book Evidence Act, whether I could see the accounts of the “vendorâ€. They were current accounts with only three entries in each. A deposit to open the account, the deposit of the cheque issued by debit to the Term Loan Account, and withdrawal to the exact amount of the cheques deposited. No other transactions over three months. The bankers were worried. I told them not to worry just yet and that I would get back to them.
I then visited the plant under erection to inspect the Jack and the Panel. They were there. The proprietors (directors of the private limited Company) were effusively hospitable and wanted me to go with them for a “Iscotchâ€. I told them I would do so after inspection. I also found out that they were very wealthy. Politically connected, sugar barons from Muzaffarnagar. So the plant was, very likely, a potential money laundering operation as such people do not really need loans except to justify the source of funds to the tax man. i.e. create a story line for white asset formation from black money.
Luckily for me, the plant was being erected by Textool Limited from Coimbatore and the staff were Tamil, so I spoke with them in Tamil, (much to the consternation of the Directors) and discovered that the Panel and the Jack had been supplied by them under the deferred payment guarantee issued by my Bank. This was a clear case of double financing where the Bank was financing the same assets through Deferred Payment Guarantee as well as Medium Term Loan. This was a common phenomenon in India and I had dealt with cash credits against stocks under lock and key where the go downs have two doors at its two ends. Each bearing the sign of having been hypothecated to a different bank.
I then took the precaution to write letters to my school class mates who were still in various Hostels (IIT Madras, BITS Pilani) and at home in Bangalore enclosing letters addressed to the Chairman and the Chief Vigilance Officer of the Bank, Chief of Police in Rajasthan and the Department of Banking Operations at the RBI, various newspaper editors, and asking my friends to mail the enclosures unless they heard from me once every fortnight.
I then summoned the Directors for a meeting. I declined the “Iscotch†and the cabaret.and chose the Branch, after hours, as the venue. I told them what the problem was. They immediately offered me a bribe. The more I refused, the more it went up. To four lakhs of rupees, which at that time was enough to buy a prime property in my home town of Bangalore. At that point, they must have reached the limit of their budget so they began to threaten me. Muzaffarnagar was notorious at that time for murderous members of the Congress Party. I told them of the arrangements that I had made. I had them now. So they pleaded with me to spare them. I told them the matter was very simple. I knew they had vast means, so all they had to do was tap them. They thought I was angling for a bigger bribe. Then I gave them my ultimatum. I asked them to write me a letter saying that they had wrongly applied for the Medium Term Loan and asking for the cancellation as the Jack, the Panel and the Crane were to be supplied under Deferred Payment Guarantee. And then. the sting in the tail: please enclose a cheque for the full value availed by you within a week (as I was being transferred out by then) so that I can extinguish your Term Loan account balance.
They paid up. And I wrote a nasty letter to the Chief (Credit) about what could we officers on the field do if Head Office exhibits such laxity in credit appraisal ,with a copy to the Chairman and closed the matter. It was important for me, as a Banker, to recover the money entrusted to me by the depositors rather than score brownie points and pose as a hero. This is the difference between a Banker’s perspective and a politician’s or bureaucrat’s perspective.
Bankers are ( or should I say, used to be?) accountable for other people’s money. Politicians and Bureaucrats are not and never were.
Replied to SuchindranathAiyerS comment 6 years ago
Dear sir.. Extremely Well written.. Crooks are created as no one is a crook.. They are created by rogue politician bureaucracy or corruption driven bank managers.. With a new government formation at least if a few bankers have to live in tihar the message will be clear.. Don't mess.. Also a director at Andhra bank is counting days as is mel of IDBI... Yes unscrupulous media will make a hue and cry calling it witch hunt terrorism etc but if the hand is gangrenous cut it
Replied to SuchindranathAiyerS comment 6 years ago
You did an extraordinary job. Had this been the ethos in banks, they would have healthy entities. Fact is that both bankers and corporates have nibbled away banks with impunity.
My competition is not China, it is the government of India. Outsource the government functions to another country or agency for the betterment of India
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The feedback from the public is extremely important for it to work. And that's precisely what the North Block is intent on doing. And honestly, they're responding to criticism rather well. GST has been tweaked here and there based on feedback.
IBC will take sometime to develop. One of the consequences and outcomes of IBC, I feel, will be development of bond markets, amongst other things. Let's see how this one pans out. It'll be interesting.
Wonder how the new govt will deal with it. If its a coalition govt, chances of successfully dealing with it are remote.
But the main problem might be the handling of the NCLT and the courts, which are poor quality in India unlike the UK or the USA.
Let me give you a case from my own experience to illustrate the Banker’s view:
I remember, way back in 1977, when I was still a Management Trainee officiating as Branch Manager of Punjab National Bank, Kota Industrial Estate, for a very brief while during half yearly accounts closing. We had an enormous loan to a Mini Steel Plant on our books and the Mini Steel Plants were in bad trouble at the time.
As I went though the accounts for half yearly closing I noticed some heavy disbursements from the Medium Term Loan sanctioned to them by Head Office. They covered an invoice for a Vickers-Sperry Hydraulic jack, and a Thyristor Control Panel. (An EOT Crane had also been sanctioned under Term Loan but had not as yet been availed). The cheques, both to the same supplier, had been cleared through State bank of Bikaner and Jaipur and Punjab and Sindh bank respectively. I thought to myself that a supplier of such expensive equipment in a small place like Kota should be on my books rather than anybody else’s so I took a walk in the very hot Sun of April to the Bazaar to locate the vendor. There was no such vendor and no such address. I then visited the two Banks that had cleared the cheques and requested, under the clearing house arrangements and Bankers Book Evidence Act, whether I could see the accounts of the “vendorâ€. They were current accounts with only three entries in each. A deposit to open the account, the deposit of the cheque issued by debit to the Term Loan Account, and withdrawal to the exact amount of the cheques deposited. No other transactions over three months. The bankers were worried. I told them not to worry just yet and that I would get back to them.
I then visited the plant under erection to inspect the Jack and the Panel. They were there. The proprietors (directors of the private limited Company) were effusively hospitable and wanted me to go with them for a “Iscotchâ€. I told them I would do so after inspection. I also found out that they were very wealthy. Politically connected, sugar barons from Muzaffarnagar. So the plant was, very likely, a potential money laundering operation as such people do not really need loans except to justify the source of funds to the tax man. i.e. create a story line for white asset formation from black money.
Luckily for me, the plant was being erected by Textool Limited from Coimbatore and the staff were Tamil, so I spoke with them in Tamil, (much to the consternation of the Directors) and discovered that the Panel and the Jack had been supplied by them under the deferred payment guarantee issued by my Bank. This was a clear case of double financing where the Bank was financing the same assets through Deferred Payment Guarantee as well as Medium Term Loan. This was a common phenomenon in India and I had dealt with cash credits against stocks under lock and key where the go downs have two doors at its two ends. Each bearing the sign of having been hypothecated to a different bank.
I then took the precaution to write letters to my school class mates who were still in various Hostels (IIT Madras, BITS Pilani) and at home in Bangalore enclosing letters addressed to the Chairman and the Chief Vigilance Officer of the Bank, Chief of Police in Rajasthan and the Department of Banking Operations at the RBI, various newspaper editors, and asking my friends to mail the enclosures unless they heard from me once every fortnight.
I then summoned the Directors for a meeting. I declined the “Iscotch†and the cabaret.and chose the Branch, after hours, as the venue. I told them what the problem was. They immediately offered me a bribe. The more I refused, the more it went up. To four lakhs of rupees, which at that time was enough to buy a prime property in my home town of Bangalore. At that point, they must have reached the limit of their budget so they began to threaten me. Muzaffarnagar was notorious at that time for murderous members of the Congress Party. I told them of the arrangements that I had made. I had them now. So they pleaded with me to spare them. I told them the matter was very simple. I knew they had vast means, so all they had to do was tap them. They thought I was angling for a bigger bribe. Then I gave them my ultimatum. I asked them to write me a letter saying that they had wrongly applied for the Medium Term Loan and asking for the cancellation as the Jack, the Panel and the Crane were to be supplied under Deferred Payment Guarantee. And then. the sting in the tail: please enclose a cheque for the full value availed by you within a week (as I was being transferred out by then) so that I can extinguish your Term Loan account balance.
They paid up. And I wrote a nasty letter to the Chief (Credit) about what could we officers on the field do if Head Office exhibits such laxity in credit appraisal ,with a copy to the Chairman and closed the matter. It was important for me, as a Banker, to recover the money entrusted to me by the depositors rather than score brownie points and pose as a hero. This is the difference between a Banker’s perspective and a politician’s or bureaucrat’s perspective.
Bankers are ( or should I say, used to be?) accountable for other people’s money. Politicians and Bureaucrats are not and never were.