Indian banking purgatory – 2/3 (the Dharma of blocking the defaulter)

The amendment to the Insolvency and Bankruptcy code (IBC) to bar the defaulting promoter from bidding for his own assets was, on paper, a reasonable one. After all, it is like rewarding either stupidity or dishonesty or both. He defaults. His asset comes on block. The banks realise whatever value possible and write off the rest of the loan. Now, if he comes and buys the asset, he gets rid off the loan and he keeps the asset and the hair cut (loan that is written off) now is a subsidy given to him by the rest of the taxpayers. So, stop him for bidding for his own assets. The amendment also stated certain conditions for the ‘cleanliness’ of the other bidders.

Now, look at the consequences it has caused. Borrowers are now spinning legal webs around bidders and are either preventing or delaying the sale of assets and resolution. No one wants to let go off their prized assets even as they do not wish to settle or cannot settle the loan. See the article for the various hurdles that have cropped up in the sale of assets.

The intent was reasonable: block the guy who defaulted from being his own asset back at a throwaway price and have his liability cancelled too.

But, translation into execution? See how difficult it is.

Who is to be blocked, how and for how long? Where does one draw the line on all these questions?

Well, good to keep tweaking but keep tweaking quickly. Learning by doing should not come in the way of ‘doing’.

It also raises the question with no one-answer-for-ever:

Is it good for the government to learn to live with some imperfections in the system than create more complications in the hope of preventing all chances of ‘bad guys’ winning and laughing all the way to the bank?

What is the yardstick for such a trade-off? Whose value systems define that trade-off? The political leader’s, that of the bureaucrat in charge who drafts it or actually is it that of their grandparents, parents and uncles who shaped the value systems?

In the process of ensuring that no wilful defaulter bids again for the asset that he owned, if loan resolution and economic recovery are delayed, then has public interest been served well?

The MINT article says:

Although it is only two months since the code has been amended, it is time to tweak it to ensure that genuine bidders aren’t shut out. For example, the code should clearly specify whether past associations with disqualified entities are relevant and for how long. Another could be to clearly specify what kinds of relationships are relevant instead of an all-encompassing definition of related parties and connected parties.

A friend wrote that this indicated sloppiness in the original drafting. He wrote,

I’m very unsympathetic to a Ministry which made regulations without paying attention to such basic details – how could they have not foreseen the problems with not having to define the kinds of association with disqualified entities and its duration. This is just as naive as their original regulation that did not anticipate and did not contain some basic safeguards to ensure that promoters do not bid again. I would say failure of the bureaucracy.

Yes, sloppiness cannot be ruled out. Perhaps, equally possibly, the original promoters will have somehow ensured that the assets did not go into anyone else’s hands. I recall Arundati Bhattacharya recounting the story of how no industrialist bid for the assets of Mallya’s mansion in Goa when SBI brought it to the market.

Also, read how the process was stayed in the courts by Mallya’s legal team and with the assistance of some government officials too. This was her interview with Shekhar Gupta’s ‘Walk the Talk’.

And borrowers have access to enormous legal talent.

I do not discuss accounts, but because there is so much public attention, probably it is known we have been fighting (against Vijay Mallya) in the debt recovery tribunal from 2013. We have had 81 hearings there.Various cases have been filed by him and we have filed counter-claims. There are 22 cases we are fighting here, and overall there have been 508 hearings. The number of adjournments is more than 180.For one particular villa (Mallya’s villa in Goa), which we were trying to get possession of, the high court passed an order saying it should be done in three months. The order was issued to the collector. The collector, in turn, held eight hearings and then went on leave.

This is the Goa government’s collector?

Normally, collectors are supposed to take possession, not hold hearings. But this person held eight hearings.We approached the attorney-general and said we need to really take up (Kingfisher Airline’s loan default) in the highest court. We were told we had to go through debt recovery tribunal.

The next day we moved the tribunal, which did not provide any relief. We went to the high court, which remitted it back to the tribunal, which did not give us the relief we are seeking. We need his assets under oath. [Link]

Also, recall what the former Shipping Secretary Michael Pinto wrote about the bidding for the fourth terminal at Jawaharlal Nehru Port Trust (JNPT):

Much has been said about the laid-back manner in which the government has gone about the task of attracting private investment into the maritime sector. While much of the criticism is valid, policy makers do have to deal with a number of extraneous factors. … In all fairness, it must be recognised that this, like some other delays, was outside the control of the authorities.

When, in pursuance of a policy that was intended to encourage competition and prevent near monopoly conditions in the port, one party was debarred from bidding, they approached the high court, alleging discrimination. Their plea was rejected first by a single bench of the high court and then, in appeal, by a division bench of the same court. Against this the party went in appeal to the Supreme Court and here they were successful. The SC ruled that they should be allowed to bid along with other short-listed parties. It was here that the story took an interesting twist. Instead of celebrating victory in a nearly two-year court battle by offering a competitive bid, the party stated that, having established their point in the long legal proceedings at different levels, they were no longer keen to participate in the bid.

The question that immediately arose was why they fought such a desperate court battle to establish their rights to bid for a project in which they were not really interested. By way of explanation we were told that, on studying the detailed tender terms and conditions, the party felt that they were too onerous and that bidding in such a tender was not worth their while. This did little to quell doubts that had been raised because it was beyond belief that a savvy, commercially oriented party would fight such a long court battle without even being sure if the prize to be won was worth fighting for. Instead, speculation was rife that by delaying the project for the two-year period over which litigation was spread, other less attractive terminals in other ports were able to develop and consolidate in a manner that would not have been possible if work on JNPT’s fourth terminal had commenced. [Link]

The Machiavellian machinations of the private sector and the corrupt ways or the over-zealous regulatory instincts of the government – which drives the other?

The fact that everyone seems to have some ‘tainted’ history (real or contrived – I was told that JSW Steel had a rather creative objection to Tata Steel bid for Bhushan Steel), it brings up an interesting ethical question. Which of us is really pure? Everyone seem to have some association with someone somewhere who has defaulted or has some record against them or have been associated with someone who has been involved in some controversy. Everyone is living in the glass house including the politicians.

So, is the best thing to keep it simple? Just bar the promoter and his immediate family from bidding for the assets. Even if the Act specified the ‘relevant relationships’, will that not be gamed easily?

Or, just not bar them at all? Then, rewarding immorality and bad ethics!! What a dilemma?!

Andy Mukherjee had argued for no ban on the original promoter, to keep it simple. Wonder if he was right.

Isn’t the road to hell paved with good intentions? It is always an occupational hazard with public policy. The ban on promoters bidding for their own assets is a classic case study of that public policy axiom.

(Postscript: Tata Steel appears to have won the bid to buy Bhushan Steel. Is that a done deal?)

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