Should bankrupt­ing pro­mot­ers be granted an­other chance?

Mint Asia ST - - News - SUNDEEP KHANNA

Putting

aside the pol­i­tics of the Rafale deal, there is the larger is­sue of whether a pro­moter who’s made a hash of one (or more) busi­ness should be given a shot at an­other. En­trepreneur­ship by its very na­ture en­tails tak­ing risks, of­ten by those who don’t al­ways have the nec­es­sary cre­den­tials. Think of Dhirub­hai Am­bani, the trad­ing firm clerk who set up the gi­gan­tic oil and gas be­he­moth Reliance In­dus­tries, or even Karsanbhai Pa­tel whose Nirma went on to teach mar­ket­ing tac­tics to multi­na­tion­als like Hin­dus­tan Unilever Ltd. Would either of them have made the cut when they were still as­pir­ing en­trepreneurs?

All such en­trepreneurs do need a help­ing hand at the be­gin­ning of their ca­reers, be it from a vi­sion­ary banker who de­cides to waive a few of the cri­te­ria for a loan or a big buyer who of­fers them a life­line. The ques­tion of course is, at what point does such a call turn into nepo­tism and the help into a bla­tant favour.

As the hun­dreds of cases re­ferred to the Na­tional Com­pany Law Tri­bunal (NCLT) prove, far too many pro­mot­ers have ex­ploited the loop­holes in the sys­tem in pur­suit of grand am­bi­tions at the ex­pense of lenders and share­hold­ers. The prin­ci­ple of nat­u­ral jus­tice de­mands that re­spon­si­bil­ity be as­signed for such wan­ton waste.

When a busi­ness is run­ning aground, the first per­son to fig­ure that out has to be the pro­moter. Other in­vestors, big or large, in­di­vid­ual or in­sti­tu­tional, don’t have eyes in the op­er­a­tions and there­fore aren’t a part of the early warn­ing sys­tem. Which is why the buck has to stop with the pro­mot­ers of com­pa­nies, as own­ers as well as managers.

It is the rea­son why the Bank­ruptcy Code was in fact amended in Jan­uary this year to stop de­fault­ing pro­mot­ers of com­pa­nies un­der in­sol­vency pro­ceed­ings from tak­ing ad­van­tage of the ear­lier pro­vi­sion and bid­ding for the as­sets of the com­pa­nies which they had driven to bank­ruptcy in the first place, at con­sid­er­ably lower prices. A new Sec­tion, 29A, was brought in pre­cisely to pro­hibit pro­mot­ers from be­ing “res­o­lu­tion ap­pli­cants” while also rul­ing out peo­ple con­nected with the pro­mot­ers.

In re­cent months, we are see­ing In­dian pro­mot­ers at pains to ab­solve them­selves of cul­pa­bil­ity in run­ning busi­nesses aground. The Singh broth­ers, after the twin train wrecks of Ran­baxy and For­tis, are now busy pass­ing the buck. Many oth­ers sim­ply blame the busi­ness en­vi­ron­ment. It isn’t an ac­cept­able po­si­tion. We of­ten un­der­es­ti­mate the im­pact that fail­ing busi­nesses have on so­ci­ety in the form of loss in share­holder value and trust, dis­rup­tion in ser­vice, higher prices and job losses. Set against that, a cer­tain cool­ing-off pe­riod after a par­tic­u­larly glar­ing fail­ure in busi­ness may not be such a bad idea.

Ken­neth Lay, founder and chair­man of the Amer­i­can en­ergy com­pany, En­ron Corp., was con­victed of seven counts of fraud and con­spir­acy for his role in the com­pany’s even­tual bank­ruptcy. Dur­ing his trial, Lay in­sisted that busi­ness fail­ure is not the same as a crime. His words, “As CEO of the com­pany, I ac­cept re­spon­si­bil­ity for En­ron’s col­lapse. How­ever, that does not mean I knew ev­ery­thing that hap­pened at En­ron, and I firmly re­ject any no­tion that I en­gaged in any wrong­ful or crim­i­nal ac­tiv­ity”, might well res­onate with many In­dian pro­mot­ers. But just as the jury in that case was un­con­vinced, it would be dif­fi­cult to ac­cept the plea of many In­dian own­ers be­cause they are in­ex­tri­ca­bly linked with their busi­nesses.

So, how do you draw a dis­tinc­tion be­tween the en­tre­pre­neur who de­serves that se­cond or third or fourth chance and one who doesn’t?

A sim­ple way might be to use the lens of cor­po­rate gov­er­nance and see if past fail­ures led to per­sonal en­rich­ment or were brought about by non-busi­ness de­ci­sions. In the case of Ran­baxy, for in­stance, it wasn’t a sound busi­ness de­ci­sion to fudge pro­duc­tion records and mis­lead the mar­kets. Tak­ing ad­van­tage of reg­u­la­tory loop­holes is an­other no-no. Pro­mot­ers of such com­pa­nies don’t de­serve govern­ment or in­sti­tu­tional largesse. For the oth­ers, maybe we need more tol­er­ance.

Sundeep Khanna is a con­sult­ing ed­i­tor at Mint and over­sees the news­room’s cor­po­rate cov­er­age. The Cor­po­rate Out­sider looks at cur­rent is­sues and trends in the cor­po­rate sec­tor ev­ery week.

PRADEEP GAUR/MINT

Case in point: A file photo of a Ran­baxy build­ing in Gur­gaon. In Ran­baxy’s case, it wasn’t a sound busi­ness de­ci­sion to fudge pro­duc­tion records and mis­lead the mar­kets.

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