The emerging mechanism under the Insolvency and Bankruptcy Code (IBC) to book companies facing serious debt default has taken a hit. The Supreme Court has directed banks not to refer cases for insolvency under the February 12 circular of the Reserve Bank (RBI) and has transferred all cases challenging the notification to itself. A large clutch of insolvency disputes have been effectively stayed for two months, but its anybody’s guess how long it will take to resolve the issue considering the high stakes involved.
The February 12 notification directs lenders to refer cases of loans of Rs 2,000 crore or more that are not resolved within 180 days of default. The Supreme Court stay directly affects stressed power companies, but several others in shipping, sugar and other industries have also challenged this notification.
The stay order will benefit a clutch of thermal power companies facing winding up proceedings who are trying for a revival package outside the perimeters of the Insolvency Code. However, in the long run, attempts to develop a fast-track mechanism to end loan defaults as a culture has been temporarily frustrated by clever litigation.
THE BIG PICTURE
While the likes of Punj Lloyd and Essar Power dispute the process, we should not lose sight of the bigger picture. In December 2017, the Union government admitted that the total non-performing assets (NPAs) dragging down banks had touched a humungous Rs 8.41 lakh crore. To counter this rot in the banking system, the government brought in the IBC in August 2016. Under the IBC, the National Company Law Tribunal (NCLT) was set up with a mechanism to provide a platform for stressed companies either to reform and revive; or, if there was no rescue possible, to ensure winding before they wrought more damage.
The RBI referred two sets of hugely-defaulting companies for resolution of closure. There was slow progress. The acquisition of Bhushan Steel by Tata Steel through a subsidiary became the first classic case of a ‘resolution’ under the IBC code wherein the Tatas undertook to settle over Rs 32,000 crore in unpaid dues. Other cases were not so lucky and have been mired in litigation and controversy. The RBI’s February 12 notification was an attempt to widen the net and hasten the process.
In this messy cauldron, former RBI Governor Raghuram Rajan’s recent 17-page note on the NPA crisis is an eye-opener. What emerges from his note is that both the past Congress as well as the current Narendra Modi-led governments pretty much fiddled like Nero, as Delhi burnt at the pyre of rising NPAs.
RAGHURAM RAJAN INTERVENES
Rajan says a lot of the bad loans originated in the 2006-08 period, when the economic growth was strong and the due diligence of banks and government was weak. He also mentions that the NPAs included a fair amount of ‘frauds’, though banks were reluctant to call them that. And then the bombshell! That he had alerted the PM’s office of some of the serious frauds, but got little response.
“I also sent a list of high-profile cases to the PMO urging that we coordinate action to bring at least one or two to book. I am not aware of progress on this front,” he says.
Interestingly, Rajan sees the Insolvency Code as part of the clean-up process, but notes: “The Bankruptcy Code is being tested by the large promoters, with continuous and sometimes frivolous appeals. It is very important that the integrity of the process be maintained, and bankruptcy resolution be speedy, without the promoter inserting a bid by an associate at the auction and acquiring the firm at a bargain-basement price.”
Long-term, the IBC will play a ‘settlement’ role, says the former RBI chief. “Bankruptcy Court should be a final threat, and much loan renegotiation should be done under the shadow of the Bankruptcy Court, not in it.” Much of the problems of the IBC are not so much its objects as faulty processes adopted by the NCLT and the appellate authority, the NCLAT.
The Supreme Court has pointed out in a recent hearing that the Insolvency courts should not butt in when the consultation mechanism through the Resolution Professional and the Committee of Creditors were doing their work. Again, ArcelorMittal being disqualified for non-payment of dues of Rs 7,000 crore to third parties was pointed to by the Supreme Court as an example of bad adjudication. One can only hope that these problems will be ironed out soon and the IBC mechanism is restored to ensure that the system is cleaned up and the misuse of public funds ended.