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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Insolvency And Bureaucratic Code

In India, economic reforms begin with good intent only to flounder in the quicksand of corporate rivalry. The IBC is too important a reform to be held hostage to the darker forces that inhabit India's legal and corporate world


The Insolvency and Bankruptcy Code (IBC) is one of the most farsighted economic reforms legislated by the Narendra Modi government. It promises to mitigate the principal weakness in the Indian economy - non-performing assets (NPAs) that have squeezed banks' capacity to lend to corporates. In turn that has dried up private investment by cash-strapped companies. This has dampened economic growth and job creation.

The Insolvency and Bankruptcy Code, legislated in 2016, was meant to strike at the root of the problem by establishing a legal mechanism that would help get bankrupt companies with unpaid bank loans but good underlying assets new buyers. Haircuts would vary. But the estimated Rs 9 lakh crore NPA deadweight would lighten significantly, enabling banks to restart corporate lending and get the economy up to speed.  

The IBC has worked well so far with its first batch of 12 large bankrupt companies near to resolution. Time limits on completing negotiations between lenders (committee of creditors - CoC) and resolution professionals (RP), who jointly troubleshoot for buyers, sellers and banks, have concentrated minds. But as usually happens in India when lawyers, bankers, accountants and corporates enter into commercial disputes, a numbing bureaucratic mindset overtakes the process. Delays became endemic.

Anticipating this problem, the government in June 2016 had constituted the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) to resolve legal challenges by thwarted bidders for bankrupt companies. The mechanism has worked well - up to a point. The NCLT has eleven benches across the country, including a principal bench in Delhi. But no one quite anticipated the ingenuity and doggedness of Indian entrepreneurs. Several cases nearing resolution have been stymied by repeated appeals to the NCLAT. One of the most pernicious delays has been the never-ending battle for Binani Cement.

Both the Aditya Birla group's UltraTech Cement and Dalmia Bharat covet Binani Cement which has outstanding liabilities of Rs 7,290 crore. It admitted to insolvency proceedings at the NCLT's Kolkata bench in July 2017. Ten months later, things are back to square one. Dalmia bid Rs 6,932 crore for Binani and emerged the highest bidder, edging out UltraTech Cement by merely Rs 100 crore. The matter should have ended there and the resolution process completed.

But in India nothing is so simple. UltraTech upped its bid to Rs 7,960 crore. Binani's committee of creditors declined the offer because it was made after Dalmia was declared the winning bidder. The lawyers now got into the act. Former Attorney General Mukul Rohatgi, appearing for UltraTech, told the Kolkata bench of the NCLT that his client was prepared to outbid any revised Dalmia offer by Rs 500 crore. Oddly, the Kolkata bench agreed to re-open bidding, saying in its order: "It is made clear that if both (companies) are willing to participate in the bidding process, the committee of creditors is expected to allow both in the bidding process."

The Kolkata bench extended the resolution process to June 24, leaving the banks and its committee of creditors in a quandary. The creditors would welcome UltraTech's higher bid but a messy legal battle with the original bid winner could delay resolution - defeating the very purpose of the Insolvency and Bankruptcy Code legislation. Dalmia Bharat issued this public statement: "We are surprised by the order passed by the NCLT.  In our view, any revised offer from an unsuccessful resolution applicant outside the resolution process cannot become a basis for setting aside the decision of the committee of creditors. We have strong conviction that we have followed the law as per due process and believe that we will eventually succeed. We will take all the appropriate steps required."

There are hundreds of insolvency cases before the NCLT. If one case causes delays due to an arbitrary order, a precedent will be set. The contest between Britain's Liberty House and the Tatas for insolvent Bhushan Power and Steel has followed a similarly rocky path. The committee of creditors rejected a proposal to initiate rebidding. Liberty House thought it could now go ahead with the purchase of Bhushan Power and Steel with an upfront payment of Rs 18,500 crore, considerably higher than Tata's offer of Rs 17,000 crore. But here too there's a twist in the tale.

State Bank of India is the lead creditor in this transaction. The SBI-led CoC had initially rejected the Liberty House bid because it came 12 days after the February 8, 2018 deadline. The CoC rightly disqualified the bid. Liberty House approached the NCLT to appeal the decision which passed an order to reopen bidding. A further legal challenge from the two thwarted early bidders, Tatas and JSW, will however delay the transaction instead of giving banks much needed NPA relief. The principle of accepting bids after bidding has closed though must be discouraged in future to ensure certitude and credibility of the IBC process.

Other speed breakers to a quick resolution involve Essar Steel and Ruchi Soya. They highlight how a progressive legislation can be muddied by lawyers, accountants, judicial officers and rival corporate houses. Arcelor Mittal, the world's largest steelmaker headed by Lakshmi Mittal, and Numetal, whose majority stake holder is Russia's VTB Capital, are competing fiercely for bankrupt Essar Steel's assets. Arcelor Mittal has bid around Rs 32,000 crore, a smidgeon higher than Numetal. Arcelor Mittal's eligibility has, however, been challenged in the NCLAT which will hear both bidders on May 17, further delaying the banks' debt resolution even as interest costs continue to rise.

Meanwhile insolvent Ruchi Soya, to demonstrate how the IBC can be derailed, has moved the Mumbai bench of the NCLT to reverse a Rs 48-crore debit entry made by ICICI Bank in the company's current account. Ruchi Soya owes banks Rs  12,000 crore. Senior lawyers are involved in the case which again will prolong a resolution of Ruchi Soya's liabilities to banks and other lenders.
In India, economic reforms begin with good intent only to flounder in the quicksand of corporate rivalry. The IBC is too important a reform to be held hostage to the darker forces that inhabit India's legal and corporate world.

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