Changed priorities 

Changed priorities 

Context

The government’s move will shift attention away from recovery of bad loans to selling assets of defaulting corporates

The Irony

The 2017 Forbes India List says that the combined net worth of India’s 100 wealthiest stood at a whopping $479 billion, top corporate borrower groups in India are unable to repay loans and make timely interest payments.

Tackling NPAs

The government has taken the high moral ground to deal with the menace of non-performing assets or NPAs that have brought many public sector banks on the verge of bankruptcy.

Amendment of IBC 2016

It sounded the bugle for errant promoters with its ordinance of November 23 amending the Insolvency and Bankruptcy Code (IBC) 2016.

Lead to further loss

Many are of the view that if the errant promoter is disqualified from the bidding process it will lead to further losses for banks.

Merely signals intent

However, the ordinance is not likely to either eliminate errant promoters or hugely escalate bank losses apart from the deep haircuts already suffered. It merely signals the government’s intent to shift attention away from recovery of bad loans to selling the assets of defaulting corporates.

No explicit direction from the government

The May 2017 ordinance directed banks to accept deep haircuts on their non-performing loans. However, there was no explicit direction from the government as the majority owner of public sector banks to recall the outstanding loans and recover as much as possible against the personal guarantees of promoters.

Corporate Defaulters being praised

• Paeans (a song of praise or triumph) are being sung in praise of corporate defaulters for their stellar role in the development of the infrastructure sector
• The Mumbai and Delhi airports are being cited as examples of the success of the public-private partnership (PPP) model
• The fact that defaulting corporates such as GMR Infrastructure, GVK Power and Infrastructure, and Jaiprakash Associates borrowed more money than they could repay is being overlooked and their inability to repay is sought to be justified by “circumstances beyond their control”.

No change in the Creditworthiness of these Corporates

These corporates have not been downgraded on their creditworthiness parameter although the Reserve Bank of India (RBI) has been monitoring all large loans through the Central Repository of Information on Large Credits (CRILC) since 2014.

Questions rises

Would the government show the same leniency to the 32,000 odd home buyers of JaypeeInfratech and waive off their home loans since they may not get possession of their flats due to “circumstances beyond their control” ?

Corporates-bank nexus

The fact that lending banks in case of large borrowers were operating as a consortium of a score or more of banks obviates the need for any investigation into the corporates-bank nexus that caused this loss of lakh-crores of depositors’ money

The all-powerful Resolution Professional

The recent ordinance makes the resolution professional all powerful

It is now up to the resolution professional to decide who will be eligible to bid for the defaulter companies or their assets.

The Ordinance

• The ordinance conveys the urgency of impeccable antecedents of bidders so as to exclude wilful defaulters as well as companies whose interest and charges are outstanding for a period of one year or more
• An existing promoter is eligible to bid for majority control only if all dues are paid
• A defaulting promoter is not even allowed to bid indirectly through or along with other parties since “connected persons” are excluded from eligibility
• A strict interpretation of the ordinance would mean that the loan accounts of each one of the 400-odd defaulter corporate borrowers are technically classified as NPAs. Otherwise they would not have reached this stage of resolution.

Unsuccessful restructuring

These accounts are likely to have been through various rounds of unsuccessful restructuring in the past

• Having failed to repay even the reduced amounts of loan and interest to the banks, their past credit history should raise serious questions on their antecedents
• Hence, the promoters of these companies should not qualify as eligible bidders
• So far, none of the first 12 corporates referred to the IBC has been debarred from bidding back their companies after driving them aground.
• Thus, the ordinance creates the scope for disqualifying an existing promoter or including a rank outsider into the bidding process.

IBBI

• The Insolvency and Bankruptcy Board of India (IBBI) is the regulator set up on October 1, 2016 under the Insolvency and Bankruptcy Code
• The resolution professionals entrusted with the responsibility of sorting out the insolvent companies or individuals can be registered with any one of the three insolvency professional agencies.
• The IBBI is assisted by the disciplinary, advisory and technical committees

Top Corporates as heads of various IBBI Committees

• A quick glance at the IBBI website reveals that the advisory committees on corporate insolvency and liquidation are chaired by several top corporates.
• While there is nothing unusual about government consultation with corporate India, the appointment of corporates as heads of important corporate insolvency advisory committees under IBBI does not inspire confidence in the credibility of the resolution process

Conclusion

The recent ordinance may end up being used selectively to defeat the very objective of penalising the errant promoter. The banks will only lose if resolution is sidetracked by the ensuing power struggle among corporate India to purchase distressed assets at rock-bottom prices.