The Insolvency and Bankruptcy Code was in itself a landmark legislation, setting the stage for a focused and concerted effort to take India’s non-performing assets problem to its logical endgame. The recent ordinance to keep out promoters who are wilful defaulters, or whose account has been classified as NPA for a period of more than one year, as well as other connected persons from submitting a resolution plan for the stressed assets in the National Company Law Tribunal is an important addition to the IBC and one which will have long-lasting implications, not only for stressed assets but for the economy as a whole.
Hard Decisions, Structural Benefits
Like any new legislation, the IBC is still in beta mode and will take some tweaks and changes to reach its final shape. One of the gaps identified in IBC was around the possibility of promoters who were wilful defaulters taking control of their company through the NCLT process. By moving quickly to close this lacuna, the government has made it clear that there is no further room for crony capitalism in the country. It is indeed another critical moment in India’s fight against defaulting borrowers. In the past, there were never enough tools with the lenders to effectively deal with rogue borrowers but IBC is consistently changing that. At every step now, be it demonetisation, or the Goods and Services Tax, or the IBC, the government has made it clear that it is not afraid to take hard decisions as long as the structural benefits outlast the short-term pain.
Some Short-Term Pain...
As with all far-reaching changes, there are some issues around the short-term consequences this ordinance will entail. The primary concern that has been voiced is around the pricing of stressed assets which might see a fall as promoters are barred from entering the process.
However, the bottom-line is that in most cases, as it is, the promoters were struggling to put together credible, tangible resolution plans with sizable bids, so pricing impact should be minimal.
Even then, most large and good quality assets will have several genuine buyers coming in and efficient price discovery should not be a challenge at all. In fact, this could further open up the gates for private equity investors and large global funds to actively look at buying these assets, driving up foreign investment in the Indian market.
For such companies, promoters would likely have been the only viable option and the government needs to proactively ensure that such companies do not face inadvertent closures, resulting in any job losses.
The change might also lead to some small delays in the resolution process as fresh bids might be called for some cases since the pre-packaged resolutions with existing promoters will not be possible now. Also, the due diligence will need to be even more rigorous to ensure non-participation of disbarred promoters or related entities.
...But Long-Term Gain
At a structural level, this ordinance could permanently transform the behaviour of both corporate and the financial services system in India. Over the years, India has churned out several respected and successful companies which have had no promoter involvement. Be it an HDFC Bank, ITC, L&T or ICICI Bank, these and many other companies are epitomes of the shift from promoter oriented culture to professional investors and professionally-managed companies. This ordinance will further accelerate this trend creating higher in the long-term.
Incrementally, banks may now prefer to restructure loans outside of the NCLT and may use Asset Reconstruction Companies (ARCs) for this to get better pricing.
Over a period of time, this will also create a mindset shift for lenders who will realise the need to be calibrated in picking borrowers. Driven by the need to identify and service the good quality borrowers, under-writing mechanisms will evolve and refine with new paradigms being added to the existing ones. The bottom-line will be a surge in quality borrowing with lower credit disbursal to low-quality debtors. While it is important today to bring out such an ordinance, it is hoped that eventually, once we have created a robust market for stressed assets in the country, the ordinance can be replaced. Not only will this ensure even more efficiency in the system, it will also allow the creditors to have the final say in disposal/sale of their assets.
Towards A Developed India
Undoubtedly, this legislation is another important milestone in creating a holistic economic environment. The government and regulators’ receptiveness to actively incorporate changes taking cognisance of the prevailing needs augurs well for the country. While there might be some short-term effects, which need to be handled carefully, in the long-term the financial discipline it will incorporate in both lenders and borrowers can have a galvanising effect on the Indian credit landscape.
A stable, robust and efficient credit market is the hallmark of any developed economy. As India continues to take giant strides in this journey, this ordinance will also be remembered as another watershed moment that helped India on its journey to the path of development.
Rashesh Shah is Chairman and Managing Director of the Edelweiss Group.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.
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