The first major resolution under India’s new Insolvency and Bankruptcy law went through last week, with Tata Steel announcing its takeover of Bhushan Steel, a development that Piyush Goyal, standing in as Finance Minister for Arun Jaitley, described as a “historic breakthrough” in resolving the legacy issues of banks. Several others from among the 12 major defaulters whose cases RBI had referred to the National Company Law Tribunal (NCLT) for resolution, too, are expected to report progress over the next few months as bidders pitch for their assets.
The new law passed in May 2016 provides for either resolution or winding up of a distressed firm, which is referred to the NCLT under a legal framework. Since the law was notified in November 2016, over 800 cases have been admitted, and about four times that number of applications have been rejected. Orders for resolution or liquidation have been passed in 200 cases, mostly for winding up. Along the way, as promoters attempted to game the system, the government has worked to keep out willful defaulters, and those whose accounts were classified as bad loans, from bidding again unless they repaid their loans. The government concedes it is in uncharted territory here, and Jaitley told Parliament this January that implementing the law was a “learning experience”, and that the government would continue to make changes to it.
The economic impact
There are clear signs of behavioural change among promoters and company managements after the law kicked in. With the tightening of rules by the regulator, and with banks having to set aside more funds to cover losses, corporates and promoters are scrambling to ensure payments. In the past, lenders were comfortable with the backing of collateral — assets such as land, shares, etc. — while approving loans. Now, the cash flows of companies are increasingly the key determinant, and promoters are being forced to bring in more of their capital to ensure what is known as “more skin in the game”, that is, a stronger demonstration of their commitment.
The 180-day window for completion of the resolution process is ambitious — it is 12 months in the UK, for example. The law has been criticised, and questions have been raised on the calibre of the new breed of insolvency professionals mandated to manage the affairs of troubled companies in the interim. It is to be kept in mind, however, that judicial delays in the past too, have contributed to the swelling of bad loans, and that many of those on the NCLT benches are going through their own learning processes. Many of the glitches, indeed, are not because of the law, but because of the capacity constraints in developing quality resolution professionals, adding more benches, and in driving institutional change and the behaviour of lenders. Recent experience shows that bankers who agree to forego a part of their dues — or settle for a “haircut” — continue to have reason to fear action by investigating agencies, the presence of an oversight committee notwithstanding.
Over the next year or two, this law will be seen as one of the legacies of this government. But in the medium term, this could well test banks and the government with new challenges. The balance has tilted towards the lenders for now, but promoters are increasingly working to lower their debt to banks, raising money from the corporate bond market or through overseas borrowings, instead. Over the last few years, India’s corporate bond market has seen much higher volumes, with more companies tapping it for funds. But as policymakers welcome this shift away from banks, they will have to reckon with the challenge of good borrowers migrating to that market or to other forms of borrowing. The vacuum created by public banks that now control 70% of assets in India, will be reflected in the expansion of Non Banking Finance Companies and their lending portfolios.
For the government, the challenge is to revive investment — a formidable task in this environment, with banks weighed down by debt, a tax regime that many businessmen view as being unfriendly and unstable, and an atmosphere of perceived promoter bashing. The worry also is that banks and industry are weighed down at a time of strong global growth; the contrast is with 2004-08, when India was able to capitalise on such growth. Few will disagree with what the new law seeks to achieve — creative destruction — but the pain could last longer than expected.