Games promoters play

If a promoter knows that he can afford not to repay loans and buy back his company in the bankruptcy court at a discount with a reduced debt burden, he has a strong incentive to drive his firm aground

Some promoters of Indian companies never cease to surprise. Even as the Appellate Tribunal stayed the National Company Law Tribunal (NCLT) order directing the lenders of Dewan Housing Finance Ltd (DHFL) to consider Kapil Wadhawan’s offer, another Indian promoter last week decided to try his luck to derail the insolvency resolution process of one of his group companies.

Manoj Gaur, executive chairman of Jaiprakash Associates, wrote to the committee of creditors at Jaypee Infratech, proposing to settle the company’s dues in full “in the interest of homebuyers”. This, at a time when the company’s insolvency process is in the final stages. In his letter, Mr Gaur said accepting haircut while ignoring the offer of its promoters was “imprudent” and would set “a wrong (precedent)”.

While it’s good that Mr Gaur’s heart is now bleeding for the 20,000 homebuyers of JIL, the problem is that his conscience has taken over four years to be pricked. But the homebuyers whose interests Mr Gaur is now seeking to protect are unlikely to support a bid from the very builder who delayed the construction and is the root cause of their problems.

The arguments put forward by Mr Gaur in his letter will be familiar to anybody who has read Mr Wadhawan’s representations to the administrator appointed by the Reserve Bank of India. Even the timing is almost identical. Mr Wadhawan, who is in jail on charges of money laundering and diverting bank funds, also struck just when the bidding process for DHFL entered the final lap.

Mr Wadhawan offered to pay up over Rs 90,000 crore dues but the question is: If he has that kind of money to pay even while being in prison, what prevented him from paying up earlier? What is even more galling is that several of the 10 properties he has proposed to monetise to pay his dues have been under investigation by the Enforcement Directorate, which has provisionally attached them under the Prevention of Money Laundering Act (PMLA) for being “proceeds of crime”.

It is thus inexplicable why the NCLT chose to ignore all this and asked the DHFL lenders to consider Mr Wadhawan’s offer. After all, it couldn’t have been the NCLT’s intention to encourage other errant promoters to seek a way to go back to their business they ran aground for a cheaper price through settlement offers.

There have been several other such attempts in the past, almost all of which failed because of a trust deficit between such promoters and bankers. Videocon’s Venugopal Dhoot, Bhushan Steel’s Sanjay Singhal, and Essar’s Ruia family also tried to make what bankers called ridiculous attempts to claw back their companies in the final stages of the resolution.

The Ruia family, the erstwhile promoters of Essar Steel, stunned its lenders by making a last-minute offer of Rs 54,389 crore under Section 12A of the Insolvency and Bankruptcy Code (IBC), which allows a company to exit the bankruptcy process if it offers to repay the dues of all lenders and if 90 per cent of the lenders agree. But the “generous” offer was made at the last stage of the resolution process (banks had already started voting on two offers). The Ahmedabad Bench of the NCLT, however, put paid to the Ruias’ hopes by stating that the promoters did not have any fundamental right to settle their dues and that such a plan could only be entertained with the approval of the lenders.

Apart from Mr Singhal of Bhushan, the other promoter to take the frivolous path was Mr Dhoot, who offered to pay Rs 31,289 crore for withdrawing insolvency proceedings against 15 of his Videocon group companies. The route was familiar: He would raise the money by monetising assets. Mr Dhoot also audaciously claimed he had a “robust business plan” to regain the group’s lost glory. No wonder, lenders have ignored his proposal.

The game most of these promoters played was a wait and watch one. They thought by delaying the insolvency process and making these last-minute bids, they might get back their companies at a throwaway price. The simple question is if these promoters had the financial means to repay loans running into thousands of crores, they should have done so much earlier. The intention is thus obvious: Create confusion and try every trick in the book to be able to hold on to the bankrupt businesses. But the final benchmark has been set by the Supreme Court — “it has to be ensured that a person who is the cause of the problem cannot be a part of the process of the solution”.

There is a powerful moral hazard argument as well. If a promoter knows that he can afford not to repay bank loans and buy back his company in the bankruptcy court at a discount with a reduced debt burden, he has a strong incentive to drive his company aground. The NCLT should have known better before giving its strange judgement in the Wadhawan case.