A recent CARE report has thrown the spotlight on India’s bad loans situation, which is the fifth worst in the world. The report said that even Spain, which lately applied to European Stability Mechanism for a €100 billion rescue package, has lower bad loans than India. But what made India’s situation worse was the vicious circle of bad loans-loan defaults-more loans.
India’s bad loans have soared to Rs 9.5 lakh crore and the pile-up happened because defaulters were not dealt strictly in the past. Former RBI chairman Raghuram Rajan had pointed out that there are “many sick industries but no corporate honcho is sick (sic).” And since a big part of India’s bad loans problem was interlinked with wilful defaulters and defaulting promoters being eligible to bid for their own companies during the insolvency process, which former SBI Chairman Arundhati Bhattacharya called a “moral hazard”, the Insolvency amendment may provide a solution.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been passed in the Lok Sabha. The Ordinance laid down 10 ineligibility criteria for a resolution applicant, few of them being, a wilful defaulter identified by the RBI, a person who has been convicted with two years more years of imprisonment, an undischarged insolvent and person prohibited from trading in securities. However, defaulting promoters who had already submitted resolution plans for insolvent companies before an ordinance will a month’s time to come clean.
How Arun Jaitley trumped loan cheats with this Ordinance
Essar Steel Ltd has a loan default of Rs 37,284 crore. In August, the National Company Law Tribunal (NCLT) admitted insolvency proceedings against it. Two months later, its parent company Essar Group was learnt to be one of the bidders to purchase the stressed asset. Essar Group said the company was doing it because the Insolvency and Bankruptcy Code allowed promoters to bid for their company.
What would have happened in this case? Essar group would have repurchased its own insolvent subsidiary at a discount without having to repay the debt. To stop this, and to stop it quickly, the government took the Ordinance route to bar wilful defaulters and defaulting promoters. Recently, Uday Kotak said what loan defaulters really needed was the fear of losing the company. “For the first time, founders fear losing control of the company if dues are not paid,” Uday Kotak said.
In fact, Arundhati Bhattacharya backed this Ordinance even as she acknowledged that a policy like this does not exist anywhere in the world. “The same people who could not run companies can bid for it at a lower price. It was leading to moral hazard. The step was taken because of genuine reasons. In India, what has happened was a deep distrust. This ordinance is an expression of that distrust,” Arundhati Bhattacharya said.