Modi government’s insolvency bill hurts the public exchequer
The Narendra Modi government, already in crisis mode for the past four years, faces yet more trouble due to massive unpaid debts in the Indian banking system. According to the latest information provided in the Lok Sabha, the lower house of Parliament, public-sector banks collectively are dealing with non-performing assets (NPAs) valued at 9 trillion rupees (US$131 billion). The corresponding figure for March 2015 was 2.8 trillion rupees, or less than one-third of current NPA levels.
The Modi government has already taken multiple steps to resolve this situation, the biggest one being the passing through Parliament of its Insolvency and Bankruptcy Code (IBC), which is supposed to smooth the process of debt resolution. However, recovery of more than 9 trillion rupees worth of non-performing loans is proving to be extremely tricky.
The Reserve Bank of India has pointed out that 25% of these unpaid loans – or debts amounting to 2.5 trillion rupees – were taken out by just 12 borrowers. Among the 12 are steel giants such as Bhushan Steel Ltd, the highest defaulter. Bhushan Steel debts of 560 billion rupees were purchased by Tata Steel for 352 billion rupees. This was the first big debt resolution under the new law, and which reportedly resulted in 35% of the total debt being written off.
The messy resolution process has critics asking whether the new law is being tweaked according to different needs and situations when bids come in to take over debt-ridden companies. For instance, last November a law was cleared through the ordinance route that disallowed promoters of defaulting companies from participating in the bidding process. This was a much-needed step, since promoters of companies such as Essar were seen bidding on their own companies, in a clear conflict of interest.
However, this new law was rendered pointless after the National Company Law Tribunal (NCLT) ruled that this ordinance would not apply to cases where the resolution process had commenced before November 2017.
Last week, another amendment to the IBC was introduced that further tweaks existing provisions. Before the amendment, the approval of 75% of total creditors – including public banks to which these companies owed money – was required to initiate the liquidation process. Then, in June, an ordinance was cleared reducing the threshold to 66%.
Bhartruhari Mahtab, a member of Parliament with Biju Janata Dal, opposed the introduction of this bill, arguing that this was being done to benefit only one corporate house: Alok Industries. Alok Industries, one of the so-called “dirty dozen” debtors, owes around 220 billion rupees.
Mahtab pointed out that 11 lenders had to take hits of 84% because of this, causing a massive loss to the exchequer, since public entities such as the Life Insurance Corporation of India (LIC) are involved, and so are public-sector banks such as State Bank of India.
“All this has happened because of the complicity of this government,” he said in the Lok Sabha on Monday. “This is nothing but a fixed match. Bad-loan resolution is becoming [a] deep-rooted nexus between the bankers, auditors and promoters, which is undermining serious recovery. Alok Industries is a glaring example. Should the law be bent like this? Should we be the party to this law, this loot? It stinks.”
Asia Times sent a detailed questionnaire to Alok Industries seeking its response to the issues raised in Parliament. This article will be updated as and when Alok Industries sends a response.
Some questions need to be raised. Alok Industries is a textile company based in Mumbai and the ones bidding on its acquisition are from Reliance Industries Limited (RIL) and JM Financial ARC. The All India Bank Officers Confederation opposed this move to sell at an 84% discount on the debt. RIL-JM Financial is the sole bidder, and only 72% of the creditors voted in favor of the initial bid. By making this amendment to the IBC law and reducing the threshold to 66%, it is quite clear that the bidders benefit. The immediate question to be asked here is: Isn’t this a clear case of crony capitalism?
The bigger vital question as this resolution process moves forward is: Will the government do this for every one of the defaulters, on a case-by-case basis? If so, it runs the risk of being accused of collusion. And this is happening just as the new IBC law is starting to show results. The law was hailed by the industry as a good move that would result in faster and cleaner resolution of the giant bad-loan mess.
This NPA issue is a complex one. But a few simple facts raise pertinent issues: A few companies took high-value loans from public-sector banks, some going back even a decade. These companies defaulted on these loans for a multitude of reasons and now the total amount is touching 9 trillion rupees.
The government passed a law called the Insolvency and Bankruptcy Code to resolve these debts quickly and cleanly. The objective was to recover massive pending dues, which is the public exchequer’s money. This had to be done with minimal losses to the banks involved. The people who did these deeds and approved these loans need to be punished, and the government needs to make sure that this situation does not arise again.