FOCUS
INSOLVENCY & BANKRUPTCY CODE: WILL IT BE A GAME CHANGER!?
Commenting on the 70th Independence day celebration, ISSUES & CONCERNS in its focus article “Modinomics &Muddled Priorities: India@70”, for September 2017 had written “Actually what the Central Government should have done on priority basis, is to tackle ballooning Non Performing Assets (NPA) of public sector banks. Allowing Vijay Mallya to flee certainly was bad for the country, when small borrowers are publicly humiliated by banks for non-payment and banks employ all kinds of tricks to force them pay. And look at the unrelenting agrarian crisis, where farmers are committing suicides to escape the debt trap of a mere lakh of rupees or less. Right now the NPA figure is close to over Rs. 8 lakh crores. All of it is not business losses. Good part of the money borrowed has gone to the wayward living style of high end borrowers, who have siphoned off borrowed business finance into personal and family a/cs. And this story is not from yesterday, it happened for all these 7 decades under different political dispensations. So what has really changed for millions of ordinary Indians, for whom Independence Days have come and gone like any other day!”
In May 2016, ISSUES & CONCERNS had carried similarly another focus story. “NPAs: An Interminable Saga of National Loot”. Here too we have raised a very pertinent question “Do we have any loss analysis prior to the decision to write off a loan-Principal + Interest?” Going further, we asked “Is there a mechanism to fix responsibility at the door of the borrower, as to how this loss could have been avoided or was it unavoidable? Or were there any misrepresentation by the borrower? Or what is the mechanism available to banks to protect itself? Hence question of accountability from both borrower and lender is of paramount importance.”
Thus the subject of Non-Performing Assets has been in public space for a fairly long time. But successive governments pushed it further for another day and another government to take the call to take the issue of NPA head on in Public Sector Banks.
However, it is to the credit of NDA II government led by Prime Minister Narendra Modi to have acted with a sense of purpose on the issue of resolution of this scourge eating into the vitals of Banking Industry. On December 15, 2015 Union Finance Minister Arun Jaitly introduced a bill called “The Insolvency and Bankruptcy Code 2016”. The bill was referred to a Parliamentary Committee which cleared it on 28th April 2016. Having passed the bill on 11th May 2016 and assented on 28th May 2016 by the President of India, it commenced to be operational on 28th May 2016. So from conception to execution it took little over 5 months only. Thus clearly this government has shown its seriousness to tackle this, contemporary India’s biggest financial challenge.
The Act No-31 of 2016, named “The Insolvency and Bankruptcy Code 2016” states “An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India and for matters connected therewith or incidental thereto.”
There are four key features.
Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For startups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.
Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.
Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies: (i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal for individuals and partnerships.
Having discussed the features of the IBC, it is important to note how fast the authorities have gone ahead with the implementation of its provisions. Before going ahead with full steam, the government also got an amendment to the IBC barring promoters and directors from taking part in the resolution plan under IBC prohibiting effectively the role of vested interest in influencing the course of IBC process.
Having the information in hand about the state of NPAs of public sector banks, Reserve Bank of India immediately asked concerned public sector bank to initiate action to refer 12 large NPA a/c for resolution to NCLT. These eight accounts belonged to Essar Steel Ltd, Bhushan Steel Ltd, Electrosteel Steels Ltd, Amtek Auto Ltd, Bhushan Power & Steel Ltd, Alok Industries, Monnet Ispat and Energy Ltd, Lanco Infratech Ltd, Era Infra Engg. Ltd, Jaypee Infratech Ltd, ABG Shipyards Ltd, Jyothi Structures Ltd. The amount in question involving these eight accounts is close to Rs.3,00,000 crores.
This indeed is a good beginning. However at this point what needs to be understood and appreciated, as we had mentioned way back in May 2016, that the growth of NPA was the legacy of all governments of the past. All government for all its 70 years have contributed to the growth of NPA by their acts of commission and omission. But apparently some governments have been more casual in their approach to lending by public sector banks which inevitably led to non-recoverable bad debts.
According to some research in public space from 1947 up to 31st March 2008 Public Sector Banks have given Rs.18,06,000 crores as loans for industrial sector. But it zoomed to Rs. 52,00,000 crores on 31st March 2014. For 60+ years, it was say 18,00,000 crores, but the next 6 years, instead of giving proportionately some 10% at Rs. 1,80,000 crores (in the ratio of 60&6 years) these banks managed to lend a whopping Rs. 34,00,000 crores. According to economists in the public space, if this staggering amount of Rs. 34,00,000 crores was to be sincerely and honestly deployed in industries, for which loans have been taken, there wouldn’t have been this unemployment problem at all. Every working person would have had 2 shifts everyday and taxes collected would have been some Rs.81,00,000 crores.
In other words, there would have been Subhiksha or Rama Rajya, better than even developed countries. But no such thing has happened. Inflation was high with industrial development being negative. Reportedly in 2014, when the new government led by NDA II took charge of governance in New Delhi rating agencies visited India only to warn the new government of Prime Minister Narendra Modi that if the same situation continued India will be categorized as junk state. Clearly India was on the brink of disaster. (See Box)
According to these economists, of the Rs.34,00,000 loans given, some 70% was lent to crony capitalists. Now who are these crony capitalists?
Generally real industrialists like the Tatas, the Birlas etc. when they take loan from banks, they acquire land, machineries, plant and buildings, thousands are given employment, these industries generate revenue to pay taxes and in the process industrialists also make money for themselves. There is capital formation within the country leading to multiplier effect. These industries and industrialists are assets to the nation and to the society. But crony capitalists are there only to cheat and loot the system and to pauperize banks.
They give the example of Lanco infrastructure
According to them, Lanco Infrastructure had to pay a principal sum to PSBs to the tune of Rs. 26000 crores, neither the interest nor the principal was repaid. This account should have been declared NPA instead the company was again extended an additional loan of Rs 6000 crores before the election in 2014. Reportedly the chairman of this company was a Member of Parliament from Andhra Pradesh. Presently this account is in NCLT for resolution process under IBC. The latest amount of outstanding reportedly is Rs. 52000 crores.
One striking feature, of the IBC is the time bound resolution of the process of resolution of insolvency. It is just 180 days, extendable by another 90 days for corporate entities and 90 days extendable by 45 days for individuals and partnership firms. Unlike earlier, when these bad debt accounts were handled by court as commercial dispute under ‘Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002’ and it can go on and on with the help from corridors of power in New Delhi. The promoters or defaulted debtors would enjoy their life with family, friends and cronies interminably, a la Vijay Mallya or Nirav Modi syndrome, in foreign shores and holiday resorts.
But this IBC and its adjudicator NCLAT has made the life of such deviant debtors difficult. Once the resolution process is on, these characters -promoters & directors- are declared persona-non-grata. There are cases of debtors truly concealing the real status of the company by creating secret reserves by falsifying accounts. There are two cases before NCLAT , Essar Steel and Sterling biotech. Essar had an outstanding component of some 50,000 crores. In the process of bidding for the properties of Essar Steel, Arcelor Miltal was successful at Rs. 42000 crores which NCLAT accepted. But Essar Steel promoter Prashant Ruia along with two other directors- Dileep Oommen and Rajiv Bhatnagar came running back to the consortium of banks offering 100% settlement and withdrawal of IBC proceedings against the company, after unsuccessfully challenging the order of Ahmadabad Bench of NCLAT. This is a clear indication that Ruias, who are promoters of Essar Steel earlier had the intention to cheat the bank. Reportedly, Committee of Creditors formed under NCLAT terms, rightly rejected the offer. They had all the opportunities with their lenders to settle the matter amicably if their intentions were good. By the very fact of offering 100% settlement, which reportedly was Rs. 54389 crores, Essar Steel promoters proved the existence of secret reserves and that the company was worth far more than 42000 crores, which Arcelor Mittal was prepared to pay to acquire the assets of Essar Steel.
Similar was the case with Sterling Biotech which owed Andhra bank Rs. 8100 crores. Reportedly Andhra Bank had accepted the onetime settlement offer from the promoters of Sterling Biotech, Nitin J. Sandesara, Chetan J. Sandesara, Dipti Chethan Sandesara & Hitesh Kumar Patel when the case was already with NCLAT under Insolvency and Bankruptcy proceeding. However NCLAT pulled up Andhra Bank for their hasty action, when Enforcement Directorate and CBI were on the lookout for both Sandesara brothers, Dipti C. Sandesara & H. Patel who are currently absconding and facing extradition order. NCLAT took strong exception on the action of Andhra Bank, especially when ED & CBI are unable to track these Sandesara brothers, daughter of one of them and the other for clandestinely offering onetime settlement to the Andhra Bank. It was a case of wanting to ‘eat the cake and have it too’. Reportedly NCLT in Mumbai has also questioned the source of funds which lenders have agreed to accept.
Reportedly even Bhushan Steel Ltd had offered onetime settlement outside IBC process.
Thus this IBC process has clearly made life difficult for both unscrupulous lenders and unscrupulous borrowers. This one piece of legislation, clearly thought out, drafted, enacted and now being implemented can be the harbinger of a new dawn for banking in India.
However in its new found enthusiasm RBI clearly jumped the gun by issuing circular which ordered banks to refer defaulting borrowers for insolvency proceedings if they missed repayments even one day beyond the stipulated 180 day grace period. This circular had reportedly stunned the industry as it would have certainly jeopardized the venture itself. Naturally Apex Court intervention has stayed the circular and RBI is working on less rigid approach to the issue of NPA being refereed to IBC resolution.
We all recognize that the economic health of a nation depends upon the financial health of its banking institutions. Better the health of its financial institutions the better is the overall development indices of a country. Surely Insolvency and Bankruptcy Code 2016 has come as a breath of fresh air in a polluted atmosphere created by the nexus between politicians, bureaucrats, bank executives and marauding entrepreneurs. Long live the government that saved our banks.
And the good news is that “IBC resolutions yielded 200% liquidation value to creditors” said M.S Sahoo the Chairman of Insolvency & Bankruptcy Board of India, as per latest report datelined New Delhi. According to him, earlier creditors would get about 25% and took 4 to 5 years to conclude, whereas under IBC resolution took less than 1 year and yielded over 45% realization for creditors.
While we are about it, it is very pertinent to know that India’s bad loan problem ranks among the World’s worst. In fact we are the 5th after Greece, Italy, Portugal and Ireland. We are followed by Russia, Rumania, UAE, Hungary and Spain to complete the top 10 in the race among 39 major world economies infested with bad loans, so informs a report by Care Ratings.
An afterthought! During the past 7 decades, our public sector banks have written off thousands of crores of rupees of bank dues, as non-recoverable bad debts. Surely not all of them deserved to be treated as non recoverable bad debts. With pictures emerging after the IBC process it is abundantly clear that there must have been nexus between bank executives including directors, CMD of banks, politicians, bureaucrats and of course borrowers in treating the doubtful debt as bad debt. The present government is capable of reopening these closed cases to know the truth, the whole truth, nothing but the truth. Hope economists and concerned individuals in public space with no-vested interest can come up with their suggestions to have a peep into the murky world of write off of Public Sector Banks' so called bad debts.
Commenting on the 70th Independence day celebration, ISSUES & CONCERNS in its focus article “Modinomics &Muddled Priorities: India@70”, for September 2017 had written “Actually what the Central Government should have done on priority basis, is to tackle ballooning Non Performing Assets (NPA) of public sector banks. Allowing Vijay Mallya to flee certainly was bad for the country, when small borrowers are publicly humiliated by banks for non-payment and banks employ all kinds of tricks to force them pay. And look at the unrelenting agrarian crisis, where farmers are committing suicides to escape the debt trap of a mere lakh of rupees or less. Right now the NPA figure is close to over Rs. 8 lakh crores. All of it is not business losses. Good part of the money borrowed has gone to the wayward living style of high end borrowers, who have siphoned off borrowed business finance into personal and family a/cs. And this story is not from yesterday, it happened for all these 7 decades under different political dispensations. So what has really changed for millions of ordinary Indians, for whom Independence Days have come and gone like any other day!”
In May 2016, ISSUES & CONCERNS had carried similarly another focus story. “NPAs: An Interminable Saga of National Loot”. Here too we have raised a very pertinent question “Do we have any loss analysis prior to the decision to write off a loan-Principal + Interest?” Going further, we asked “Is there a mechanism to fix responsibility at the door of the borrower, as to how this loss could have been avoided or was it unavoidable? Or were there any misrepresentation by the borrower? Or what is the mechanism available to banks to protect itself? Hence question of accountability from both borrower and lender is of paramount importance.”
Thus the subject of Non-Performing Assets has been in public space for a fairly long time. But successive governments pushed it further for another day and another government to take the call to take the issue of NPA head on in Public Sector Banks.
However, it is to the credit of NDA II government led by Prime Minister Narendra Modi to have acted with a sense of purpose on the issue of resolution of this scourge eating into the vitals of Banking Industry. On December 15, 2015 Union Finance Minister Arun Jaitly introduced a bill called “The Insolvency and Bankruptcy Code 2016”. The bill was referred to a Parliamentary Committee which cleared it on 28th April 2016. Having passed the bill on 11th May 2016 and assented on 28th May 2016 by the President of India, it commenced to be operational on 28th May 2016. So from conception to execution it took little over 5 months only. Thus clearly this government has shown its seriousness to tackle this, contemporary India’s biggest financial challenge.
The Act No-31 of 2016, named “The Insolvency and Bankruptcy Code 2016” states “An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India and for matters connected therewith or incidental thereto.”
There are four key features.
Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For startups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.
Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.
Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies: (i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal for individuals and partnerships.
Having discussed the features of the IBC, it is important to note how fast the authorities have gone ahead with the implementation of its provisions. Before going ahead with full steam, the government also got an amendment to the IBC barring promoters and directors from taking part in the resolution plan under IBC prohibiting effectively the role of vested interest in influencing the course of IBC process.
Having the information in hand about the state of NPAs of public sector banks, Reserve Bank of India immediately asked concerned public sector bank to initiate action to refer 12 large NPA a/c for resolution to NCLT. These eight accounts belonged to Essar Steel Ltd, Bhushan Steel Ltd, Electrosteel Steels Ltd, Amtek Auto Ltd, Bhushan Power & Steel Ltd, Alok Industries, Monnet Ispat and Energy Ltd, Lanco Infratech Ltd, Era Infra Engg. Ltd, Jaypee Infratech Ltd, ABG Shipyards Ltd, Jyothi Structures Ltd. The amount in question involving these eight accounts is close to Rs.3,00,000 crores.
This indeed is a good beginning. However at this point what needs to be understood and appreciated, as we had mentioned way back in May 2016, that the growth of NPA was the legacy of all governments of the past. All government for all its 70 years have contributed to the growth of NPA by their acts of commission and omission. But apparently some governments have been more casual in their approach to lending by public sector banks which inevitably led to non-recoverable bad debts.
According to some research in public space from 1947 up to 31st March 2008 Public Sector Banks have given Rs.18,06,000 crores as loans for industrial sector. But it zoomed to Rs. 52,00,000 crores on 31st March 2014. For 60+ years, it was say 18,00,000 crores, but the next 6 years, instead of giving proportionately some 10% at Rs. 1,80,000 crores (in the ratio of 60&6 years) these banks managed to lend a whopping Rs. 34,00,000 crores. According to economists in the public space, if this staggering amount of Rs. 34,00,000 crores was to be sincerely and honestly deployed in industries, for which loans have been taken, there wouldn’t have been this unemployment problem at all. Every working person would have had 2 shifts everyday and taxes collected would have been some Rs.81,00,000 crores.
In other words, there would have been Subhiksha or Rama Rajya, better than even developed countries. But no such thing has happened. Inflation was high with industrial development being negative. Reportedly in 2014, when the new government led by NDA II took charge of governance in New Delhi rating agencies visited India only to warn the new government of Prime Minister Narendra Modi that if the same situation continued India will be categorized as junk state. Clearly India was on the brink of disaster. (See Box)
According to these economists, of the Rs.34,00,000 loans given, some 70% was lent to crony capitalists. Now who are these crony capitalists?
Generally real industrialists like the Tatas, the Birlas etc. when they take loan from banks, they acquire land, machineries, plant and buildings, thousands are given employment, these industries generate revenue to pay taxes and in the process industrialists also make money for themselves. There is capital formation within the country leading to multiplier effect. These industries and industrialists are assets to the nation and to the society. But crony capitalists are there only to cheat and loot the system and to pauperize banks.
They give the example of Lanco infrastructure
According to them, Lanco Infrastructure had to pay a principal sum to PSBs to the tune of Rs. 26000 crores, neither the interest nor the principal was repaid. This account should have been declared NPA instead the company was again extended an additional loan of Rs 6000 crores before the election in 2014. Reportedly the chairman of this company was a Member of Parliament from Andhra Pradesh. Presently this account is in NCLT for resolution process under IBC. The latest amount of outstanding reportedly is Rs. 52000 crores.
One striking feature, of the IBC is the time bound resolution of the process of resolution of insolvency. It is just 180 days, extendable by another 90 days for corporate entities and 90 days extendable by 45 days for individuals and partnership firms. Unlike earlier, when these bad debt accounts were handled by court as commercial dispute under ‘Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002’ and it can go on and on with the help from corridors of power in New Delhi. The promoters or defaulted debtors would enjoy their life with family, friends and cronies interminably, a la Vijay Mallya or Nirav Modi syndrome, in foreign shores and holiday resorts.
But this IBC and its adjudicator NCLAT has made the life of such deviant debtors difficult. Once the resolution process is on, these characters -promoters & directors- are declared persona-non-grata. There are cases of debtors truly concealing the real status of the company by creating secret reserves by falsifying accounts. There are two cases before NCLAT , Essar Steel and Sterling biotech. Essar had an outstanding component of some 50,000 crores. In the process of bidding for the properties of Essar Steel, Arcelor Miltal was successful at Rs. 42000 crores which NCLAT accepted. But Essar Steel promoter Prashant Ruia along with two other directors- Dileep Oommen and Rajiv Bhatnagar came running back to the consortium of banks offering 100% settlement and withdrawal of IBC proceedings against the company, after unsuccessfully challenging the order of Ahmadabad Bench of NCLAT. This is a clear indication that Ruias, who are promoters of Essar Steel earlier had the intention to cheat the bank. Reportedly, Committee of Creditors formed under NCLAT terms, rightly rejected the offer. They had all the opportunities with their lenders to settle the matter amicably if their intentions were good. By the very fact of offering 100% settlement, which reportedly was Rs. 54389 crores, Essar Steel promoters proved the existence of secret reserves and that the company was worth far more than 42000 crores, which Arcelor Mittal was prepared to pay to acquire the assets of Essar Steel.
Similar was the case with Sterling Biotech which owed Andhra bank Rs. 8100 crores. Reportedly Andhra Bank had accepted the onetime settlement offer from the promoters of Sterling Biotech, Nitin J. Sandesara, Chetan J. Sandesara, Dipti Chethan Sandesara & Hitesh Kumar Patel when the case was already with NCLAT under Insolvency and Bankruptcy proceeding. However NCLAT pulled up Andhra Bank for their hasty action, when Enforcement Directorate and CBI were on the lookout for both Sandesara brothers, Dipti C. Sandesara & H. Patel who are currently absconding and facing extradition order. NCLAT took strong exception on the action of Andhra Bank, especially when ED & CBI are unable to track these Sandesara brothers, daughter of one of them and the other for clandestinely offering onetime settlement to the Andhra Bank. It was a case of wanting to ‘eat the cake and have it too’. Reportedly NCLT in Mumbai has also questioned the source of funds which lenders have agreed to accept.
Reportedly even Bhushan Steel Ltd had offered onetime settlement outside IBC process.
Thus this IBC process has clearly made life difficult for both unscrupulous lenders and unscrupulous borrowers. This one piece of legislation, clearly thought out, drafted, enacted and now being implemented can be the harbinger of a new dawn for banking in India.
However in its new found enthusiasm RBI clearly jumped the gun by issuing circular which ordered banks to refer defaulting borrowers for insolvency proceedings if they missed repayments even one day beyond the stipulated 180 day grace period. This circular had reportedly stunned the industry as it would have certainly jeopardized the venture itself. Naturally Apex Court intervention has stayed the circular and RBI is working on less rigid approach to the issue of NPA being refereed to IBC resolution.
We all recognize that the economic health of a nation depends upon the financial health of its banking institutions. Better the health of its financial institutions the better is the overall development indices of a country. Surely Insolvency and Bankruptcy Code 2016 has come as a breath of fresh air in a polluted atmosphere created by the nexus between politicians, bureaucrats, bank executives and marauding entrepreneurs. Long live the government that saved our banks.
And the good news is that “IBC resolutions yielded 200% liquidation value to creditors” said M.S Sahoo the Chairman of Insolvency & Bankruptcy Board of India, as per latest report datelined New Delhi. According to him, earlier creditors would get about 25% and took 4 to 5 years to conclude, whereas under IBC resolution took less than 1 year and yielded over 45% realization for creditors.
While we are about it, it is very pertinent to know that India’s bad loan problem ranks among the World’s worst. In fact we are the 5th after Greece, Italy, Portugal and Ireland. We are followed by Russia, Rumania, UAE, Hungary and Spain to complete the top 10 in the race among 39 major world economies infested with bad loans, so informs a report by Care Ratings.
An afterthought! During the past 7 decades, our public sector banks have written off thousands of crores of rupees of bank dues, as non-recoverable bad debts. Surely not all of them deserved to be treated as non recoverable bad debts. With pictures emerging after the IBC process it is abundantly clear that there must have been nexus between bank executives including directors, CMD of banks, politicians, bureaucrats and of course borrowers in treating the doubtful debt as bad debt. The present government is capable of reopening these closed cases to know the truth, the whole truth, nothing but the truth. Hope economists and concerned individuals in public space with no-vested interest can come up with their suggestions to have a peep into the murky world of write off of Public Sector Banks' so called bad debts.
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