Do bankrupting promoters get another chance?3 min read . Updated: 31 Jul 2018, 11:04 PM IST
As the hundreds of cases referred to the NCLT prove, far too many promoters have exploited the loopholes in the system in pursuit of grand ambitions at the expense of lenders and shareholders
Putting aside the politics of the Rafale deal, there is the larger issue of whether a promoter who’s made a hash of one (or more) business should be given a shot at another. Entrepreneurship by its very nature entails taking risks, often by those who don’t always have the necessary credentials. Think of Dhirubhai Ambani, the trading firm clerk who set up the gigantic oil and gas behemoth Reliance Industries, or even Karsanbhai Patel whose Nirma went on to teach marketing tactics to multinationals like Hindustan Unilever Ltd. Would either of them have made the cut when they were still aspiring entrepreneurs?
All such entrepreneurs do need a helping hand at the beginning of their careers, be it from a visionary banker who decides to waive a few of the criteria for a loan or a big buyer who offers them a lifeline. The question of course is, at what point does such a call turn into nepotism and the help into a blatant favour.
As the hundreds of cases referred to the National Company Law Tribunal (NCLT) prove, far too many promoters have exploited the loopholes in the system in pursuit of grand ambitions at the expense of lenders and shareholders. The principle of natural justice demands that responsibility be assigned for such wanton waste.
When a business is running aground, the first person to figure that out has to be the promoter. Other investors, big or large, individual or institutional, don’t have eyes in the operations and therefore aren’t a part of the early warning system. Which is why the buck has to stop with the promoters of companies, as owners as well as managers.
It is the reason why the Bankruptcy Code was in fact amended in January this year to stop defaulting promoters of companies under insolvency proceedings from taking advantage of the earlier provision and bidding for the assets of the companies which they had driven to bankruptcy in the first place, at considerably lower prices. A new Section, 29A, was brought in precisely to prohibit promoters from being “resolution applicants" while also ruling out people connected with the promoters.
In recent months, we are seeing Indian promoters at pains to absolve themselves of culpability in running businesses aground. The Singh brothers, after the twin train wrecks of Ranbaxy and Fortis, are now busy passing the buck. Many others simply blame the business environment. It isn’t an acceptable position. We often underestimate the impact that failing businesses have on society in the form of loss in shareholder value and trust, disruption in service, higher prices and job losses. Set against that, a certain cooling-off period after a particularly glaring failure in business may not be such a bad idea.
Kenneth Lay, founder and chairman of the American energy company, Enron Corp., was convicted of seven counts of fraud and conspiracy for his role in the company’s eventual bankruptcy. During his trial, Lay insisted that business failure is not the same as a crime. His words, “As CEO of the company, I accept responsibility for Enron’s collapse. However, that does not mean I knew everything that happened at Enron, and I firmly reject any notion that I engaged in any wrongful or criminal activity", might well resonate with many Indian promoters. But just as the jury in that case was unconvinced, it would be difficult to accept the plea of many Indian owners because they are inextricably linked with their businesses.
So, how do you draw a distinction between the entrepreneur who deserves that second or third or fourth chance and one who doesn’t?
A simple way might be to use the lens of corporate governance and see if past failures led to personal enrichment or were brought about by non-business decisions. In the case of Ranbaxy, for instance, it wasn’t a sound business decision to fudge production records and mislead the markets. Taking advantage of regulatory loopholes is another no-no. Promoters of such companies don’t deserve government or institutional largesse. For the others, maybe we need more tolerance.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider looks at current issues and trends in the corporate sector every week.