“The search for a scapegoat is the easiest of all hunting expeditions”
Dwight D. Eisenhower
The American war movie The Dirty Dozen tells the story of twelve arbitrarily chosen war convicts sent into German ranks on a suicide mission by a semi-crazy Major General. The twelve companies that RBI chose to send to the National Company Law Tribunal (NCLT) last June for insolvency resolution seem to have been conscripted as arbitrarily as the men in the movie.
The story began in May 2017. As the NPAs in public sector banks ballooned unabated, the Government decided that the banks themselves were not capable of cleaning their own balance sheets. That month, it issued an ordinance amending the Banking Regulation Act to say that henceforth, RBI could issue directions to banks to initiate action against defaulting companies under the provisions of the Insolvency and Bankruptcy Code, 2016 (the IBC). RBI already had almost unlimited power to issue directions to banks under that same Act, but the Government seems to have been seized with the urge to do something, or at least be seen to be doing something.
A few days later, RBI issued a press release which said that it was working on a framework to facilitate an “objective and consistent decision-making process” with regard to cases that may be determined for reference under the IBC. It would soon be constituting a committee largely comprised of its independent board members to advise it on this matter.
The next month, in June 2017, RBI reported that the committee (called the Internal Advisory Committee) had been constituted, and its first meeting had discussed the largest default-hit companies in the country. It had then arrived at what the press release termed as “an objective, non-discretionary criterion” for sending companies for immediate resolution under the IBC. This was: accounts with an outstanding amount greater than Rs. 5,000 crore, with 60% or more classified as “non-performing” by banks as of March 31, 2016. The only companies in India that made the cut were The Twelve.
The problem with anything ‘non-discretionary’ is that, well, it lacks discretion. With blindfolds firmly on, and with no scrutiny of the individual cases, RBI decided that one size would have to fit all. One can speculate on the extent of politics and corruption that may have led to the point that RBI would neither trust itself nor the managements of PSU banks to come to an informed decision on whether these companies needed to be sent for insolvency resolution.
Initiating the insolvency resolution process under the IBC represents only one of a bouquet of choices that any lender has when faced with a defaulting debtor. It may well be that lenders see greater value in allowing the existing management to continue running the business, than subjecting it to the restrictions of the IBC, which ejects managements in favour of a “resolution professional”. The firm’s organisational capital may rapidly deplete, its trade creditors may get spooked, and its valuation may erode the moment it is admitted for insolvency resolution.
The RBI also turned a blind eye to whether the Dirty Dozen had found a way to amicably resolve their loan defaults or had almost done so. In at least two cases (Essar Steel and Bhushan Steel), managements complained that this was exactly the case. The RBI seemed to have decided that the size of the default justifies its decision. But a large default may only indicate that the size of the business is large.
By handcuffing lending banks to the IBC for settling their NPAs with the twelve companies, the RBI has done neither the banks nor the companies any favours. It’s been almost a year since its momentous decision on The Twelve. None of the accounts has been resolved, while the share prices of the twelve companies have gone into freefall.
The Dirty Dozen ends with ten of the twelve convicts being killed in combat. Let us hope our Dirty Dozen have better luck.
