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The fate of NPA’s after the Bankruptcy Code

The Insolvency & Bankruptcy Code (IBC) was passed in the Lok Sabha on 5th May 2016 & received the assent of the President of India on 28th May 2016. Nobody knew what to expect, least of all, debt-burdened promoters of corporate India who weren’t expecting a one-stop shop for all things that spell “resolution”. The IBC ushered in a new era of accountability and gave a clear message to over-leveraged promoters, who for decades have got away with manipulating banks into providing finance to their ambitious and often unviable plans. Such loans, more often than not, ended up as Non-Performing Assets (NPA’s) in the books of the banks. Slowly, but surely, India’s mountain of debt grew taller and according to a report by CARE ratings published in December of last year, India had the highest level of NPA’s among the BRICS nations and is ranked 5th worldwide behind Greece, Italy, Portugal & Ireland.

With banks having to accept massive haircuts to resolve the largest NPA accounts in the country, the so-called “Dirty Dozen” (12 largest NPA accounts that constitute 25% of the country’s bad debts), IBC has made it aptly clear that promoters of the beleaguered companies i.e. those who contributed to the default of a company, or are otherwise undesirable, should be ineligible from bidding for stressed assets. This triggered a fear among promoters of losing control of their firms, and of being banned from bidding for other distressed assets. A report published last quarter suggests that over 2,100 companies settled  Rs 83,000 crore worth bank dues for fear of losing control over their companies before action was initiated under IBC. This sends a clear message to the promoters, that lawmakers are serious about holding them accountable for their frivolous and fraudulent borrowings and does not intend to give them the slightest leeway even though it may come at the cost of improved recovery.

The recent arrest of Neeraj Singhal, promoter of Bhushan Steel, has proved that even the most influential promoters can be made to part with their beloved companies and the past sins of these promoters will not be forgotten even after the company has undergone resolution/liquidation under IBC. Sale to buyers will not mean the closure of the case. With forensic audits and rigorous investigations being conducted by various agencies such as CBI, ED, SFIO, IT Authorities etc. the noose can be felt tightening around the neck of willfully defaulting promoters.

As we usher in this new era of debt resolution and accountability to stakeholders, the ground realities of borrowing money will see a massive transformation, where bankers will insist on the full value of the security for assets, increased mortgage coverage & promoter guarantees before disbursement of funds. The age-old adage, once bitten twice shy, will hold true going forward.

Things will see an improvement on the procedural side as well, with the law getting clearer & frivolous petitions being avoided going further. Better valuations are also more likely to be offered, meaning less haircut for banks. The overall recovery process is set to become more transparent and regulatory authorities will have a better understanding of the problems faced by banks, promoters and recovery agencies which will lead to a smoother transition of the bankruptcy law.

On the recovery front, while banks are now assured that promoter frauds will not go unpunished, they will also have to be pragmatic in their expectations of recovery and will be willing to accept haircuts if reasonable amounts can be guaranteed in a time-bound manner. Offers from prospective buyers will not always meet the banks’ forecast and immediate offers will come only where stalled plants can be revived.

The culture of borrowing & lending is changing because of IBC. It has the potential to bring about a seismic change in the landscape of corporate accountability, but like any massive system overhaul which has long-term benefit as its objective, the code will have its fair share of trial & error which might expose chinks in the IBC’s armour. This major step taken by the NDA government is in the right direction, though only time will tell if it can be implemented effectively in a country whose borrowers are not accustomed to such strict scrutiny.

 

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