SELLING NPAS: DILEMMAS GALORE FOR BANKERS AND GOVERNMENT
Commission or Comptroller and Auditor General who may accuse them of causing loss to the bank. The government’s worry hence seems to be that both bankers and promoters may use the National Company Law Tribunal (NCLT) process only to hand back the NPAS to the promoters and that too with a cut in the loan load.
However, for the government all the 12 large NPAS going back to their promoters can be a serious loss of face. What is worse, if even one promoter were to get back his plant with a loan haircut of more than Rs5,000-6,000 crore, comparisons with Vijay Mallya will surely hit headlines. Why banish one promoter out of the country and allow another to merrily win back his plant when the loss to the banking system is same or even more!
Even without the political backlash, it is not good for the long-term health of the banks, the financial system and the economy, if an overwhelming number of defaulting promoters get back their plants with a lower loan burden and that too with the stamp of judicial approval. Firstly, since some of these are repeat offenders, they are likely to run their plants into trouble in the next downturn. More important, the demonstration impact on future offenders will be terrible. The Insolvency Code is meant to exactly signal the opposite: that those who default out of incompetence or fraud will be punished by the system taking away their assets. To put it in market lingo, the effort is to ensure that equity holders suffer more than and before the debtors.
The new amendments to the Insolvency Code’s regulations, empower bankers to boldly prefer nonpromoters even if the winning applicant is asking for a higher loan haircut. Sample this: “The Committee of Creditors is expected to carry out due diligence of every resolution plan to satisfy itself that (a) the plan is viable, and (b) the persons who have submitted the plan and who would implement the plan are credible, to avoid the plans which may lead to liquidation, post resolution, and to select the most suitable plan under the circumstances.”
This clause provides enough legal cover for a banker who prefers a new applicant who has no record of NPAS to the existing promoter, especially if the existing promoter has a record of defaulting on loans in prior instances too. Also the new regulations require those who bid for stressed assets at the NCLT “to disclose details of the resolution applicant and other connected persons to enable the Committee of Creditors to assess credibility of such applicant and other connected persons to take a prudent decision while considering the resolution plan for its approval.” Clearly, this refers to promoters who may be bidding along with new-found companies who pose as private equity capital, but may be fronting for the promoters themselves.
So, it does appear that the new regulations are stacking the odds against the promoters. But then, if that is the case, the moral dilemma for bankers will come for the hundreds of stressed companies where there are unlikely to be any suitors but the promoters themselves.
This could be either because the assets have been so run down, that there is little value left. More likely rival companies will shy away from applying for fear that existing promoters may plant a poison pill in the plant, either by way of their moles in key places or by disrupting the plant technically in some way.
A third and more deadly possibility of systematically disallowing promoters to buy back may come in the form of promoters of stressed companies ripping off all assets of a plant, when it starts to go downhill.
Clearly bankers, the government and the NCLT tribunals and indeed the judiciary have to tread a thin line. They need to be diligent, yet visionary. They hold the nation on the threshold of a major breakthrough. They need to succeed for the Indian banking system and the economy to break out of a decades-old system which allowed crooks to take advantage of the dilatory legal process to cheat the banks.