Pass or Fail? : A Peek Into India's Insolvency Process
Five years of India's new insolvency law. The story so far.
What is the first thing that comes to your mind when you hear the word “insolvency”?
Do you see a company’s shutters coming down? Their assets being auctioned off? And the employees leaving the building with their stuff?
While insolvency does cause a lot of pain and shame, it does not necessarily mean “death”. You see, what can be created by a stroke of a pen, and can die by a stroke of a pen, can also be revived the same way. And, that’s exactly what Insolvency and Bankruptcy Code, 2016 does.
Why do we need an Insolvency process?
Businesses build economies. They touch the lives of people every day. Now, what if a business is not functioning properly? What if it took too many loans but is losing money and is unable to repay them?
When borrowers fail to pay back the loaned amount to banks, the banks have a right to refer the company to a board called the National Company Law Tribunal (NCLT) and appoint a ‘resolution partner’ - someone who can make the company better again.
The resolution partner acts on behalf of these downtrodden lenders and tries to revive the company. If they cannot revive the company, they look for potential buyers (if the company has worthwhile assets). It makes multiple plans and submits them to the Board of Creditors (banks). The banks, if they like the plan, approve it, and this seals the fate of the company.
But what if there are no takers?
Well, there is always the option to pull the plug.
India’s insolvency saga
India’s tryst with insolvency has been extremely painful. It continued for years. The old legislation was fragmented and distributed across several laws and several legal bodies. Cases dragged on for years. Taarik pe taarik became the norm. It used to take about 1,500 days on average to conclude a case. And even after all that pain and effort, lenders were unable to satisfactorily recover their dues.
Something needed to be done.
And so, came the ‘revolutionary’ Insolvency and Bankruptcy Code, 2016. Everything related to insolvency and bankruptcy was brought under one law. It was envisioned that all the insolvency cases will be closed in a record 180 days!
But, planning is one thing. Implementation? A whole different demon to tame.
Five years since the enactment of the code, here’s what it looks like…
250 companies have been rescued. The resolution plans yielded about 191% of the realizable value for financial creditors, in an average of 380 days (The 180-day plan took a beating. But hey, great improvement if you compare it against 1,500 days!).
So, all’s good? The code is a thundering success?
As per Niti Aayog, there are a couple of hiccups here and there. For 250 companies that have been rescued, there are 955 companies that have been referred for liquidation (which means shutting the shutters on the company). There are delays because the number of bench members (the judges who ensure that law is followed) is only 20. The law needs to be more transparent.
But, there’s a brighter side: “The law played an indisputable role in improving India’s Ease of Doing Business (EODB) ranking from 130 in 2016 to 63 in 2020.”
So, that’s all that it needs? A couple of fixes and done?
Well, it's time to pierce the veil.
Out of a total of 4,300 cases admitted, 40% of cases are still pending. In more than 360 major resolutions, banks have taken an average haircut of 80% (which means, if the company owed Rs. 100, the banks got only Rs. 20 back. Rs. 80 haircut). And there is a high chance that the law could be gamed by the very people it was created to protect.
For instance, recently, Vedanta’s group company applied to acquire the Videocon group. Now, Videocon groups loans are approx. Rs. 71,433.75 crores. But, Vedanta is going to clear off only 4.15% of it. And the creditors of the Videocon group are fine with it!
Surprised? There is more. This amount is eerily close to what the creditors would get if the resolution plan were to tank and the company was to be liquidated. NCLT was surprised at this coincidence and wondered if someone wrongfully disclosed the liquidation valuation to Vedanta. Yet, NCLT approved the plan.
Even the first-ever case under this new law was mired in controversy. A company called Synergies Dooray Automotive Ltd (SDAL) applied for resolution. It got three proposals to take over the company. One was from Synergies Casting Ltd. (SCL), a company related to the owners of SDAL. And, they proposed a payment of only 4.84% of the amount that SDAL owed to its creditors!
Such a proposal should have been rejected, right?
Instead, it got accepted. Because SCL held approx 75% of the loans in SDAL. But SCL could not vote because it is a company related to the owners of SDAL. So, to be able to vote as “creditors,” it transferred the loan to another random company. This random company then voted to accept the resolution proposal.
Another creditor of the company, Edelweiss Asset Reconstruction, could see through what was happening. It could see that the owners of SDAL were misusing the law to erase the loan liabilities while managing to retain the control of the company. And so, they moved the courts. Alas! its appeal was dismissed and it was left with pennies.
So the new law looks like the same old genie caught in a brand new lamp. With so many hair-cuts and legislative troubles, will the lenders prefer the IBC route? If they were to take haircuts in the range of 80-90%, why would they even bother so much? They might as well negotiate with the owners of the company and write off the amount.
And well, the government will never let banks go bankrupt (pun intended?). They will anyway be bailed out with the taxpayers’ money.
Our money.
At the end of it all, who will suffer? The common man.
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Hi. A very well written article. Thank you.