New exit policy where defaulting industrialists go, workers stay is welcome

Till now, the business phrase “exit policy“ meant the exit of workers, to allow owners to survive and flourish. Now, for the first time, India has an exit policy for owners that allows workers to survive and flourish. If it succeeds, it may go down as Narendra Modi\’s finest achievement.

India is famous for having many sick industries but no sick industrialists, whose political clout (and legal delays) precluded seizure of their assets by lenders. That has changed dramatically with the enforcement of the Insolvency and Bankruptcy Code 2016. The RBI is using this to force banks to get tough with defaulting promoters, forcing them to sell assets to repay debts and make their companies solvent. If this does not work, the banks will eject the promoters, and appoint a professional manager to run the company till it is auctioned to new buyers.

This is a revolutionary change. In June, the RBI identified 12 major companies for insolvency proceedings, each owing over Rs 5,000 crores. Bhushan Steel, Electosteel Steel and Lanco Infratech headed the dirty dozen, owing a whopping Rs 1,75,000 crore (almost a quarter of all bad bank loans).

Reports say the RBI has prepared a second list of 40 companies, including giants like Videocon and Jindal Steel and Power Ltd. The top 500 defaulters face similar action. The finance ministry backs a “zero tolerance“ policy for bad loans.

Many questions remain. Will new buyers be available? Will these ask for such high loan forgiveness in the takeover package that banks will refuse, leading to stalemates? Will old owners regain control at bargain prices via benami companies in tax havens? Time will tell. Yet let\’s hope for a new era where industrial might is no protection against the rule of law, and the exit of celebrated but defaulting industrialists is not only possible but happening. True capitalism requires exit for capitalists no less than workers.

Once, Vijay Mallya was politically so powerful that banks kept ever-greening loans to his sinking Kingfisher Airlines. He hoped to survive a debt of Rs 9,000 crore, as industrialists always had.But when the BJP government moved to arrest him, he fled abroad in 2016. His assets in India -including holdings in United Breweries and United Spirits -have been seized. The Enforcement Directorate claims these assets will cover his bank dues of Rs 9,000 crore, and awaits court clearance for an auction.

The Essar Group ran up huge debts to expand its empire, among allegations of inflated capital costs. Lenders have forced it to sell Essar Oil, which includes India\’s second biggest oil refinery, its captive port at Vadinar, a power station of 1,010MW capacity, and 3,500 filling stations. The $12.9 billion sale to Rosneft will enable the group to halve its debts, and probably hang on to indebted Essar Steel. However, the group\’s debts remain huge at Rs 70,000 crore.

The Jaiprakash Group (Jaypee) had a spectacular rise in the 2000s as it borrowed hugely to fund enormous infrastructure projects and real estate. That bubble then burst. The initial reaction of banks was to keep extending their loans to Jaypee despite defaults: this was business as usual. But in today\’s new era, they have leaned on Jaypee to sell its cement plants to the Birlas for a reported Rs 16,000 crore. As part of its debt recasting plan, the banks are reported to have taken over Jaypee\’s land assets worth over Rs 13,000 crore. Never before have owners ever been obliged to part with such massive, profitable assets to repay old debts.

Ousting promoters is not an end in itself.Many promoters were unlucky, including those hit by land acquisition delays, and those who built power plants but could not get fuel from Coal India. “Resolution“ in banking terminology means a deal where the lenders and owners (and sometimes trade unions) all agree to take a hit so that the enterprise becomes viable again.Resolution is the simplest and most preferred outcome. But it is feasible only when company assets are still substantial and the business is fundamentally viable. Resolution will not work for run-down companies with worthless assets.

In the old days, banks kept lending till a company became worthless, and closed without paying workers. The new approach is to seize a defaulting company while it still has good assets, revive it through resolution, or else go for a forced sale to a new buyer. The owner will exit but most workers will remain employed. It remains to be seen if this works. If it does, how marvellous!

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