Spinning loot of public money as success story

A month ago when Bhushan Steel was sold to Tata Steel, there were loud rounds of self-congratulation by government ministers and advisors about the fact that almost 65 per cent of the loan was recovered and only 35 per cent written off. I had then suggested that a successful resolution of bad loans would depend on a few fortuitous factors, mainly the quality and size of the asset and the number of well-capitalised players in the sector. The steel business is booming and Bhushan offered a large established capacity to well-established bidders, hence was an extremely attractive asset. Similarly, Essar Steel will be a very appealing asset to established players, and banks may be able to walk away with an even larger share of recovery than they did in the case of Bhushan. But, I said before, it would be a mistake to extrapolate this and start toting up the money that is likely to be recovered.

 
Now, look at another large case that got resolved last week — that of Alok Industries, a textile company. There were no self-congratulatory messages this time. The reason is that none of the conditions needed for a small haircut was present here and so very little money was recovered. Unlike steel assets — which are in demand because the steel business is booming — there are no takers for textiles assets. Also no textile players wanted to buy this bloated asset. There was just one bidder — a strange consortium of Reliance Industries Ltd (RIL) and JM Financial Asset Reconstruction Co (JMFARC). RIL has enough money of its own (and so did not need JM) while JM cannot run a textile mill. Why they got together is a mystery.

 
Anyway, this sole bidder offered only about Rs 50 billion (of which the lenders would get about Rs 47 billion). Since Alok Industries owes banks Rs 296 billion (all unaccountable public sector stalwarts such as State Bank of India, Corporation Bank, UCO Bank, Bank of Maharashtra, Life Insurance Corporation of India, Allahabad Bank, Union Bank, Dena Bank, Oriental Bank of Commerce and United Bank of India, plus Axis Bank), the lenders have taken a massive haircut of almost 84 per cent. This is exactly the opposite of the Bhushan Steel resolution. Here are some stark facts about the Alok Industries resolution, which could be typical of other bad assets as well:

 

• The JM-RIL combine was the sole bidder and had given a take-it-or-leave-it offer to the Committee of Creditors (CoC) in April.
• The CoC could not gather enough of votes to act on the resolution plan. The proposal got 70 per cent of the votes, when 75 per cent were needed.
• An ordinance amending the Insolvency and Bankruptcy Code (IBC) lowered the minimum votes needed for passing a resolution plan to 66 per cent from 75 per cent.
• Following this amendment, employees of Alok Industries and a group of operational creditors pleaded before the National Company Law Tribunal (NCLT) to accept the resolution plan submitted by RIL-JMFARC.
• The NCLT then directed Ajay Joshi, the resolution professional (RP) for Alok Industries, to redo the voting process. The sole bid went through after this fixed match.

 

A lot of larger assets may go this way. By the way, in the case of Electrosteel Steels, lenders had to take a steep 60 per cent haircut since Vedanta offered only Rs 53.20 billion against the company's outstanding of Rs 131.75 billion. But these are large cases and therefore open to scrutiny. The unknown story of bad loan resolution is the deep-rooted nexus between bankers, auditors and promoters, which threatens to undermine any serious recovery attempted by honest RPs. Very soon, the regulatory failures that are common in the banking, insurance and securities market will start undermining the IBC. This isn’t idle speculation, it is already happening.

 

RPs — at least the honest ones — are discovering, in each bad case, that massive amounts of money have been siphoned off by promoters in active connivance with bankers and auditors. In most such cases, when RPs have tightened things, cut payments to promoters and plugged the leaks, they face resistance from both the owners and bank officers. There have been stray media reports of how RPs have found that the borrower has absolutely no assets to back the loan — which can only happen in the case of deep corruption that runs from the branch to the zonal office and higher. No wonder, Rajendra Ganatra, a Mumbai-based resolution professional, estimates that bad loan average recovery will only be 10-15 per cent.

 
The bad loan resolution does nothing to break the nexus between bankers in public sector banks (PSBs) and promoters. Bankers face no punishment for writing off 84 per cent of the loan. Hence, cleaning up the current stock of bad loans will only pave the way for more of the same in future. Or, there will be a sharp shrinkage in lending by PSBs. Will shrinking PSBs, with restive employees, present a bigger challenge for the government? Meanwhile, public money of billions of rupees looted by promoters in connivance with bankers will be written off — but hailed as a success!

The writer is the editor of www.moneylife.in
Twitter: @Moneylifers