Indian promoters are proving yet again they will use every trick in the book to save themselves even though they may be defaulters. Even before the National Company Law Tribunal (NCLT) could admit the insolvency case against Essar Steel, the company has moved the Gujarat High Court; it has argued RBI selection of 12 stressed exposures to be resolved via the IBC (Insolvency and Bankruptcy Code) is arbitrary. On June 13, the central bank had identified a clutch of 12 accounts—this included Essar Steel—that were to be referred by banks to the NCLT, a decision that was justified given lenders had exhausted all other options to recover their dues.
While the wisdom of the High Court will prevail, it would be very unfortunate indeed if the Essar Steel case isn’t admitted to NCLT. That would be a very big setback for the initiative taken by the government and RBI to try and solve the bad loans problem which is threatening to stall growth. There is a lot of taxpayer money at stake—`2 lakh crore in the 12 accounts—and while the promoters may argue RBI’s selection of accounts is arbitrary and that the business is turning around, the fact is the company is unable to service its loans. If the High Court doesn’t dispose off the case quickly, which is necessary for the NCLT to admit the case, it will become very hard for the lenders to recover their loans. Moreover, it will vitiate the environment with other promoters also likely to start approaching various courts for similar relief. Should the case drag on after the next hearing on July 7, the government as the owner of the banks should explore all legal options it may have including, if need be, petitioning the Supreme Court on the need to ensure the NCLT process does not get delayed/derailed.
While the circumstances of each NPA differ, it remains a mystery as to how many of these firms were able to borrow so much even after not being able to service their loans—there is little doubt the banks were lax in their evaluation and also helped evergreen loans. Also, in the Essar case, while financial institutions took big haircuts nearly two decades ago on a loan to the company, it is not clear if they got any recompense when the promoters sold their stake in the Hutch joint venture many years later. As former RBI governor Raghuram Rajan had observed, many promoters believe it is their divine right to stay in control despite their unwillingness to put in new money. With the benefit of hindsight, tighter norms for prudential exposure limits to groups and companies would have helped prevent corporate India from being as over-leveraged as it is, almost posing a systemic risk. The very liberal norms were intended to promote industry and growth, but have ended up making the banks bankrupt. Indeed, if there were norms for blacklisting defaulters, many of the groups RBI has identified would never have been able to run up the kind of debt that they have. It would be a shame if the Gujarat High Court allows the case to drag on, thwarting the attempts of lenders to get back what is rightfully theirs.