The recent green signal given by National Company Law Tribunal (NCLT) to Arcelor Mittal taking over of Essar Steel from the Ruias in the country’s biggest ever resolution plan under the IBC (Insolvency and Bankruptcy Code) is a huge sign of how things are changing in the country.
Remember, in the run up to the 2014 polls, the country was awash with news stories of scams, favouritism in resource allocation, ‘phone banking’ & NPAs, lobbying, crony capitalism with corruption being the overarching buzzword all around. Day after day, there were stories about how a few firms had benefited out of a nexus with political and administrative decision-makers short-changing the system while public exchequer took the hit. You may read our earlier article Three major scams of UPA: NDA Clean-up for more details.
Contrast this with today. Now as the country is barely a month away from general elections, the country is witnessing a radically new narrative, that is of how the crackdown on corruption and crony capitalism through the last five years has sought to not only turn the heat on the wrongdoers but also address those issues structurally through new institutions, legislations and rules of conducting business. The Insolvency and Bankruptcy Code (IBC) is one of those measures, and the Essar Steel case is one such case.
How things happened before?
- During Congress years, in a culture of phone banking, banks not only conducted inadequate due diligence before and after handing out loans, but wilful default/fraud was not seen as NPAs on banks’ balance sheets.
- Unscrupulous promoters who inflated the cost of capital equipment through over-invoicing were rarely checked and funds were released even when sanction conditions were not complied with.
- There was also unwillingness of the debtors to repay the debts in the past.
- The culture of rolling-over debt and ever-greening was prevalent.
- There was inadequate monitoring all around.
- So, earlier, there was domestic private investment with over capacities in certain sectors coupled with unacceptably high levels of Non-Performing Assets (NPAs) in the banking system, throttling growth.
- The 12 biggest defaulters, who between them account for over Rs 1.75 lakh crore in NPAs, were given loan by the UPA regime. Congress had even tried to cheat people by underestimating the loan amount at Rs 2-2.5 lakh crore when it actually was Rs 9 lakh crore.
- When the then RBI Governor Raghuram Rajan told a parliamentary panel that a large number of non-performing assets were given between 2006 and 2008, when the UPA was in power, his statement nails Congress. He has even said that the earlier culture of leniency present at the RBI has begun to change.
The Government’s Unshakable Resolve
- In this particular case, the Ruias have waged a massive battle since RBI raised the issue. They initially challenged the locus standi of the NCLT and the validity of IBC as a law, but to no avail eventually.
- Section 12A of the Insolvency and Bankruptcy Code (IBC) says that the promoters can retrieve a company from bankruptcy proceedings by paying full settlement but not after other parties have submitted their expressions of interest. This has directly impacted the Ruias.
- There was amendment in the IBC in 2018 clearly making such promoters ineligible to bid for other assets just as the same amendment also barred relations of defaulter companies to bid in IBC cases.
The Domino Effect: Many More to Follow
- There are many cases against the various big corporates that have reached the final settlement stage in which the recovery is underway.
- In some cases, the companies who have not paid their dues back are being acquired by other companies by settling their bad debt.
- In some other cases, companies who were refusing to pay back the banks earlier are now complying with the rulesfearing a strong action against them.
- A very large number of debtors who fear that they are about to touch or cross the red line after which they will be in the NCLT (National Company Law Tribunal) are now refraining themselves from becoming defaulters.
- Financial Creditors have realized the claims of approximately Rs. 47 thousand crore in 26 cases where resolution plans have already been submitted.
- Until the end of December, financial creditors (mostly banks) have realised Rs 65,795 crore from 79 resolution plans. These companies, to put it simply, have been sold to new promoters. The Essar Steel case will take the sum past the Rs 1 lakh crore mark.
- In 2017-18, the corporate affairs ministry shut down 226,000 shell companies that had not filed tax returns or financial statements for a period of at least two years. By latest figures, as many as 3,38,000 shell companieshave been detected and de-registered, and their directors disqualified.
What is IBC?
- When a firm defaults on its debt, control shifts from the shareholders/ promoters to a Committee of Creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation.
- When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use.
- This is in complete departure with the experience under the Sick Industrial Companies Act (SICA) regime where there were delays leading to destruction of the value of the firm.
- In August 2018, a FICCI surveyrevealed that the position of banks has improved because IBC has put the debt recovery process on the fast track.
Therefore, the Essar Steel case is just the first of many to come. The cosy nexus between the promoters, bankers and government officials will no more be as smooth running as it used to be. For every penny invested in a private company, the promoter will have to be truly answerable to the shareholders and the law of the land. If they can’t run a company efficiently, the message from the government is clear: shape up or ship out.