What happens when companies need to die

The IBC regime of India has stumbled, and drastic course correction is now needed.

 What happens when companies need to die

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• The story: It is an exciting phase when companies are started. But not all make it, and eventually may need to be shut down. In a well-run free market economy, getting out of businesses should be equally easy. But for India, it is not.
• IBC's initial successes: The Insolvency and Bankruptcy Code (IBC) was launched in 2016. There were some initial successes in finding buyers for distressed steel plants. Eeryone thought that finally, valuable capital will be extracted from failed businesses. Soon, creditors saw the prospect of upto 90% haircuts. Bailout funds faced long delays in admitting cases by tribunals and a shortage of judges. Things are back to square one!
• Copying the West: Many emerging countries have tried copying the successful institutional model of the West. But their poor execution makes them flounder badly. India's IBC is being touted as exactly one such case. Experts call it “isomorphic mimicry”: aping the form of successful Western institutions but leaving them dysfunctional.
• What investors thought: Early on, global investors were excited by India’s 2016 insolvency law, hoping to profit from Rs 19 lakh crore ($260 billion) of bad loans, including those written off by banks in the last eight years.

1. Sadly, large, indebted businesses have continued to turn into zombies.
2. Vodafone Idea Ltd. can’t possibly repay the $30 billion the unprofitable company now owes the government and banks. And Future Retail Ltd. was hoping to stay afloat by selling assets to Mukesh Ambani’s empire, but Amazon.com Inc., from which Future’s founder Kishore Biyani had taken money after promising to not sell out to India’s richest man, has legally blocked the deal.

• Corporate death: It is an inherent feature of capitalism, not something to be worried about. India copied the British system of putting creditors in charge of insolvent firms. Debtors too can initiate in-court bankruptcy proceedings, or lenders can do it. But execution troubles are undoing it.
• What went wrong: Many say that Vodafone Idea itself is reluctant to file, as it isn't sure that it will be allowed to retain its licenses in insolvency. Without them, the carrier with 25.5 crore subscribers is worth little. Then in the Future case, having recently extended the maturity of Future’s $1.4 billion of onshore debt, banks are wary of the loan-loss provisions they’ll have to make by dragging it to a bankruptcy tribunal.

1. Across India, 27 tribunals are being run by 29 judges, and 25 more are needed
2. Many judges have no experience in financial matters, and some sit on four benches
3. These insolvency courts also adjudicate unrelated matters under the Companies Act, overwhelming an already strained system

• Delays: There are delays in approving a sale or liquidation in 270 days as the law proposed originally (the time limit was later increased to 330 days), and also in admitting cases to start the clock. Leaving aside the top nine bankruptcies initiated in 2017 at the central bank’s behest, creditors’ recovery rate has been just 24%.
• From British Raj to free India: India's corporate landscape is a colonial legacy. Few British managing agencies used to hold sway over large swathes of productive assets with very little capital. The agencies, which came to be controlled by Indian business families, were outlawed in 1969, but a heavily state-dominated banking system still allows empire-building by politically connected debtors on a sliver of loss-absorbing equity. When government-owned banks lose money, taxpayers fill the hole.
• IBC law: The power imbalance were known when parliament legislated the bankruptcy law. So creditor-friendly features were made. But soon, the political system lost its courage when actual decisions (of allowing large firms to go under) had to be made. Urjit Patel, the previous central bank governor who sought to make large borrowers more accountable by ending banks’ evergreening of soured loans, failed and quit abruptly.
• Summary: It is only through strong political will that the wonderfully crafted but woefully executed IBC system may be made to work again.
• EXAM QUESTIONS: (1) Explain the major reasons the IBC regime in India did not take off as planned. What can be done to remedy the situation? (2) What were the original goals of the IBC regime? How was it supposed to help the system? Analyse.

#IBC #Insolvency #Bankruptcy #NCLT

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