When new capital inherits old problems

Somewhere in my second decade at State Bank, an older colleague told me that a loan file will tell you everything about a company except the one thing you need to know. He meant the promoter. You can read a balance sheet in an afternoon. Working out whether its controller will still be worth lending to in five years takes longer, and often you get it wrong. Every credit committee I ever sat on began with that question: Who is running this, and what are they like?

I was reminded of it while reading about the Delhi High Court’s recent order in the enforcement proceedings that Daiichi Sankyo has been pursuing against Malvinder Mohan Singh and Shivinder Mohan Singh over an arbitral award. The court has called for a forensic audit into the shareholding the two brothers once held in Fortis Healthcare, the change of control that followed, and the role of various stakeholders.

Two things struck me. First, the court has been explicit that this is a fact-finding exercise, and that questions of liability are to be considered after the facts have been established. Nothing I say here should be read as a view on the merits or conduct of anyone before the court. Second, the order raises a question that goes beyond the parties: how far should the consequences of a former controller’s conduct travel with a company after control has changed?

Every banker knows the textbook answer. A company is a continuing legal entity. Promoters come and go, boards are reconstituted, and management is replaced. That continuity is the basis on which contracts and guarantees mean anything.

But the principle cuts both ways. Pushed far enough, corporate continuity can blur the distinction between what former controllers did and what new owners, directors, and managers are answerable for. A lender wants to know the risks attached to the borrower. An investor wants to know what liabilities it is acquiring.

The Fortis chronology is relevant. The Singh brothers resigned from the company’s board in February 2018. In April, following pressure from activist shareholders, the board was reconstituted and shareholder-nominated independent directors were inducted. By June, Fortis had itself initiated action against the brothers to recover more than `500 crore. The company was therefore already moving away from its former promoters and taking action in relation to them before the subsequent change in control.

Whenever a resolution came up under the Insolvency and Bankruptcy Code (IBC), serious bidders would ask a basic question before committing capital: what exactly are we buying?

The IBC was designed to provide an answer. Once a resolution plan is approved, the applicant is expected to know the liabilities it is taking on. The Supreme Court has described this as the “clean slate” principle: the successful applicant should be able to run the business without previously unknown claims appearing after resolution.

There is a broader lesson. If a change of ownership outside the IBC can leave a new investor facing potentially open-ended consequences for conduct attributed to former controllers, while an IBC resolution provides a statutory route to finality, the message to the market is odd: that there may be no reliable way to acquire a troubled or legacy-laden business other than through insolvency. That cannot be good for the market for corporate assets or for lenders seeking buyers for viable businesses.

Fortis also illustrates what a change of hands can mean operationally. On the company’s disclosures, it had around 4,800 beds in March 2018. By March 2026, the network had roughly 6,100 operational beds across 36 facilities. Reported capital expenditure rose from about `300 crore in FY23 to around `600 crore in FY24, excluding specified acquisitions, and around `700 crore in FY25 and FY26. Those are operating theatres, ICU beds, imaging equipment, and the doctors and technicians who go with them. India does not have nearly enough of any of it.

Management attention is finite, as is the attention of boards and lenders. When it remains unclear for years where investigation ends and liability begins, the cost of that uncertainty does not stay in the courtroom. It can affect how lenders price risk, how investors value a business, and how readily capital is committed to expansion.

The order itself points to a way through. It draws on an earlier Supreme Court decision in which a forensic audit of certain banks was directed even though they were not judgment debtors, with questions of their rights and liabilities held over until the facts were established. The sequence seems right: establish what happened, then decide who answers for it.

None of this is an argument for going easy. A legitimate claim should be pressed to the end, and a change of ownership must not become a place to hide. If the audit establishes improper conduct, the law should pursue it wherever it leads. Equally, ordering an audit is not itself a finding against everyone whose transactions or role may be examined.

My point is narrower. Responsibility should attach to what a person or entity did, rather than simply to the fact that the corporate entity remained in existence after its ownership and management changed. That is a balance corporate India will increasingly have to strike. The past must remain open to examination. But a business that has genuinely changed hands, along with its governance and management, must also be allowed to build a record of its own.

We need capital to go into companies being repaired, expanded, or put under better management rather than started from scratch. That capital will come where two things are clear: that the past will be accounted for, and that investors, lenders, and managers can understand who is answerable for what today.

In banking we would simply call that trust. It is the only thing we ever really deal in.