1. Insolvency process: Crackdown against defaulting owners is good; why no one should shed tears

Insolvency process: Crackdown against defaulting owners is good; why no one should shed tears

Promoters ran firms into the ground, so had to be ousted, and banks were happy to sweep the dirt under the carpet

By: | Published: November 27, 2017 5:15 AM
Insolvency process, Insolvency and Bankruptcy Code,  defaulting on loans, Raghuram Rajan,  banking system , PROMOTERS, willful defaulter, Tata Steel To that extent, the amendments to the IBC are justified and necessary, because it would be a travesty were promoters to win back the companies after turning defaulters.

Given how many promoters have often gamed the system and got away with defaulting on loans, leaving banks to take huge haircuts, it is only right they be barred from bidding for their businesses under the Insolvency and Bankruptcy Code (IBC). To that extent, the amendments to the IBC are justified and necessary, because it would be a travesty were promoters to win back the companies after turning defaulters. Indeed, the government must be congratulated for having been quick to prevent a situation where promoters got back in the driver’s seat without having given up anything and, in the process, leaving a bigger hole in banks’ books.  There are some, including top bankers, who argue that what matters now is how much the banks are able to get back, and how quickly. They point out that, with the promoters out of the race, the other bidders are likely to put in less attractive bids for the companies on offer. That is possible since the promoters had the most to lose, the most skin in the game so to speak, and may have come up with the best offer. But given how these promoters ran the businesses into the ground, there is no a priori reason they would have the best bid either—it is possible a Tata Steel will bid more for a stressed steel plant since it will do a better job of turning it around.

Moreover, coming from banks, the argument sounds opportunistic. While there is no doubt they may have been pressured by politicians to lend to certain businessmen, it is also true they goofed up badly while assessing projects. Their systems and processes were not always up to the mark and they failed to arm themselves with adequate collateral and guarantees. Indeed, had then RBI Governor Raghuram Rajan not insisted they classify their assets correctly, we may not have known how little many of these are worth today. Bankers were happy to sweep a lot of the dirt under the carpet, merely to make their balance sheets look cleaner when they should have being classified loans correctly. Had this been done three or four years ago—the Annual Quality Review was initiated in the September-December quarter of 2015—they might have been able to salvage a lot more. Instead, they chose to be quiet, and were, more often than not, slow to take tough decisions. They are, therefore, hardly in a position to complain—amazingly, instead of foreclosing on defaulters, the term “willful defaulter” was coined to protect existing promoters.

Unless promoters are made to pay for their sins, they will always believe they can get away with them. Hundreds of promoters have already got away, and this cannot go on. They must be made to realise they are not ‘too big to fail’. To be sure, the banking system could take more of a knock if the bids for the businesses—from non-promoters—are not as attractive. But the hit would be well worth it if the new owners run the business well. Handing back the assets to defaulters would only create a moral hazard. This is the first government to have called out freeloading promoters—most others either encouraged crony capitalism or did nothing about it—and there should be no compromises. The focus now should be on identifying credible business houses that can take care of the assets.

  1. No Comments.

Go to Top