Sanctity of contracts and stability of rules are the bedrock of a vibrant economy. Both are under threat now, thanks to the campaign of projecting individual mismanagement as a national economic crisis.
One reform that the Narendra Modi government could showcase is the dedicated bankruptcy resolution platform, aimed at transforming the way Indians did business and bankers did banking. But intense efforts are on to subvert it instead of strengthening it.
It is not only private corporate vested interests that are at play, but some government departments and lenders — for whose benefit it was designed in the first place — are also guilty of the tardy progress of the well-intentioned reforms programme.
The Essar Steel bankruptcy case, the ring-fencing of Infrastructure Leasing & Financial Services (IL&FS) from creditors, and the unfolding crisis after Jet AirwaysNSE -2.78 % defaulted reflect how the industry and regulators are fighting to stay where they were decades ago rather than reflect the reality of a new era.
Arun Jaitley had summed up the essence of the bankruptcy law: “One thing is very clear that the old regime by which the creditor would get tired chasing the debtor and end up recovering nothing is now over. If a debtor has to survive, he will have to service his debts or else he will have to make way for somebody else.
I think this is the only correct way by which businesses would now be run and this message, I think, has to go loud and clear to all.” Two years may still be too early in any legislation’s life to be declared a failure or a success, but the desired changes appear to be elusive.
It is nearly 20 months since the Reserve Bank of India gave the green signal to try the biggest dozen defaulters in bankruptcy courts. The law prescribes 270 days to complete the resolution.
Just three of the 12 high-value cases have been resolved. One such case delayed by litigation is Essar Steel where the promoter Ruias, after trying to block the bankruptcy process, are offering to pay more than the Lakshmi Mittal’s winning bid that was accepted by the creditors.
NCLT on Tuesday threw out Ruias’ challenge, but there’s a possibility of another appeal. Then comes the implosion of IL&FS with Rs 91,000 crore of debt outstanding. Mutual funds panicked and typical of any default, investors began punishing other borrowers by not lending to them. Mutual funds and non-banking finance companies were prompt enough to pass the panic to the government.
Is it the responsibility of the government to provide comfort to mutual funds and banks? What are the regulators for? Why is there a bankruptcy law that would have covered almost all the operating companies of IL&FS and ensured orderly resolution? Is the government raising doubts about its own institutional framework like the bankruptcy law? It has created a moral hazard.
The government’s panicky reaction is seen as its policy declaration to intervene in troubled businesses giving a backstop to investors who failed in risk assessment. It has just muddled the entire process. The moratorium on payments for all group firms has made matters worse than otherwise.
With such an approach to a company owned by SBI, HDFC, Japan’s Orix and Life Insurance Corp of India, investors now assume that the government wouldn’t allow any company of reasonable size to fail. Just raise the bogey of job losses. Next in line is Jet Airways which employs 22,000 people.
Laws and regulations are aimed at treating every citizen equally and are applied uniformly. But that has not been the case. Corporations are so used to special dispensations that anyone reasonably powerful could bend them.
SBI is reportedly lobbying for relaxing the rules by Sebi for an equity investment by Etihad Airways in the troubled Jet Airways. Let the regulator do so if the rules permit, but attempting to circumvent laws with special exemptions would be a slap on the face of those who follow them in letter and spirit.
Sebi took a long time to recover from the reputational damage it suffered after letting Gujarat Ambuja CementsNSE -0.77 % control and run ACC by shortchanging minority shareholders.
For decades, weak recovery laws and opaque banking practices led to the unscrupulous thrive. Now the spirit of the law is clear. But it is the responsibility of the government, banks and regulators to ensure that the ‘Bombay Club’ doesn’t hijack the agenda.
Source : Economic Times