The absurd drama over the Reliance Capital insolvency process is the latest example of how bidders are making a mockery of what was once showcased as a shining example of reforms in India’s financial sector. That the Insolvency and Bankruptcy Code (IBC) isn’t working to the extent desired was best articulated by veteran banker Uday Kotak when he cited the experiences in the Srei and RCap resolutions to drive home his point that we need an overhaul not merely for insolvencies in the financial sector but for all cases. The law needs to be made watertight and less susceptible to interpretation. A second auction for RCap’s assets is on the cards after more than 500 days of the resolution process having kicked in. Had there existed the possibility of the lenders recovering a big share of the dues, it might have been worth the delay. But banks are likely to get back less than the liquidation value of around Rs 13,000 crore after so much delay.
One can’t blame bankers for wanting to recover more but they just can’t let the bidders take the upper hand or risk not getting any bids at all. The Hinduja Group reportedly backtracked on a commitment to pay Rs 9,000 crore in cash, topping the Torrent Group’s winning bid of Rs 8,640 crore at the first auction but is understood to have once again agreed to pay the amount. The revived bid may have been prompted by Torrent’s appeal in the Supreme Court against the Committee of Creditor’s decision to go in for a second auction. If true, this behaviour is unacceptable.
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In the pursuit of maximising the value, not only is the process getting delayed, the sanctity of auction results is being eroded. How else does one explain a second auction after a winner has been declared at the first? That seems patently unfair. Even in earlier instances we have seen the tribunal benches accepting late applications. The judgment in the Vidharbha Industries versus Axis Bank case had said that the National Company Law Tribunal must consider the grounds made out by the corporate debtor against admission on its own merits. This meant that applications of lenders could be turned down even if the borrower has defaulted. The tribunals should not appropriate powers that rightfully belong to the lenders and creditors; matters of commercial consideration should be the preserve of the lenders alone.
To be sure, the banks too haven’t exactly covered themselves with glory. That the process is short on checks and balances was evident when the Mumbai NCLT pointed out how intriguingly close the winning bid, put in by Anil Agarwal’s Twin Star Technologies for Videocon Group companies, of Rs 2,962 crore, was to that of the liquidation value and drew attention to the haircut of nearly 96%. It called for examining the need for further safeguards to ensure confidentiality. The NCLT’s Chennai bench had questioned IDBI Bank on the one-time settlement (OTS) deal reached between the consortium and Siva Industries and Holdings; it had drawn attention to the CBI probing C Sivsasankaran in a loan fraud case.
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Resolution professionals too have come in for some flak. So, while the IBC has tilted the balance in favour of lenders and disciplined borrowers, lenders need to work harder first by spotting stress in time and second by moving quickly. The tribunals need to be cognisant of time limits and must make sure the rules are respected. The Essar Steel case, although delayed, ensured a transfer of the business at a reasonable price and compelled a defaulting promoter to give up his company. We need more such cases.