The union government has promulgated an ordinance seeking to amend the Insolvency and Bankruptcy Code [IBC] – a law that was passed by the parliament last year aimed at faster and time-bound resolution of non-performing assets [NPAs] of commercial banks nearly 75% of which are with public sector banks [PSBs].
The resolution process involves the lender [read: bank] – under directions from the Reserve Bank of India [RBI] – making a reference of defaulting borrower to the National Company Law Tribunal [NCLT] which appoints interim resolution professional [IRP] for conducting the process. Under it, potential bidders make a bid for the company and the amount thus realized is used to pay back the loan. The process involves banks taking a hair-cut.
Under the extant law, there was no bar on defaulting promoter of the company making a bid for it. The amendment seeks to prevent him/her from taking part. Those debarred include willful defaulters, persons who had their NPAs pending for more than one year, those who were found to have diverted borrowed funds, persons indulging in fraudulent transactions, directors disqualified by ministry of corporate affairs or Securities and Exchange Board of India [SEBI].
There are a couple of niggling questions. Having enacted the law only last year, what was the urgency of coming up with an amendment? Why could not the government wait for the parliament session which commences on December 15, 2017? What was the urgency of doing it through an ordinance route?
Given that the NPAs had reached an unsustainable high level hampering banks ability to increase lending [at a time when it was needed the most] early this year, the government decided to put their resolution on fast trajectory and accordingly made necessary amendment in the Banking Regulation Act [BRA] arming RBI to give directions to banks. As a follow up, 12 such cases [accounting for 25% of the total NPAs] were referred to NCLT in June, 2017.
In most of these cases, existing promoters have shown interest in bidding for the company put on the block. This has created an anomalous situation. The very persons [read: promoters] who were responsible for healthy running of the company and generating enough cash to meet repayment obligations to its creditors [primarily banks] but abdicated this responsibility leading to build up of NPAs are now coming forward to buy back.
This gives rise to suspicion that either they diverted funds to uses [including deployment in shell companies] other than the projects for which they borrowed or they were in a position to pay back and yet decided not to pay [willfully defaulted] leading to NPA build-up. Now, with inevitable decline in the value of asset, they are coming forward to buy it back. In plain words, first you run down a company and then, wrest control over it at the cost of banks.
There could be some borrowers who are neither willful defaulters nor diverted funds but were victims of factors beyond their control such as dumping of foreign products. In such cases, when the external environment improved leading to better cash generation [in steel sector for instance], they could have come forward to pay back. In fact, there were schemes such as SDR [strategic debt restructuring], S4S [scheme for sustainable structuring of stressed assets] etc which they could have used for reducing the burden of amortization. Yet, if they did not bother, such persons cannot also be beyond suspicion.
As regards persons whose loans turned NPAs because their projects could not take off due to cancellation of license [coal mining or spectrum], they cannot even be considered for the benefit of ‘factors beyond control’. They had procured licenses using unethical means and corrupt practices and faced the inevitable.
In this backdrop, it is only apt that the government has made a thoughtful move to prohibit all such promoters from participating in the bid. This is all the more necessary to prevent any wrong signal at a time when opposition parties are alleging that Modi – dispensation is favoring a few industrialists. The choice of ordinance route also cannot be faulted as without it either the wrong [letting defaulter promoter bid] would have been committed or the auction process gets delayed.
Ironically, this amendment is being opposed in certain quarters. PSBs are worried that this will lower realization from the sale. The CEO of a PSB even opined “the banks will turn bald instead of just a haircut”. The assessment is not only far-fetched but even flawed.
It pre-supposes that inclusion of the defaulting promoter in the list of bidders would add value to the bid thereby help in reducing the extent of hair-cut [read: loss] taken by banks. This is self-contradictory. If, his participation or otherwise were to make such a big difference, it means that he is financially strong. Indeed, if this were so then, why would he not pay back the loan?
Alternatively, if despite being financially sound, he did not bother to pay back, it is all the more necessary that he is excluded. This is because in a scenario of his wresting control over the company, he is more likely to repeat the wrong committed in the past making the banks perennially vulnerable. A somewhat better price realization at the cost of letting a dubious promoter run business is not advisable.
For an economy of India’s size, an ever expanding market and at a time when the investor sentiment is at a crescendo [thanks to the rapid pace of reforms unleashed by Modi – government], there won’t be any dearth of bidders for the assets put on auction. Hence, the banks would be able to maximize realization even without the promoter [albeit defaulter] participating in the bid.
The opposition to the amendment is also on the ground that this will delay the process as fresh bids need to be invited under the revised rules. This is a very trivial argument in a landscape where the banking sector is undergoing a major overhaul with focus on ‘healthy’ and ‘robust’ lender-borrower relationship. Even so, the IBC allows for a leeway of 90 days in addition to 180 days allowed for resolution process to be consummated.
Team Modi is doing all the right things to deal with the problem of NPAs. The amendment to exclude willful defaulter makes the process more credible. It needs to be pursued vigorously.