Plotting the revival (Bringing the Indian economy back on track post-COVID)

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 Plotting the revival (Bringing the Indian economy back on track post-COVID)

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• The balance sheet problem: After the 2007 global financial crisis, Indian economy suffered from 2008/09 due to balance sheets of firms being hit badly. 

1. 2020 is different, as the hit is much broader and deeper now, covering many more firms.
2. A gradualist strategy (like earlier) will not be fruitful this time.

• Speed is of essence: Reveues have dried up, forcing companies to relieve part of their workforce. Vendor payments are delayed, causing problem in entire supply chain. 

1. Hence, first of all, firms need credit (to pay to workers and suppliers) before they restart production. Problem? Impaired firms don’t get credit, and impaired banks don't give credit.
2. Value of bankrupt firms drops sharply with time, hence the govt. can reduce its own pain by acting faster (as govt's own fiscal position is badly eroded).
3. Quick resolution for firms is tough as the IBC's working is suspended for six months (Insolvency and Bankruptcy Code) - which otherwise was a good decision given the stress. Even if IBC is revived, who is going to buy the stressed firms, when everyone is troubled! And it's morally wrong to take firms away from their promoters when they stopped working on government's request.

• SNAP needed: We need faster procedures, with sunset clauses, that use the IBC framework. We can call it "Special Non-Adversarial Procedures".

1. Once COVID-19 crisis is over, the IBC CoCs (Committee of Creditors) must swing into action.
2. The largest cases (debt > Rs.10000 cr) should be treated the normal IBC way. All others can be treated by SNAP.
3. SNAP will check if the troubled firms are in trouble purely due to the lockdowns. Then they will be called LAEs - lockdown affected enterprises.

• LAEs: The IBC will appoint the Insolvency Professional (IP) for the LAEs, and ensure that existing management keeps running the firm. The CoC will take a look at the debt position, and allow for a reasonable haircut. 

1. Firm will be free from bankruptcy. NCLT won't come into picture. SNAP will end by Dec 2020.
2. So, we will see - not liquidation and rehabilitation under new promoters (regular IBC) but rehabilitation under existing management (SNAP).

• Checks needed: To ensure no fraud happens, and firms don't take unworthy debt reductions, banks will need to certify that defaulters are truly LAEs, and IPs will need to certify the size of debt reduction.
• What government will do: Two things -

1. Give legal cover to bankers to avoid any investigation later on
2. The public sector banks ought to be compensated for the cost of the haircuts

• Benefits of SNAP: It will be fast, and without the adversarial nature of regular IBC. Why? Because promoters are forced to cede their firms. This is the design provided for in Chapter 11 of American Bankruptcy Act also.
• What about power and real estate: These two are hugely stressed, for many years now, and the slowdown has hurt them deeply. Only way forward is a sui generis approach - create a bad bank. Why so?

1. Power sector's viability depends on govt. policy, so government has to be completely involved in its rescue.
2. Real estate resolutions have to ensure protection of interest of home-owners, which does not happen under existing IBC.

• Three prongs: Thus, (a) Create the SNAP, (b) Reform the IBC for loss-minimisation, and (c) Bad bank for stressed assets in power and real estate sector.
• Summary : The balance sheet problems are now worsened due to COVID-19, and a new approach to IBC can help a lot.

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