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What is the Insolvency & Bankruptcy Code, and why Modi govt's changes to it are bold | ep 216



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clutter today no surprise that I am

holding couple of sheets for my regular

writing pad but why am i holding a pink

paper is really fine pink paper business

standard that is because I'm talking

about something that concerns capital

markets financial markets and also about

all of us taxpayers and every citizen of

India who has money in India's banks

because I'm talking about the latest

term in the IBC the insolvency and

bankruptcy code this is a code this was

moody government's most important reform

and I have said this before and I'll say

it again and again a very bold reform

because Indian capitalism has never

understood bankruptcy because bankruptcy

in India is seen to be a shame

bankruptcy is bad but it's not a shame

business can fail so one we should not

hide the fact that a business has failed

and second if a business has failed what

happens to those who that business owes

money to so there has to be a mechanism

whereby bankers suppliers employees of

that business get something paid for

that

IBC was set up with a bunch of laws so

that was done in 2016 the purpose of IBC

was that when a company but banks

conclude that they cannot get their

loans back from a company they can go to

a national company law tribunal a

judicially constituted body specialist

special body and take a company through

the bankruptcy process and then that NC

LT will set up the process in the

process there will be a resolution

professional who will be an outsider

somebody from the world of finance

accountancy or one of these corporate

consultancies who will come and

supervise the process then they will be

a committee of creditors so people

essentially bankers who have lent money

to that company will form a committee so

they

we'll then negotiate and see what is the

value they want to get and at some point

the resolution professional after

satisfying himself will call for bids

from buyers for this bankrupted company

and as bids come and finally the highest

bid is accepted by everybody then that

money that comes from the buyer will

then be distributed among all the

lenders on the basis that the committee

of creditors decides now this whole

process was supposed to take place in

270 days because the impression earlier

was that in the in the Indian legal

system this will just go on forever

because people will use misuse the legal

process to delay this to 70 days now

when that happened the first thing the

Reserve Bank of India did to make an

example and to show that this process

works and to also check out the creases

in the system they declare a list of 12

biggest loan default errs in the Indian

banking system so you can call it a list

of dirty dozen although that's not my

preferred preferred expression a company

going bankrupt goes bankrupt Donald

Trump has gone bankrupt twice he's the

present president of America and the

most powerful man in the world so really

real capitalist countries do not see any

shame in bankruptcy in India we do and

that's why in India even the bankrupt

tried to brazen it out

so these 12 companies were referred to

the IBC process insolvency and

bankruptcy process in June 2017 two

years back some have been sold and banks

have recovered a fair bit of money which

is a very good thing some have gone into

liquidation because nobody came to buy

them some there is some issues going on

and some haven't got sufficient price

yet on them but some have dragged the

process through litigation exactly the

intention of what exactly was the

intention intention of the IBC was to

avoid so let me read the list of these

dozen

not saying Dirty Dozen because I don't

think failure in business is dirty it's

normal it's not good but it's normal so

one and I will also heat out the amounts

that they had owed at that point of the

banking system

Bhushan steel forty four thousand four

hundred and seventy eight corrodes lagna

co infra tech remember the big

infrastructure company at one point it

was seen to be among the fastest growing

infrastructure companies in the world

forty four thousand three sixty four

crores Essar Steel owned by the real

family

thirty-seven thousand 284 crores and

we'll come back to it Bhushan power and

steel from the same promoters as the

first one thirty seven thousand to forty

eight crores alok industries twenty-two

thousand 75 crores I am take out of

fourteen thousand seventy four crores

monitors path twelve thousand 115 crores

electro steel Steel's limited ten

thousand to 75 crores era infra

engineering ten thousand sixty five

crores JP in protect 9065 six hundred

and thirty five crores just next door to

Delhi you know noida-greater noida EBG

shipyards six thousand nine fifty three

crores in Jyothi structures five

thousand 165 clothes these twelve

companies at that point accounted for

about twenty five percent of all of the

bad loans in the banking system so these

were really the big boys and I know I'm

saying the big boys but I am sure my

feminist friends will not complain also

about my not sort of correcting that

because these are not really boys that

you want to identify with too much now

what's happened here is that some have

been sold as I said bush and steel for

example Bhushan group companies have

been sold to the Tatas they are doing

better already

monitors path has been sold to jsw

general group they are doing better many

others and held out but the standout

case here is SR steel vise s are still

important one because it's a very large

company and it's a very large loan and

many banks are involved led by the State

Bank of India second

the process started the steel industry

that came through a revival globally

steel prices picked up steel demand

picked up and suddenly what was because

commodities business is cyclical so

steel cycle turned upwards so this

became a valuable business again

so one banks for getting a good price

from a buyer which in this case was a

ArcelorMittal Lakshmi Mittal who lives

in London he made a bid of 42,000 crores

plus for this company so essentially

banks will recover most of their money

in fact more but the promoters

themselves the Ria's who had earlier

defaulted they thought now this business

had become so profitable that they could

raise the money and repay their loans

and start running their company again

now that in again a settled capitalist

society with where people accept these

principles of capitalism principally

they would not have been a problem even

a promoter himself can buy his broken

company if he can find the money but in

India where capitalism is still maturing

public opinion would never have expect

accepted this that somebody who's gone

bankrupt stopped paying his banks

suddenly the commodity cycle gets better

so he comes back and pays back and buys

his own company that was not going to be

accepted accepted so Modi government in

the first term amended the law to ensure

that owners themselves after they had

been sent to bankruptcy process could

not buy back their companies so that is

where SR owners had a setback but then

they went through they used they meant

for appeal in the tribunal because over

NC LT national company law tribunal

there is a talk national company law

Appellate Tribunal they failed there

they went to the Supreme Court they went

to a High Court

so through this court process this s our

steel case has now gone on for 600 days

plus and that is what was causing a gate

great deal of stress in the system

because once

it became evident that the royal family

had gamed

the new IBC system others also learned

from them and they thought if they have

joined it why can't I and this is not a

few companies between January March 2016

and Jan 2017 banks referred another

eighteen hundred and fifty-eight

companies to the IBC process then more

were referred and more were referred in

fact this has not become such a big

process that just earlier this year 27

more judges were sworn in for NC LT so

NC LT now has more judges than the

Supreme Court of India many more judges

than the Supreme Court of India because

there is so much resolution to be done

of bad loans so if one had been stuck

like this others would have followed the

same example and delayed the process and

that would have won scuppered this big

reform and second once again given

Indian businesses a bad name and would

have finally driven the banks completely

bankrupt because after all how long can

the government paying them so the latest

provocation and the reason we are

talking now is that s are in the Sr case

the NCL 80 judge in the NCL 80 gave an

order just earlier this week saying that

of the money that will be paid to by the

company by the new buyer kind of

proportionate amount will be also paid

out to operational creditors of the

company that means banks were lent the

company money against the security and

somebody you might have sold them fuel

or somebody who might have sold them

vehicles or somebody who might have sold

them whatever suppliers will also get on

the same basis that was not acceptable

for the committee of creditors which is

the banks so they now went to Supreme

Court and it became evident that this

will now go to court and take several

months after that so Modi government now

if you see in the papers today they have

now amended the insolvency and

bankruptcy court in such a way that this

delay now cannot happen so they have

given primacy

to those creditors who have lent money

against security essentially the bank's

the committee of that prejudice will

then decide what to give to whom because

there is a seniority process and there

is a hierarchy of lenders also within

that committee or among the lenders if

some don't agree once fifty percent more

than fifty percent agree everyone else's

assent is to be taken for granted so

these things and commercial

considerations will drive the resolution

process so banks have to try and get the

best value and whatever gets in the best

value including mergers and acquisitions

in this process they are now authorized

to do it and most importantly now these

new amendments say that even if there is

litigation at whatever level they've

extended the term from 270 days by

another 60 days so 330 days but even if

you go to courts whatever course

all this has to be done in three to

thirty days and even by even while

litigation may be going on the

resolution process also goes on so there

are no delays so overall very good

reform on top of the reform that was

being blocked by old businessman gaming

the system this is a good answer to

those subverting the insolvency and

bankruptcy process it is good for the

banks it is good for the taxpayer it is

good for the honest borrower

because honest borrower has to now pay a

penalty of in terms of higher interest

for bad loans by people who run their

businesses badly and and even block the

bankruptcy process and also it is good

for Indian capitalism because for Indian

capitalism to mature in my opinion

people have to see businessmen go

bankrupt go bankrupt banks will recover

their money some might have a feeling of

vengeance but more importantly you will

see many of this businessmen again does

their knees and get up and start

something new or rebuild their lives and

entrepreneurship

so to reach a state where there you

don't find bankruptcy embarrassing or

shameful you first have to see a whole

bunch of genuine clean bankruptcies

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