Business News/ Opinion / Columns/  India’s bankruptcy code might well be in need of a rescue too

In the seven years that it has been around, Indian Prime Minister Narendra Modi’s signature bankruptcy reform has failed to live up to its billing. The 2016 insolvency law was crafted when India was starting to tackle a huge pile of bad loans: a $200 billion-plus menace. With banks garnering bumper profits in a post-pandemic high interest-rate environment, that baggage is lighter with a lower urgency to deal with it.

It shouldn’t be. Creditors’ recovery rates on soured advances have been low for the past couple of years—and they’re falling. Liquidations are the most common result of bankruptcy proceedings, which take more than twice the 270 days envisaged. In a country where savings are in short supply, the priority was always to prevent productive capital from going to waste in unviable projects. Some big resolutions of steel plants raised creditor hopes, but rampant gaming of the legal process by vested interests is dashing them.

Which is why the bankruptcy protection sought by Go Airlines is so crucial. It has temporarily shut down. If the court can’t quickly revive Go First, as the brand is now known, the risk is that it will be grounded forever, like Kingfisher in 2012 and Jet in 2019. The domestic aviation market will become even more of a duopoly.

But rescuing Go First could be seen as bailing out the billionaire Nusli Wadia by inflicting losses on SMBC Aviation Capital, ACG Aircraft Leasing Ireland and other aircraft lessors. SMBC, which claims to have ended its lease before Go’s filing, wants to take its jets away. The bankruptcy protection, lessors allege, is a “fraudulent exercise." On Monday, the appellate authority rejected their plea: They need to approach the tribunal to repossess planes with expired leases, or go to the apex court.

It’s a complicated bankruptcy. About half of Go’s Airbus fleet has been incapacitated by failures of Raytheon’s Pratt & Whitney engines. The airline has claimed $894 million in compensation. A Singapore-based arbitration panel asked P&W to “immediately begin making reasonable efforts" to locate suitable spares. The engine-maker said that it will honour the award. But since it hasn’t supplied the first batch of 10 engines that the tribunal asked it to try to deliver by 27 April, Go filed for bankruptcy. Or that’s what its filing said.

But those nuances are irrelevant for Go First creditors: Regardless of whether the airline was incompetent, undercapitalized or unlucky, its shareholders must pay a price before lenders and lessors are asked to make sacrifices.

The Code has disappointed. In only 6% of instances do debtors trigger bankruptcies. And the recovery rate for creditors in such cases that do get resolved is just 18%. Lenders are far more comfortable when they themselves drag firms into insolvency. Although still low by global standards, the recovery rate in resolutions initiated by financial creditors is almost twice at high at 34%, according to India Ratings & Research. Two years ago, it was 45%.

What’ll be Go’s fate? Air travel has come back and P&W has a queue of customers. But assuming that it manages to deliver 10 spares a month to Go First till December, as it has been directed by the arbitrator, it could fly again. But it should return as an operation that can sustain its debt, leases, salaries and also delays in fleet repair. One solution may be to leave the corporate structure of Go Airlines behind with a chunk of its 11,500 crore owed to creditors and all its equity. This part can die. After that, creditors can invite bids from anyone who wants to inject fresh capital into a new avatar of Go First. If the next owner happens to be Wadia, that’s fine. If it’s not, that would be okay too.

Go First has been repaying banks and only recently defaulted to lessors and operational creditors. Had any of its debt gone bad for a year before the resolution plan kicks in, the Wadia Group would have been ruled out as a prospective bidder. That is just faux puritanism. A practical bankruptcy code would be promoter agnostic. Give them back their insolvent firms if they want them, but close out ways to game the outcomes, such as by forcing lenders to accept lowball out-of-court settlements: Let them take haircuts, stand in line with everyone else, and bid.

Leaving planes with a borrower that isn’t selling flight tickets isn’t ideal. It’s true that it will likely jack up leasing rates for others. Still, this may be worth it. Consumers will pay a lot more if Indigo and the Tata trio of airlines dominate air travel in India. Note that SpiceJet is in some trouble too.

There is a difference between protecting the capital in a business and saving the capitalist behind it. After some initial successes, Modi’s bankruptcy reform has often been unable to find that fine line. It’s up to the insolvency court to show that this time will be different. 

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

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Updated: 25 May 2023, 12:01 AM IST
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