Don’t miss the latest developments in business and finance.

A fair chance

Promoters shouldn't be allowed to game insolvency process

Image
Business Standard Editorial Comment
Last Updated : Nov 06 2017 | 11:03 PM IST
As the Indian financial sector faces a serious problem with bad debt, a ray of hope on the horizon is the modern insolvency process. The mechanism is closely supervised and time-bound, and the first test cases are winding their way through it at the moment. It is generally hoped that the new law will permit speedy and efficient resolution of many such cases and that, in appropriate ones, assets will be revived under new management. The assumption is that this will help clean up the private sector in a sense with weak promoters, owners and managers being replaced by new ones who will turn some of these distressed assets into profitable ventures. What will not inspire confidence is if, even after this new process, it appears that existing promoters of troubled companies somehow manage to retain control or have some sort of advantage in the retention of such control. However, there is an increasing number of voices raised in concern that this is precisely what might happen and that the system could be gamed by existing promoters. 

Naturally, if the existing promoter is the best or the only possible alternative, and all that is needed is a reasonable renegotiation of terms, then banks are perfectly justified in considering that option. Certainly, this is not illegal under the insolvency and bankruptcy procedure. However, it is it is imperative to have a mechanism to ensure there is, in fact, no undue preference being accorded to existing owners. That will only kick the problem of bad loans down the road, precisely what the new insolvency law is designed to avoid. Banks, therefore, must ensure the widest possible set of management and ownership structures is considered and they must be open to meeting and discussing the assets in question with people and enterprises other than the current owners. The priority must be not just the preservation of capital in each case but also its efficient management in the future. The overall optics of the system should also be kept in mind; doubts in the market that this new law is indeed a genuine improvement over the old mechanism must be addressed and laid to rest. 

One possibility is that if the former owner makes the best bid for a stressed asset then the second best bidder should be asked if he is willing to match it and, if so, he should be allowed to take over. Such a setup will ensure that the system is not being gamed by the existing owners while also not foreclosing any opportunity for reviving an asset that has a possibility of recovery. The recovery from the slowdown, which has caused so much capital to be tied up, requires banks to take reasonable haircuts while preserving capital, but the future health of the economy also requires new blood in management and ownership. These two imperatives must be carefully balanced by banks.


Next Story