Do not go gentle into that good night, wrote Welsh poet Dylan Thomas some 70 years ago. That’s a message that many Indian promoters of companies seem to have taken to heart. Despite being smothered by distressed assets, promoters are not throwing in the towel just yet. Through fair means or foul, by which we mean litigation or random allegations, they seem determined to hold on to their crumbling empires.

The ones bearing the brunt of this inability to let go are, predictably, employees and lenders. Banks have reported a steady rise in the number of non-performing assets on their loan books. These are loans to companies that seem unable to pay back. In just the past two years, there has been a surfeit of such ‘assets’: Binani Cement with debts of Rs 3,976 crore; Essar Steel, now bankrupt with debts of Rs 37,284 crore; and Bhushan Steel with borrowings of over Rs 44,000 crore.

A succession of such insolvent companies meant that banks found their bad loans, or non-performing assets (NPA), steadily mounting. As on June 2017, NPAs stood at Rs 7,33,137 crore, according to finance ministry data.

This isn’t a new problem by any stretch. It’s been going on for decades, with successive governments trying piecemeal reforms and creating a patchwork of legislation. Enter the new government, led by the Bharatiya Janata Party (BJP). Within two years of sweeping to power, the government introduced the Insolvency and Bankruptcy Code (IBC) in 2016. The idea behind this code was to put an end to Sisyphean legal exercises by promoters. In effect, the new law gave stakeholders two options: put in place an approved resolution plan, or liquidate the company. Either way, lenders would get back at least a fraction of their money. At the same time, the National Company Law Tribunal (NCLT) was set up. The NCLT was set up more than 15 years after the Justice V. Balakrishna Eradi Committee submitted its report on the insolvency laws in India.

At the time, the committee had recommended setting up a National Tribunal to replace various entities including the Board for Industrial and Financial Reconstruction (BIFR). The idea was to streamline the resolution process for insolvent companies. Bureaucratic and political delays meant that the NCLT was set up only in 2016, along with the National Company Law Appellate Tribunal (NCLAT)—the court of appeal for NCLT cases.

When it was launched, the IBC was greeted with acclaim. It is perhaps “the boldest attempt to fix the system”, says Aditya Mittal, president and group chief financial officer (CFO), ArcelorMittal. The code “provides India with a selfcorrecting marketplace for the secure and transparent disposal of distressed assets”, he adds. Puneet Dalmia, managing director, Dalmia Bharat Group, agrees, saying the code is “the biggest reform story in India’s capitalist history”.

These are powerful voices from India Inc. You’d think these would be the ones against the idea of the IBC since it’s so clearly about putting promoters in their place. That corporate India is in favour of the code says much.

Except, of course, it hasn’t been as perfect. Promoters soon found a loophole that they used to devastating effect. They simply bid for their own bankrupt company at substantially discounted rates, which meant that they kept their company while the lenders had to bear the loss; in the jargon of the financial world, lenders had to take a haircut. In effect, then, the IBC became a mechanism for promoters to keep their assets.

Banks, meanwhile, continued to suffer. In a bid to close this loophole, the government announced an amendment to the IBC in 2017, and introduced the significant Section 29A. This amendment attempts to define who can bid for a company and suggest a resolution, and clearly states that existing promoters cannot participate in the process.

It’s been barely six months since the amendment was introduced, and corporate India seems up in arms over it. Pretty much everyone we’ve spoken to wants the amendment changed. “A default can be for various reasons—business failure, fraud or wilful default. Is it right to club all of these in the same bucket? Why should a promoter who has defaulted because of business failure not be allowed to bid for his company?” asks Amit Tandon, founder and managing director, Institutional Investor Advisory Services.

Somewhat ironically, Mittal seems happy to have the IBC in the shape it is. Ironic, given that his company has challenged the decision of the resolution professional and the lenders in the case of Essar Steel; ArcelorMittal had bid for Essar but the bid was rejected under Section 29A. ArcelorMittal has challenged this decision and has approached the NCLT for redress. Meanwhile, Mittal says: “Promoters don’t want to let go of their assets. This is a new India and businesses are still getting used to it.”

There’s much to be said in favour of the IBC—and plenty of people are saying it. What the IBC has done, says Mukesh Butani, managing partner, BMR Legal, is to put the fear of losing their assets among bankrupt corporates or wilful defaulters. So far, such defaulters could take public money, do whatever they wanted with it, and in case their business failed, could either get their loan restructured, or delay the repayment, or otherwise frustrate the recovery process through litigation or other means. “Without a proper exit for bankrupt companies,” says Dalmia, “Indian capitalism was socialism for the rich people.”

With strong voices in favour of the IBC, why then are there so many cases against rulings made under it? Today, virtually every decision of the NCLT or the resolution professionals—appointed by the lenders— has been either criticised or challenged in court. Divyanshu Pandey, partner, J. Sagar Associates, a law firm, says stakeholders (read promoters) are trying to maximise their gains by finding loopholes in the code.

Like many things, the IBC seems like a great idea. Implementation, however, is quite another thing. The litany of complaints against rulings under the IBC is getting louder and more discordant.

From the role of the resolution professional to the time given to come up with a resolution plan to voting rights of the consortium of lenders, there’s nothing that seems to be right. The Insolvency Code, in its current shape and form, seems more like an insolvent code, which is simply not able to get its act together.

Today India Inc. is drawing up new strategies, lining up legal luminaries, consultants, and chartered accountants, and joining hands with promoters, co-opting private equity and other financial institutions, all in a bid to fight provisions in the IBC.

The NCLT isn’t helping much. In a recent judgement, the principal bench of the NCLT in Delhi ruled that a resolution plan doesn’t really need to follow the letter of the law; the law, in this case, being the IBC. The case was that of Liberty House, a British industrial and metals company, submitting a bid for Bhushan Power and Steel after the deadline. It can be argued that Liberty House used information from other bids and submitted a higher one. The bid was rejected because it was filed late, and predictably, the case was taken to NCLT.

“The resolution plan of Liberty House shall not be rejected on the ground of delay emanating from process document or any other document internally circulated by the RP [resolution professional] or CoC [consortium of creditors],” went the judgement.

The NCLT itself is stuck between a rock and a hard place. On the one hand, it has to ensure that distressed companies are not liquidated without all other options being explored. On the other, it has to uphold provisions of the IBC which don’t allow much wriggle room.

Take the office of the resolution professional, who is to be appointed by the consortium of lenders under the IBC. The resolution professional’s job, as spelled out by the law, is to recommend a viable, sustainable resolution plan, that has the approval of 75% of the creditors. This has to be done in 270 days. This exercise has opened a whole new front in the battle against IBC provisions.

“How do you expect a resolution professional not only to understand the nuances of the business, calculate the claims of various creditors, figure out the long-term viability of the company, and then devise a resolution plan that will ensure that the company continues to generate enough cash flows to not just service its debts but generate profits too?” asks Pandey of J. Sagar Associates.

Remember, this job is made even more difficult because of the propensity of the creditors to go to court at the drop of a hat. What happens to the 270 days then? “The law isn’t very clear on whether the days spent in litigation should be included or excluded from the 270-day window,” says Kumar Saurabh Singh, partner at law firm Khaitan & Co.

Seshagiri Rao M.V.S., joint managing director and group CFO, JSW Steel, says the litigation period has to be outside the 270 days to save a company from liquidation. “Of course, there is an interpretation that the deadline cannot extend beyond 270 days,” he says. “But where there is time lost due to litigation, some flexibility is always better.

Seshagiri Rao

JSW to take final call on EV investments by August

IBC: A code in need of an urgent upgrade