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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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Reboot Bankruptcy Code

Speed and clarity are of the essence if the IBC is to live up to its promise of cleaning up bank balance sheets

Photo Credit : Shutterstock


In India nothing is as it seems. The Insolvency and Bankruptcy Code (IBC) is widely regarded as one of the most significant reforms of the Narendra Modi government. The legislation completes two years in December 2018. And yet what began as a game-changer is in danger of becoming entangled in a legal and procedural web. 

The initial prognosis was good. For the first time since Independence, a strong law was passed by parliament to strike at the root of the bank NPA crisis: wilful defaulters who used legal shields with impunity to avoid repaying bank loans that were often obtained by using political patronage. 

Examine the facts. A total of 9,000 cases have come for redressal under the IBC over the past two years. Around 3,500 cases were resolved at inception – before they were admitted. The sword of a strong insolvency law can concentrate the most devious minds. These 3,500 cases, resolved at the pre-admission stage, led to banks and other creditors receiving repayments of Rs. 1.2 lakh crore from defaulting promoters. 

The story now begins to wobble. Of the remaining 5,500 cases pending under the IBC, only 1,300 have so far been admitted for resolution. The rest await approval based on an assessment of their bona fides. The government is hopeful of quick settlements in hundreds of the 1,300 cases approved for resolution, taking likely recoveries up to Rs. 2.40 lakh crore. Another Rs. 60,000 crore in NPAs have become standard accounts in lenders’ books by promoters repaying overdue amounts. 

The report card of two years therefore reads: NPAs of around Rs. 3 lakh crore across 4,800 insolvency cases have been resolved or are under active resolution. That appears impressive and is. But for the remaining 4,200 cases still before the tribunals, legal hurdles have slowed progress. Several big cases have breached the 270-day resolution deadline mandated by the IBC. The National Company Law Tribunal (NCLT) is understaffed. The National Company Law Appelate Tribunal (NCLAT) too suffers from infrastructure and staff issues. 

There are two main reasons for delays. First, defaulting promoters use every legal artifice to drag out the resolution procedure. Rivals put in late bids and go into appeal if the bid is rejected. Some move the Supreme Court to seek a stay even when the NCLAT has dismissed their bids and all avenues of appeal have been exhausted. Fortunately, the apex court has been strict to enforce the discipline necessary to ensure the IBC does not get caught in a legal quagmire. 

The second reason for the slowdown is laxity at the tribunal level itself. For example, the Ahmedabad chapter of the NCLT on Novmeber 28 deferred hearing the Essar Steel case till mid-December because of lack of quorum – one of the member-judges, Manorama Kumari, was on leave. That left 21 applications due to be heard on the contested Essar Steel resolution in limbo. 

Speed and clarity are of the essence if the IBC is to live up to its promise of cleaning up bank balance sheets. Promoters will no longer fear the IBC if they feel it can be subverted by legal sleight of hand. A worried government knows that its insolvency law that promised so much can easily be upended by callous promoters and benami bidders. Corporate Affairs Secretary Injeti Srinivas, clearly aware of the danger, said in an interview: “We have to see if we need to recognise pre-packaged bankruptcy plans in the law or if it is something that we can do even now. We will ask the Insolvency and Bankruptcy Board of India to look into it.” 

With overall NPAs estimated at well over Rs. 10 lakh crore, decisive action is needed. Reporting for Mint, Gireesh Chandra Prasad wrote: “The Union Government is set to introduce a quick corporate rescue option which will be finalised mostly in boardrooms (rather) than in courts, as it seeks to avoid prolonged and costly legal battles over the resolution of bankrupt companies. Under the so-called ‘pre-packed’ bankruptcy schemes, creditors and shareholders will approach a bankruptcy court with a pre-negotiated corporate reorganisation plan, as prevalent in countries such as the US and the UK. With this step, the government aims to cut down on litigation and ensure that deadlines are met. A time-bound resolution of bankrupt assets is crucial as it would help prevent any erosion in their value. A consensual approach to corporate rescue will also save costs.” 

The NPA crisis lay hidden for over a decade. In the go-go years of 2005-08, banks lent liberally. “Phone banking”, as PM Modi sardonically termed it, was in vogue. A telephone call from the ministry of finance to a PSU bank chairman could open doors – and the bank’s treasury. 

When global financial markets seized up after the Lehman Brothers crash in September 2008, many large bank loans to Indian promoters began to go bad as infrastructure and other projects failed to take off. Till 2015, rapidly escalating NPAs were hidden by banks as standard accounts in their books. Overdue amounts were rolled over along with accrued interest. The Reserve Bank of India (RBI) looked the other way. The most damaging period for NPAs accumulating but remaining unrecognised as NPAs in bank balance sheets was 2010-2015.

In 2015, the RBI finally opened its eyes after the Modi government had spent a year assessing the growing pile of unrecognised NPAs. Under new rules, banks began to reclassify overdue loans as NPAs. When the true picture emerged, it was clear surgery would be needed. The 2016 insolvency and bankruptcy legislation was the scalpel.

After two years, the IBC has been a mixed success. It can become a game-changer only if mechanisms are put in place to strictly enforce the 270-day resolution deadline and increase the number of NCLT and NCLAT benches around the country. 

Promoters who earlier borrowed with impunity no longer do so. Phone banking has ceased. Future avatars of Nirav Modi and Mehul Choksi will now find it increasingly difficult to subvert the banking system. But until all stakeholders in the IBC ecosystem pull in the same direction, bank NPAs will remain hostage to delays and artificial roadblocks.

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Bankruptcy code magazine 24 November 2018

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