It will be difficult to find an adequate reason why Kingfisher Airlines was not asked to sign up for formal corporate debt restructuring (CDR) on Saturday. There are three plausible reasons for why this has not happened, but none of them sound good. Rather, at an alarming stage of economic stress, they show up India Inc, the banking sector and the government in a pretty poor glow of achievement.
The first reason could be a realisation among the banks that no matter what they do to restructure the debts this time around, the company?s cash flows are unlikely to improve significantly in the future. They could have a reason for believing so.
The last time the consortium of 13 banks took an equity exposure of 23% in the airlines, they had obviously hoped for a turnaround. The unusual exposure (unusual because despite the high equity stake involved, the banks did not insist on a significant presence in the boards) happened in March this year. Since then, all the key ratios of Kingfisher Airlines have deteriorated further.
Its debt-to-asset ratio (the higher the number, the more is the company?s exposure to lenders) is now at 82. Rival Jet has a ratio of 67, while SpiceJet is 7.7 (Bloomberg data). Its interest cover is less than 1 and the debt-to-equity ratio has become rather absurd. The numbers all say this company needs to be put under a formal CDR mechanism.
The last attempt was itself made under an RBI-blessed plan to put in place a debt support mechanism for the aviation sector, which involved not having to invoke the CDR mechanism. So, they have plausibly run out of options, which is difficult to believe.
This brings us to reason number two. The only way to put life into a company where a supposedly non-CDR prescription has not worked should be to administer a CDR dose, i.e. go for the jugular. The reason why banks are not doing so is because the government?without any rationale?has stepped out to declare Vijay Mallya?s airline a national asset.
Like any plan, a CDR involves reaching a break-even point where someone has to take a call if the company has to be wound up. A national asset, obviously, cannot be wound up, so a CDR cannot be implemented.
That brings up the third reason. If the banks can be dissuaded from wielding the stick, then other industrial groups similarly fraught can also ask for forbearance from the political class. This means there is an understandable degree of support from sections of India Inc that Mallya should not be put under duress. Since only the creditors will baulk at this suggestion, and as they are mostly under government ownership, there are no protests. This means Kingfisher can continue to operate as usual, often on the pretext that public sector Air India is doing no better.
All these attempts to bypass the CDR mechanism are despite it being among the weakest for any comparable financial sector globally. Unlike in the US, where a company has to file for bankruptcy under chapter 11 of the US bankruptcy code, before its debt recast happens, there are no similar provisions in India. The Companies Act of 1956 has a long-winded procedure that usually takes about a decade to unravel, as per the Doing Business in India report of the International Finance Corporation.
The CDR mechanism, set out by RBI, first in August 2001 and then modified in 2006, is a kid-glove mechanism to handle corporate delinquency. It neither insists that the account has to become an NPA to qualify for the recast nor does it bar any fresh debt exposure. Among the support it provides is a six-month stand-still window that blocks the debtor and the creditor from taking any legal recourse to settle their dispute.
It took inspiration from the UK and Korean model (after the 1990s banking crisis in the UK, and the Asian crisis of 1998 that included Korea), but while those include the central bank as the third part in the recast, the CDR cell is a banking industry-driven one. It also needs only 75% of the creditors to agree for the process to begin and has all the usual offers, including converting all or part of the interest liability into term loans and so on.
Yet, the odium of the process is good enough for leading industrialists to avoid the reference and instead ask for or demand a settlement, at their terms. Until the end of 2010, the CDR cell has settled about R90,000 crore worth of cases, but the marquee names do not figure in that list.
So, the reason why banks are often reluctant to wheel in the celebrity patients into the operation theatre is that they have no support. The debt recast plan, supposed to be the inviolate bedrock of CDR right at the beginning, will run the risk of risk of being violated, first. For instance, often such a recast needs a change of management. This is impossible in India?s family-run enterprises. Yet, as the US has shown, all the companies that took government support in 2008, many times bringing in new management, have paid back with profit the public investment made in them. In countries like Korea, the implementation of the formal restructuring processes was one of the chief factors for the turnaround from the crisis of 1998.
The fundamental principles involved were very clear. Creditors had to get full disclosure of information; the agreements were binding with penal clauses; a collective roll-out of debt recast by all creditors with well laid-out schedules and finally a policy of sharing the losses and recast of debt among the creditors.
By avoiding this straightforward course, the government is spreading losses among the banks, encouraging the delinquent companies to behave irresponsibly and acting as the back stop with disastrous consequences for its and the state-run banking sector?s finances.
subhomoy.bhattacharjee@expressindia.com