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What Satyam, IL&FS and DHFL tell us about insolvency resolution

It's a reflection of the state’s failure that a reform such as an insolvency law, aimed at speedy resolution of troubled firms, is being sought to be scuttled or gamed by all the players involved, including firms, lenders and insolvency resolution professionals. (Photo: iStock)Premium
It's a reflection of the state’s failure that a reform such as an insolvency law, aimed at speedy resolution of troubled firms, is being sought to be scuttled or gamed by all the players involved, including firms, lenders and insolvency resolution professionals. (Photo: iStock)

  • In all three cases, if the resolution process was fairly successful, it was either because the government or the regulator stepped in early enough by appointing top-rung and respected professionals to oversee the process, backing them fully, and insulating them from legal challenges

In the second half of 2018, as media reports emerged of the collapse of the Mumbai-based Infrastructure Leasing and Financial Services, or IL&FS, the dominant headline of an article on the group’s fallout was “India’s Lehman moment".

Fears of a similar domino effect playing out were fuelled further a couple of months later with fresh reports of defaults and financial irregularities in another firm, Dewan Housing Finance Corporation Ltd, or DHFL. Over a decade earlier, in 2010, the country’s biggest corporate fraud had been reported in Hyderabad, with Nasdaq-listed Satyam Computers disclosing that its accounts had been fudged.

What is striking, and a common thread running in each of these corporate frauds and governance cases is that the resolution process to retrieve assets maximised value and restored faith among investors and the market. And those at the centre of these frauds haven't managed to escape punishment as per law.

What are the takeaways from other resolution cases? In all three cases, if the resolution process was fairly successful, it was either because the government or the regulator stepped in early enough by appointing top-rung and respected professionals to oversee the process, backing them fully, and insulating them from legal challenges.

In Satyam’s case, the new board with carefully chosen experts from the field of information and technology, law, corporate governance and banking, besides auditing, including former Nasscom chief Kiran Karnik and HDFC chief Deepak Parekh, was able to douse the fire and sell the firm to the Mahindra group. The promoter of the company is in judicial custody. 

In IL&FS, the new board led by banker Uday Kotak has over the last couple of years been able to resolve outstanding debt of close to 55,000 crore, whittling down the total group entities from 347 to a little over 100 now. 

And the administrator or resolution professional of DFHL, Subramania Kumar, a former chief of Indian Overseas Bank, appointed by the Reserve Bank of India, has managed to complete the resolution of the housing finance firm, with banks having received an upfront cash payout of 14,700 crore. Last week, the Central Bureau of Investigation, or the CBI, said it has filed a case against the promoters of DHFL and others for cheating a consortium of banks of 34,615 crore, the biggest such case by the anti-corruption agency.

The message is that even in a difficult operating environment, it is possible to realise value from distressed assets if a credible, committed and empowered group of professionals is set to work.

But the success rate is low in a large number of other similar cases. It's a reflection of the state’s failure that a reform such as an insolvency law, aimed at speedy resolution of troubled firms, is being sought to be scuttled or gamed by all the players involved, including firms, lenders and insolvency resolution professionals.

One of India’s central bank chiefs once said that the pile of bad loans and the challenges arising from it was due to the inability of banks to enforce their rights in time. Unless the judicial process was set right, it would impact the country’s growth trajectory, he had warned.

Over the last two decades, India has experimented with Debt Recovery Tribunals, the Sarfaesi Act, Asset Reconstruction Companies and now the Insolvency and Bankruptcy Code.

State intervention to address market or corporate failures as in the three cases cited earlier unfortunately can't be the template to be followed every time. There have to be institutional, regulatory and market mechanisms for the purpose.

Ensuring that the NCLT delivers while building institutional capacity and a pool of resolution professionals should help. Taking recourse to robot lawyers or legal robots to carry out summary proceedings as a way to handle mounting cases may work in China; it won't in India.

The other option could be to consider the model of a corporate frauds probe agency which combines investigation and prosecution of criminal cases like in some jurisdictions.

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