Stop the Loot via Bankruptcy Code: Better Solutions Are Possible
On 25th June, Moneycontrol reported that the government may review the bankruptcy code as public sector banks (PSBs) have begun to accept haircuts as high as 94% to let off the biggest corporate defaulters. Well, it is long overdue. These ridiculous haircuts, or loan waivers, are over and above the massive loan write-offs by PSBs to reduce the embarrassing mountain of bad loans of over Rs10 lakh crore, which are funded by the people through the exchequer. Indian banks wrote off Rs1.53 lakh crore worth of loans in the financial year (FY) 2021 and Rs1.45 lakh crore in FY2020. 
 
Our banks don’t care. Collectively, as a committee of creditors, they seem to have zero individual responsibility, accountability or conscience, at a time when ordinary people are struggling to earn a livelihood. When it comes to resolution of listed entities, there is also no consistency. And, with the Securities and Exchange Board of India (SEBI) having abdicated its responsibility, it is also a perfect opportunity to fool swarms of retail speculators who are ‘playing’ the market like in a Casino. 
 
Things have turned so embarrassing that even industrialist Harsh Goenka protested in a tweet, tagging the prime minister (PM), that went viral. “Promoters stash away money on the side, take the company to the cleaners, get 80-90% haircut from bankers/NCLT—that’s the new game in town. A lot of institutions cleansed by the government—NCLT next please @PMOIndia. We can’t have our hard earned public money being stolen!” he said.
 
 
There is anecdotal evidence of how the defaulter-promoter of a controversial resolution has made so much money, with the surge in stock prices of his shares, that he has rented an additional floor in the same super-luxury apartment where he already owns a duplex. But bankers have accepted a massive haircut which is eventually paid by the ordinary citizen.
 
The All India Bank Employees Association (AIBEA) also voiced a protest about the outrageous settlement with Siva Industries with this poster below. According to market reports, the ‘settlement’ was facilitated by a powerful ideologue close to the ruling party. 
 
 
Why, even the National Company Law Tribunal (NCLT) has been questioning the dubious acceptance of massive haircuts in the case of Siva, Sterling Biotech and Videocon. 
 
The Insolvency and Bankruptcy Code (IBC), like the Goods and Services Tax (GST), was touted as a game-changing legislation by a strong government to staunch the haemorrhaging of bank loans. The Siva settlement and mishandling of several high-profile cases shows that things are sliding badly. 
 
Seven years later, the government has made no headway in its much-publicised attempt to bring back big defaulters who fled India. While there is slow progress in diamantaire Nirav Modi’s case, the Mehul Choksi episode was a fiasco with a charter aircraft sent to bring him back returning empty (at whose cost?).  Jatin Mehta of Winsome Diamonds (earlier Su-Raj Diamonds) is so well-connected that he is not even pursued seriously. 
 
Similarly, the Sandesaras of Sterling Biotech are running a booming oil business in Nigeria while absconding from India. They are negotiating a 60% write-off of Indian loans, our banks are bending backward to accommodate them and even Interpol alerts for their arrest are being quietly withdrawn—a fact that becomes known through legal proceedings abroad. So gross is the mishandling that there is now a lot of sympathy for the flamboyant Vijay Mallya, whose total outstanding looks small in comparison. 
 
On 23rd June, the Enforcement Directorate (ED), in an unusual press release, announced that it had handed over Rs9,371 crore belonging to Vijay Mallya, Nirav Modi, Mehul Choksi to PSBs (Rs9,371 Cr Seized Assets of Mallya-Choksi-Nirav Modi Transferred to Banks: ED) out of a total loss of Rs22,585.83 crore. This is pitiful in the face of massive haircuts accepted by banks and suggests the need to re-examine their basic understanding of corporate lending. It is also time to hold some bankers personally responsible for fraud and malfeasance. 
 
This article that I wrote in March 1998 would reveal how decades of complicity had ballooned the total borrowings of Videocon to Rs64,838 crore and it is being sold off at a 95.85% haircut with no consequences to banks or the promoters. The liquidation value of the entire group of 13 entities is just a little more than its borrowings in 1998. 
 
 
If the government wants to change the rules, it is important to examine successes and failures, instead of merely lurching from one experiment to another. The PM must note that action against only six big defaulters has led to significant recovery. Corporate circles say there was a clear directive in these cases not to yield to corporate pressure no matter how much legal firepower was deployed by them. Even here, banks are not pursuing defaults in other group companies after one big successful resolution. We tend to forget that all these loans also involved very significant write-offs. 
 
Data on IBC’s performance puts the extent of haircuts in 2021 at 60% of outstanding, which indicates good times overall for large corporate defaulters, while small borrowers are decimated by the recovery process. The write-offs are estimated at Rs6.5 lakh crore with recovery of 1% of the outstanding in some cases.
 
What Has Worked: IL&FS 
Just as some big defaulters have been dealt with kid gloves, similar sympathy was evident in the case of Ravi Parthasarathy, founder and long-term chairman of Infrastructure Leasing & Financial Services (IL&FS). He was finally arrested on the basis of a private complaint, while the government remained perplexingly frozen. 
 
Interestingly, the resolution of the gargantuan, 347-company IL&FS group is doing a lot better over three years than what the Reserve Bank of India (RBI) has managed with Punjab and Maharashtra Bank Cooperative Bank (PMC Bank) or PSBs and investigation agencies are doing with scores of other mega defaulters. In October 2018, the government appointed banker Uday Kotak as chairman of a new board (mainly retired bureaucrats) to handle the resolution. It was backed by expensive but crack teams of lawyers and auditors whose success rate now appears better than that ofbanks and regulators.
 
Here is some data put out by IL&FS. The 347 companies in the group have been reduced to 167 and are expected to drop further to below 100 by the end of the year. This was done by shutting down or selling off a large number of foreign and local subsidiaries. Anyone who has closed a company in India would know the herculean effort and red tape involved in getting this done in less than three years. 
 
Uday Kotak has said that he expects to recover 60% of the total outstanding of nearly Rs100,000 crore; the new management has addressed Rs43,000 crore and expects recovery to touch anywhere between Rs61,000 crore to Rs63,000 crore. In case of IL&FS, every decision has an excruciating process and is ratified by the NCLT after clearing it through a retired judge, or fought in court. 
 
Only last week, IL&FS recovered Rs1,925 crore from a Haryana government outfit after a long-drawn battle and expects to get more in the same case. In my view, much of the success of IL&FS is not due to bureaucrats on the board but because Uday Kotak’s reputation is on the line forcing him to carry this monkey on his back. Now compare this with what RBI, PSBs and SEBI have been doing in just three specific cases. 
 
1. Dewan Housing Finance Limited (DHFL), a single entity with a smaller outstanding of Rs87,000 crore and a dubious recovery of just Rs37,000 crore, that has been challenged by secured depositors and small investors who are being callously short-changed when the recovery potential from existing projects is estimated by market sources at over Rs10,000 crore. Why couldn’t banks have negotiated a better deal for all when there was another bidder offering similar amounts in this case? Appointing a monitoring panel after the case is badly messed up is clearly too late. 
 
2. Siva Industries, which owed Rs4,863 crore, has been pulled out of insolvency accepting Rs316 crore settlement of which only Rs5 crore will be paid upfront. The controversial C Siva Sankaran gets to keep the company and be eligible for more borrowing. Even NCLT has questioned the deal.
 
3. In contrast with the complex IL&FS, RBI only managed an ‘in-principle’ approval to Centrum Financial Services and BharatPe to take over PMC Bank. The resolution comes with multiple riders, is risky, and it will be a long time before depositors get to see their money. Had the central bank been open to ideas and a lot more proactive in protecting depositors, a far stronger solution could have been found a lot earlier. 
 
If the government is serious about making defaulters pay and retain the faith of taxpayers, it needs to change the resolution process which is already ridden with corruption. Videocon, Siva, DHFL and PMC Bank needed to be handled better, without leaving small investors in the lurch. An IL&FS-like action, with credible people in charge, was possible with PMC Bank and Yes Bank, but was ignored. Meanwhile, SEBI is showing signs of waking up after exposing retail investors to massive speculation in companies whose shares were to be delisted by its failure to stop trading immediately. But that is the subject of another column. 
 
 

Comments
arjunmohnot
2 months ago
Zero to Public Shareholders Called as Successful NCLT Resolution: Who is Behind Video in Videocon?

It is very surprise for all the NCLT matters including recent Videocon Group of Companies judgement pronounced on 8th June 2021 and declared on 14th June 2021 by the NCLT Mumbai, the zero amount to public shareholders is called as successful resolution after three years. Why such long time is taken for resolution with target of zero to public shareholders in all the NCLT matters. The courts are relying on the bankers, but we should not believe the same bankers for their commercial wisdom who have not given the loans wisely.

The shares and securities are just like currency and atleast its face value should be payable to the public shareholders as minimum amount against resolution. The erstwhile promoter Mr. Dhoot was ready to pay full amount of Rs. 31000 Crores in instalments with interest, but our wise bankers have accepted less than 10 percent i.e. Rs. 2962 Crores in instalments from newly formed M/s Twin Star Technologies Ltd. (Vedanta Group Company) with zero amount to the public shareholders as achievement. For the public shareholders they are considering nil amount and for bankers any percentage just above liquidation value is welcome because they have not invested from own pocket and never realised the value of public money who have invested unconditionally through approved IPO with high premium for the development of the country.

The importance of initial amount of the public and the bankers are same. But the concern authorities including bankers, NCLT, SEBI, etc. are not working in the interest of public. So far, they are not able to justify their role for the public in the resolution matters under IBC. The higher authorities should intervene to protect the public money and faith in the financial system.

The SEBI has made the Delisting of Equity Shares Regulations, 2021 dated 10th June 2021 but still it is not applicable for NCLT matters. They could have also made regulations for protecting public shareholders for the companies under NCLT or IBC matters, but SEBI is busy for charging penalties on decade old insider trading matters without sharing this amount to the public who were affected during that trading.

After judgement, NCLT Mumbai has raised the doubts over confidentiality clause for liquidation value for Videocon Group resolution. The NCLT has questioned the IBBI that how the resolution proposal is just close to the confidential liquidation value. This objection is published in all the print media on 16th June, 2021. It means NCLT itself is not satisfied with the commercial aspect of own order and the resolution proposed by the bankers.

After the CoC meeting dt. 11th Dec., 2020, ET has published a news dated 12th December, 2020 that the Vedanta has offered Rs. 5000-6000 Crores. But, suddenly two days after again CoC meeting was held and ET has published a news dt. 14th December, 2020 that Vedanta Group Company Twin Star has now offered total Rs. 3500 Crores.

What is the reason for this manipulation of about Rs. 2500 Crores within two days in December 2020. It means liquidation value of Rs. 2568/- (as published in Moneylife dt. 16th June, 2021) was revealed to the buyer and he was facilitated by the CoC to revise downward the offer amount.

The above facts and the doubt of NCLT after the order raises the question mark that who is behind the video in Videocon Group resolution. This doubtful resolution should be cancelled in public interest and to protect the public shareholders in NCLT and other matters.
Thariyan Tharayil
2 months ago
Dear Editor, Please allow us to edit our comments even after posting them. This will enable us to correct some genuine mistakes.
baskarans53
2 months ago
I share your concern on the low% of recovery in IBC accounts. However comparing ILFS with Videocon/ Shiva is like comparing rotten apple with rotten oranges. ILFS with all its scams have had many infra assets completed and in process with cash flow. Videocon & Shiva are essentially trading assets light corporates from which humongous money was diverted leaving only shell. Which buyer would be willing to pay higher amount. ED has to disgorge diverted bank funds which they have been doing in many cases. An objective investigation needed to ascertain as to whether Banks/IP connived to loot or they felt something is better than nothing to take corrective steps in insolvency proceedings
S K Nataraj
2 months ago
347 group companies, that itself is a big scam!
veereshmalik
2 months ago
It appears that all we are left with are Kafkaesque "procedures" and not much equity in justice.
Udayan Dasgupta
2 months ago
I am not a banker but one difference between the NCLT and ILFS-Kotak approaches appears to be the selling of assets piecemeal in latter, after de-segregating the portfolio, which is not or cannot be followed by NCLT-appointed "resolution professionals"
anil
2 months ago
It is a well compiled article but lacks punch and solution. An honest debtor, Vijay Mallya is portrayed crook with other crooks. His recoveries are clubbed with other crooks to show that government did well.

If you remove an amount recovered from Mallya, the remaining uncovered amount is just a trickle of total amount outstanding from those diamond borrowers.

Vijay Mallya failed because of huge rise in oil prices to $150 that made airline operation unprofitable. It was a normal business failure due to circumstances beyond his control.

All airlines of India and abroad, lost in thousands of crores, but Vijay Mallya was singled out as "Evil."

He told his bankers two years ago to sell his pledged assets, which were valued much above the debt owed. But the banks led by State Bank of India headed by compliant Arundhati Bhattacharya did not do so, and started witch hunting him due to the wishes of her political bosses.

Vijay Mallya did not borrow huge amount by himself. He had taken over Captain Gopinath owned debt laden Deccan Airways that caused trouble due to $150 oil prices. In fact, he paid over ? 3,000 crores from sale of his personal stake in United Breweries to Diaggio.

However, his SBI led bankers did not classify his advance as Non Performing, so that they can continue to charge him penal interest. As per practice, the banks are not permitted to charge interest on non performing loans or advance. (I am an international banker with 19 years experience, who was Legal Manager in a nationalised bank in Hong Kong).

It was penal interests that swelled his liability.

I was posted in Hong Kong. I travelled by his airline, Kingfisher Airlines. i was pleasently surprised to enter the Mumbai bound plane with "WOW". It was elegant, the staff young, well mannered and suave, and excellent food that changed my flying experience.

I left the bank in 1987 and became international stock broker and bond trader operating from Hong Kong. I served for 17 years.

Even the reputed airlines like Cathay Pacific and Singapore Airlines could not compete to Kingfisher on every count, service, appearance, food and punctuality.

I had a few leading western Pilots and Air hostesses from Cathay as my clients, who were holding high positions in their Unions. Even they admitted that Kingfishers have outshone all of them.

But this white bearded fakir, has been engaged to glorify himself at the cost of genuine businessman like Vijay Mallya.

Even Nitin Gadkari, the only sensible Cabinet Minister in BJP, also condemned chorus maligning Mallya, saying that for over 30 years he had made crores of rupees out of his businesses and paid taxes properly. He was shiuted down for his unpalatable comments.
sundar_ramang
3 months ago
As usual, superb analysis and presentation of facts by Sucheta Dalal..What a system we have..Pathetic..Corruption all around..Politicians,Bankers,Bureaucrats, Insolvency resolution professionals...
cdnath
3 months ago
A good narrative sans giving solution to the long standing structural ills plaguing the banking sector. The conflicting multi stakeholders issues and finding solution in compliance with regulatory and legal frame work is a big challenge. This post mortem question of the effectiveness of IBC is going for quite some time. The narrative is mockery and gives misleading and misrepresenting the gullible public and it is " impressed that "as if " the recovery rate prior to IBC was 90%and in IBC Regime , it has fallen to 5% . What a cruel joke and with due respect to the author a irresponsible reporting making a mockery of bold and beautiful piece of legislation with far reaching implications to the borrowers in default ! Some one needs to take out cases of effectiveness of OTS, Sec 230 cases, CDR cases with no of cases resolved vis-a-vis - Vis overall exposure and money realised to nail neo-negative narrative by non state actors ( media etc) with catchy headlines in the garb of protecting public money against an young and still evolving dynamic legislation! We need to start from "somewhere"to end the structural decades long mess! Similar piece of legislation is going with "no one" questioned the market play forces in US and other matured markets . Remember Sub prime crisis in US and Europe and billions were written off from the banks portfolio! When free melas and dubious loans are given to many industrial houses , no one questioned the leaders and we reelected them !! They are going scot free . The stressed assets in Banking system has a legacy background and IBC is not a panacea for all structural ills of the banking system. There are a few black sheep in the entire value chain of stakeholders which is inevitable in any system . An young and evolving golden legislation just coming 4 years back came out with 16 amendments in the last four years to ring fence the errant promoters. Now the threat of IBC has resulted in behaviour change of defaulting promoters and borrowers is itself a welcoming change for the future of the banking system.
chandrabeharisharma
3 months ago
Oh my god, so many big scam s are happening in this govt.
I think, if Modi ji comes, RAM RAJ WILL BE COME.
OH MY GOD.
chandrabeharisharma
3 months ago
Oh my god, so many big scam s are happening in this govt.
I think, if Modi ji comes, RAM RAJ WILL BE COME.
OH MY GOD.
istaynear
3 months ago
perfect article at perfect time. looks as if our own people are looting their country shamelessly since years and thus widening the gap between rich and poor. Modi alone cannot reach everywhere.. as correctly pointed we need more gentlemen like Uday kotak to take ahead such resolution plans instead of again assisting new thugs in disguise of IBC.
cdnath
3 months ago
The stressed assets has a legacy background and IBC is not a panacea for all structural ills of the banking system since decades due to pampering or support from our political system in the past . The Resolution is the chief cardinal objective of the IBC Code with the consensus resolution of the Stressed asset whose liquidation value is almost negligible even going down to 1% of the exposure and to wait for liquidation value realisation over another decade to realise the value. Kindly note that many banks have made 100% provision for these NPAs longing for ever in the books. The genesis and diversionary of many connected promoters is now known to Public and they should be persecuted and punished . When existing laws and judiciary unable to frame the responsibility and accountability of those people responsible, now blaming an young and a game changer legislation is bad in taste and lack of wisdom. The same is the case in many Now the banking system getting upfront resulting in a huge haircuts in some cases it is even 90- 94% . The stakeholder Banks takes the legal framework recourse after an extensive resolution plan under the court sanction. There may be black sheep or vested interests with the help of all intermediary players including from our noble judiciary . In the same breath other resolution methods are explored including OTS, Compromise arrangement under Sec 230 of the Act , SARFAESI Act, 2002 and DRT Acts and all are not yielding results with time ticking away further eroding the almost scrap assets of the borrowers , the only alternative is the IBC . We needs to live with it for the surgical treatment of cancerous structural banking ills !!
manikantan1127
3 months ago
Yes,RajSSR111.Time has come to question the "Commercial wisdom of COC" if the Resolution plan/Liquidation/OTS leads to very high haircut or the OCs, particularly the employees are deprived off their social benefits like PF, Gratuity during the process
rajssr111
3 months ago
Everyone is talking about banks and the haircut Banks are taking. What about Operational Creditors? No data even on IBBI platform. OC are being paid less than 0.5%. Thousands of employees and hundreds of MSMES are the loosers. The racket of bankers, promoters well supported by RPs needs to be investigated and busted. NCLT is a show piece having no power than to endorse the resolution plan approved by corrupt bank officers. NCLAT made useless by SC decision as they cannot reject the plan. Great Going for public money looters and defaulters.
sucheta
Replied to rajssr111 comment 3 months ago
A very important point. It was considered only in case of Essar Steel. In India those with the best lobbying power managed to get heard. Unless there is an association / network of those who fall into the category of operational creditors, challenging the legal framework is impossible. Also Expensive! Only home owners managed to get heard -- probably because many bureaucrats and relatives of lawyers and judges were affected and they could see the pain first hand!
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