Corporate India is walking away with enormous wealth transfers, primarily through the public banking system, in a covert game that has been going on for two decades. After much delay, the stalled process of settling defaulting corporate bad debt utilising the Insolvency and Bankruptcy Code (IBC) is now being completed in a growing number of cases. Examining the outcomes of completed resolutions reveals that:
public banks are taking huge "haircuts" and incurring losses, the burden of which falls on the taxpayer who funds recapitalisation;
those who acquire the assets of the corporate defaulters that underpin this debt do so at a discount; and
promoters and major shareowners, who are the failing corporate's management, benefit from huge debt write-offs in firms from which they previously profited. In post-liberalisation India, incurring debt, failing to repay it, and reaching a settlement that may or may not include a third party appears to be a method of transferring wealth from the state to a large enterprise.
The evidence has grown so strong that even the National Company Law Tribunal (NCLT), the legal body through which the resolution plan presented by the “resolution professional” and accepted by a “committee of creditors” (CoC) must pass, has voiced concerns about the process's integrity. Consider the case of Videocon Industries, which was brought before the NCLT for settlement of its non-performing debt of Rs 35,000 crore. Twin Star Technologies, a Vedanta group business headed by mining mogul Anil Agarwal, agreed to take over Videocon. Twin Star is to pay Rs 2,962 crore in exchange for the “bankrupt” defaulter, according to the resolution plan authorised by Videocon's creditors. That is, the creditors agreed to a deal in which Vedanta acquired Videocon by paying just 4.15 per cent of the total debt and the creditors agreed to a "hair cut" of 95.85 per cent.
The code only provides a patina of legitimacy to the operation. For over a decade, it has been known that the credit boom of the 2000s, which witnessed massive increases in lending to large corporations, resulted in an unsustainable pile of bad debt on the books of Indian banks. It was also obvious that with defaulters now mostly consisting of large corporations with significant loan exposures, collecting a meaningful amount of that debt was becoming exceedingly difficult. Disputes were brought to court and went on for years, even while assets with corporate creditors that might be expropriated as compensation were stripped or simply lost value.
These recent incidents only serve to highlight the reality that the IBC, touted as game-changing bankruptcy legislation, is being used to transfer wealth to capitalists. The code only provides a patina of legitimacy to the operation. For over a decade, it has been recognised that the credit boom of the 2000s, which saw massive increases in lending to large corporations, resulted in an unsustainable accumulation of bad debt. It was also obvious that with defaulters now mostly consisting of large corporations with significant loan exposures, collecting a meaningful amount of that debt was becoming exceedingly difficult. Disputes were brought to court and went on for years, even while assets with corporate creditors that might be expropriated as compensation were stripped or simply lost value. The issue is that it fails to mention that these cases of rapid recovery are the exception rather than the rule. If we look at the ratio of realisation value to liquidation value, we can see that it has been less than two in 11 of the 15 quarters and has been at or below 1.3 in eight of the 15 quarters. Despite the accomplishments, the average amounts realised most times were not considerably more than the liquidation value. That is, in most situations, the settlement procedure did not assist recover much more than what might have been collected through liquidation. This supports the NCLT's concern about the resolution process's integrity. Despite the anticipation, the IBC has not been able to assist banks in recovering debts made to large corporate entities, who have simply refused to pay such liabilities. Rather, it has been used to orchestrate a shift of wealth from banks to large enterprises. And the majority of those banks are publicly held, i.e., by regular Indians.
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