Insolvency, bankruptcy: India
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Insolvency and Bankruptcy Code 2016
2016: Parliament passes comprehensive bankruptcy code
The Times of India, May 12 2016
Insolvency code to ease closure of sick units gets House nod
Parliament passed a comprehensive bankruptcy code, a longpending grudge with international investors, which will help speed up closure of unviable companies and revival of viable entities.
The lack of a bankruptcy code is one of the key reasons for India ranking low on the ease of doing business rankings, since it takes several years to wind up a business. Currently , there are a dozen laws dealing with various aspects of sickness and closure, and the one related to insolvency is over a century old.
Through the new law, which was cleared by the Rajya Sabha on Wednesday evening, the government is trying to put in place a speedy process for early identifi cation of financial stress and resolve the strain if the business is found viable. It has stipulated a time-bound revival. The new law comes at a time when lenders are dealing with a record pile of bad debt, for which the government has also sought to amend existing laws to make recoveries smoother.
“The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholderspromoters to a committee of creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use. This is in complete departure with the experience under the SICA (Sick Industrial Companies Act) regime where there were delays leading to destruction of the value of the firm,“ the finance ministry said in a statement.
The new system provides for two processes for resolution of individual cases -fresh start and insolvency resolution.
It also puts the dues of the employees at the top of the pile with certain creditors getting preference over the government. In addition, it provides for powers to acquire overseas assets of a defaulter, for which the government has to sign global agreements.
FM seeks opposition support for GST
New Delhi: FM Arun Jaitley on again urged Congress to support the bill that seeks to amend the Constitution for the introduction of goods and services tax (GST) after the principal opposition party suggested it would offer support, provided its three key recommendations are accepted.
“For heaven's sake, I beseech you in the interest of Indian democracy not to go on this misadventure (judge-headed panel)...With the manner in which encroachment of legislative and executive authority by India's judiciary is taking place, probably fi nancial power and budget making is the last power that you have left. Taxation is the only power which states have,“ he said during the debate on the finance bill in the Rajya Sabha.
The minister said it was “wholly misconceived“ for any political party to hand over the taxation power to judiciary . Jaitley asked Congress to “reconsider“ its stance on GST, which is held up as Congress wants the government to specify the GST rate in the bill, provide for an independent dispute resolution mechanism, and drop the plan for an additional 1% levy by manufacturing states.
Impact: banks get tough with defaulting promoters/ 2017
Till now, the business phrase “exit policy“ meant the exit of workers, to allow owners to survive and flourish. Now, for the first time, India has an exit policy for owners that allows workers to survive and flourish. If it succeeds, it may go down as Narendra Modi's finest achievement.
India is famous for having many sick industries but no sick industrialists, whose political clout (and legal delays) precluded seizure of their assets by lenders. That has changed dramatically with the enforcement of the Insolvency and Bankruptcy Code 2016. The RBI is using this to force banks to get tough with defaulting promoters, forcing them to sell assets to repay debts and make their companies solvent. If this does not work, the banks will eject the promoters, and appoint a professional manager to run the company till it is auctioned to new buyers.
This is a revolutionary change. In June, the RBI identified 12 major companies for insolvency proceedings, each owing over Rs 5,000 crores. Bhushan Steel, Electosteel Steel and Lanco Infratech headed the dirty dozen, owing a whopping Rs 1,75,000 crore (almost a quarter of all bad bank loans).
Reports say the RBI has prepared a second list of 40 companies, including giants like Videocon and Jindal Steel and Power Ltd. The top 500 defaulters face similar action. The finance ministry backs a “zero tolerance“ policy for bad loans.
Many questions remain. Will new buyers be available? Will these ask for such high loan forgiveness in the takeover package that banks will refuse, leading to stalemates? Will old owners regain control at bargain prices via benami companies in tax havens? Time will tell. Yet let's hope for a new era where industrial might is no protec tion against the rule of law, and the exit of celebrated but defaulting industrialists is not only possible but happening. True capitalism requires exit for capitalists no less than workers.
Once, Vijay Mallya was politically so powerful that banks kept ever-greening loans to his sinking Kingfisher Airlines. He hoped to survive a debt of Rs 9,000 crore, as industrialists always had.But when the BJP government moved to arrest him, he fled abroad in 2016. His assets in India -including holdings in United Breweries and United Spirits -have been seized. The Enforcement Directorate claims these assets will cover his bank dues of Rs 9,000 crore, and awaits court clearance for an auction.
The Essar Group ran up huge debts to expand its empire, among allegations of inflated capital costs. Lenders have forced it to sell Essar Oil, which includes India's second biggest oil refinery, its captive port at Vadinar, a power station of 1,010MW capacity, and 3,500 filling stations. The $12.9 billion sale to Rosneft will enable the group to halve its debts, and probably hang on to indebted Essar Steel. However, the group's debts remain huge at Rs 70,000 crore.
The Jaiprakash Group (Jaypee) had a spectacular rise in the 2000s as it borrowed hugely to fund enormous infrastructure projects and real estate. That bubble then burst. The initial reaction of banks was to keep extending their loans to Jaypee despite defaults: this was business as usual. But in today's new era, they have leaned on Jaypee to sell its cement plants to the Birlas for a reported Rs 16,000 crore. As part of its debt recasting plan, the banks are reported to have taken over Jaypee's land assets worth over Rs 13,000 crore. Never before have owners ever been obliged to part with such massive, profitable assets to repay old debts.
Ousting promoters is not an end in itself.Many promoters were unlucky, including those hit by land acquisition delays, and those who built power plants but could not get fuel from Coal India. “Resolution“ in banking terminology means a deal where the lenders and owners (and sometimes trade unions) all agree to take a hit so that the enterprise becomes viable again.Resolution is the simplest and most preferred outcome. But it is feasible only when company assets are still substantial and the business is fundamentally viable. Resolution will not work for run-down companies with worthless assets.
In the old days, banks kept lending till a company became worthless, and closed without paying workers. The new approach is to seize a defaulting company while it still has good assets, revive it through resolution, or else go for a forced sale to a new buyer. The owner will exit but most workers will remain employed. It remains to be seen if this works. If it does, how marvellous!
