It’s three years since the Parliament passed the Insolvency and Bankruptcy Code (IBC). It was called the biggest economic ‘reform’ of the NDA government. It boosted India’s rankings in the World Bank’s ease of doing business. It was claimed that it will help to solve the problem of NPAs faced by Indian banks and recover outstanding loans. The experience of the last 30 months, since the first case was filed under the new law, shows that the IBC has legalized the loot of public money with banks. The write-off of big amounts of NPAs by banks is now carried out under the order of a court.
When a defaulting company is not able to pay interest on time or repay loans or money due to suppliers, it can be taken to bankruptcy court. Once the application is accepted by the bankruptcy court, the management of the company is taken over by a resolution professional. The resolution professional invites bids for the sale of company. If a bid acceptable to lenders is received, the bankruptcy court orders the sale of the company to the successful bidder. If no acceptable bid is received within 180 days (plus a 90-day grace period), the court orders the liquidation of the company. Then the assets of the company are sold and the money received is shared among lenders.
A total of 1,858 cases of defaulting companies have been registered under the IBC by 31 March 2019. In case of 94 companies, acceptable bids were received and the ownership was transferred. However, acceptance of the bids through the court order required banks to write off huge amount of outstanding loans of these companies. While about Rs 75,000 crore were received through the sale of these companies, the write-off of Rs 100,000 crore was legalized under the IBC.
Another 378 companies, with outstanding dues of Rs 2,57,462 crore, were sent for liquidation by the court. The sale of assets of these companies is expected to recover only 7 percent of outstanding dues. That means another Rs 2,39,000 crore of outstanding amount will have to be written off.
Thus 3 years of the IBC will lead to court-ordered write-off of nearly Rs 3,40,000 crore by banks. The very first case decided by the IBC of Synergies-Dooray Automotive, an auto ancillary company, in Aug 2017, led to write-off of 94 percent of outstanding loans of the company. Lenders got only Rs 54 crore out of the total debt of Rs 972 crore.
In most cases of sale of companies through the IBC, the buyers have been able to buy valuable assets at very low prices. In 2017, the Reserve Bank of India referred 12 big NPAs, with outstanding amount of Rs 3.45 lakh crore, for resolution under the IBC. So far 5 cases have been decided – one for liquidation (Lanco Infrastructure with outstanding dues of over Rs 17,000 crore ) and another four for sale (Bhushan Steel - bought by Tata Steel for Rs 35,200 crore as against outstanding dues of Rs 56,000 crore; Electrosteel - bought by Vedanta for Rs 5320 crore as against outstanding dues of Rs 13,000 crore; Monnet Ispat - bought by JSW Steel for Rs 2,875 crore as against outstanding dues of Rs 11,000 crore ; Amtek Auto - bought by Liberty House for Rs 4,400 crore as against outstanding dues of Rs 12,000 crore). The loan write-off in case of these four companies varies from 35 to 70 percent of outstanding dues. The court decision in case of these five companies alone will mean banks writing off nearly Rs 60,000 crore of loans!
The three years of the operation of the IBC has clearly demonstrated that it is a tool to legalize write-off of big loans by banks and for purchase of valuable productive assets at very low prices by big Indian and foreign monopolies. The IBC has given legal sanctity to the big loot of the savings of workers and toilers deposited in banks.