Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Columns/  India remains a very difficult country for dying companies
BackBack

India remains a very difficult country for dying companies

Is our 2016 bankruptcy law another case of ‘isomorphic mimicry’?

Analysts wonder if India copied institutions without empowering them (Photo: iStock)Premium
Analysts wonder if India copied institutions without empowering them (Photo: iStock)

A telecom carrier and a retailer are showing a mirror to India’s tryst with assisted corporate demise and rebirth. The image staring back is one of defeat snatched from the jaws of victory. As a five-year-old bankruptcy experiment flounders, blame it on what development scholars refer to as ‘isomorphic mimicry’: Emerging economies ape the form of successful Western institutions but leave them dysfunctional and devoid of content, almost guaranteeing their failure.

Global investors were genuinely excited by India’s 2016 insolvency law, hoping to profit from bad loans. Initial success with distressed steel plants raised hopes that the savings-starved economy would extricate valuable capital from failed ventures. But now, creditors are balking at 90% haircuts, and bailout funds are disillusioned with everything from long delays in admitting cases by tribunals to a shortage of judges.

Large indebted businesses continue to turn into zombies. Absent a miracle, Vodafone Idea Ltd can’t possibly repay the $30 billion it owes the government and banks. Future Retail Ltd was hoping to stay afloat by selling assets to Reliance. But Amazon.com Inc, from which Future’s founder Kishore Biyani had taken money after promising to not sell out to Reliance, has legally blocked the deal. Unless Biyani and Amazon can strike a compromise, the pandemic-battered firm’s survival looks iffy.

Corporate death is a feature of capitalism, not a bug. India copied the British playbook of putting creditors in charge of insolvent firms. Debtors can initiate in-court bankruptcy proceedings, or lenders can pull the plug. On paper, all looks fine. But if the institution was actually working to its intended purpose, India Inc wouldn’t still be grappling with large enterprises that are both living and dead—like Schrödinger’s Cat.

There’s no easy answer to what’s gone wrong. Vodafone Idea is reportedly reluctant to file. The experience of other bankrupt phone networks doesn’t inspire confidence that it will be allowed to retain its licences in insolvency. Without them, the carrier with 255 million subscribers is worth very little. Having recently extended the maturity of Future’s $1.4 billion of onshore debt, banks are wary of the loan-loss provisions they’ll have to make by dragging it into bankruptcy. It’s a Catch-22: Recoveries could be dismal later. Last week, Future paid the coupon on its offshore bonds within the 30-day grace period, but the notes are still trading at about 60 cents to the dollar.

No two bankruptcies are the same, but India’s processes for handling them have some common deficiencies. Across the country, 27 tribunals are being run by 29 judges, at least 25 short of what’s required. Many have no experience in financial matters. Insolvency courts also adjudicate unrelated matters under the Companies Act, overwhelming an already strained system.

Delays abound, not just in approving a sale or liquidation in 270 days as the law proposed originally (it was later increased to 330 days), but even in admitting cases to start the clock. Punjab National Bank has tried in vain since November 2018 to push Indian Steel into bankruptcy. KKR & Co’s India unit moved against Sintex-BAPL Ltd a year ago. But an operational creditor came up with its own petition against the auto parts maker, settled with it, and the firm exited bankruptcy. KKR’s application was finally admitted only last month. Leaving aside the top nine bankruptcies initiated in 2017 at the central bank’s behest, creditors’ recovery rate has been just 24%, according to Macquarie Research.

India’s corporate landscape is a colonial legacy. A handful of British managing agencies used to hold sway over large swathes of productive assets with little capital. The agencies, which came to be controlled by Indian business families, were outlawed in 1969, but a state-dominated banking system still allows empire-building by politically connected debtors on a sliver of loss-absorbing equity. When state-owned banks lose money, taxpayers fill the hole. The power imbalance and the perverse incentives were known India adopted its bankruptcy law, so lawmakers packed it with creditor-friendly features. But then came the inevitable pushback and politicians lost their nerve for tough love. Urjit Patel, the previous central bank governor who sought to make large borrowers more accountable by ending banks’ evergreening of soured loans, failed and quit abruptly.

It’s still not too late to [fix] the bankruptcy regime. Maybe it will happen only once the state is no longer a dominant player in the lending market. But even awaiting bank privatization, procedural infirmities can be fixed relatively easily if politicians want to put a stop to misallocation of capital. Perhaps they don’t. As economist Lant Pritchett and others have noted, isomorphic mimicry is a great technique for ensuring persistent, successful failure. 

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 23 Aug 2021, 10:16 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App