ECONOMIC TIMES, 17 SEP 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 to go and to allow workers to survive and flourish. If it succeeds, it may go down as Narendra Modi's finest achievement.
India is rather infamous 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 loan ~ Yes, the situation is that bad ).
Reports say the RBI has now also prepared a second list of 40 companies, including giants like and Jindal Steel & Power Ltd. The top 500 defaulters face similar action. The finance ministry backs a "zero tolerance" policy for bad loans. However, 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? Only time will tell.
Once, Vijay Mallya was politically so powerful that banks kept “ ever-greening “ his loans {{ viz kept extending his loans while simultaneously making them “ softer & softer “ year on year, by diluting & relaxing repayment terms ever so imperceptibly }} to his sinking Kingfisher Airlines. He hoped to survive a debt of Rs 9,000 crore, as most industrialists always had. But when the BJP government moved to arrest him, he fled abroad in 2016, clearly with well-oiled inside help.
However, 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 too has ran up huge debts to expand its empire, among allegations of inflated capital costs. Lenders have now 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 of Russia will enable the group to halve its debts, and probably hang on to the indebted and beleaguered Essar Steel. However, the group's debts still remain huge at Rs 70,000 crore dwarfing Mallaya’s 9,000 crores .
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 the promoters is not an end in itself. Many promoters were plain unlucky, including those hit by land acquisition delays, and those who built power plants but could not get fuel from Coal India, which is a Government subsidaery. They need gentler way to deal with.
For such entities in particular , "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.
Ever-greening of loans and hiding bad & unrecoverable loans under the innocuous term “ NPAs-Non Performing Assets” in their balance sheets or even removing them totally from their balance sheets on pretext of keeping the balance sheets technically “ clean “ are the standard ploys employed by all banks , for having two-fold benefits – to keep themselves away from public scrutiny and therefore from financial and criminal accountability , as also to shield the beneficiary industry.
The RBI, under the previous Governor, has initiated cleansing reforms , by forcing the Banks to declare publicly their so called NPAs, to arrest the trend of lowering the interest rates on loans arbitrarily, and seeking more accountability in handling of public money. And to the credit of our financial watchdog, the present Governor has vigorously pursued this long due process.
In the old days, banks kept lending or evening “ ever-greening” 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 promoter will surely be made to exit, but most workers will remain employed. True capitalism requires exit for capitalists no less than workers.
Yet , let's hope for a new era where industrial might and political patronage is no protection against the rule of law, and the exit of celebrated but defaulting industrialists is not only possible but happening. It remains to be seen if this works.
If it does, how marvelous
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