ANALYSIS
The amended IBC essentially bars controlling shareholders (or promoters) of companies from bidding for their bankrupt companies that are being auctioned off via the NCLT (National Company Law Tribunal)-overseen process.
The recent changes to the Insolvency and Bankruptcy Code (IBC) through an Ordinance has brought into stark relief an enduring cliché — “good politics is not good economics”. Or at least, that is the dominant narrative of the market and the financial nomenklatura (let’s call it the finklatura) that cheerleads the market. Prima facie, the rationale of the finklatura is unexceptionable.
The amended IBC essentially bars controlling shareholders (or promoters) of companies from bidding for their bankrupt companies that are being auctioned off via the NCLT (National Company Law Tribunal)-overseen process. In its original avatar, only those promoters deemed as “willful defaulters” were proscribed from bidding. Before this amendment came through, bidders in many of these cases before the NCLT included promoters (eg, Ruias for Essar Steel).
The politics of this is ostensibly simple — harsh measures against big business make for good optics and good messaging.
Economically, the finklatura asserts, it’s the other way round. Currently, there are 12 identified bankrupt companies that are before the NCLT for auctions that try to minimise the haircuts creditors (primarily banks) will need to take on the loans outstanding. In the short run, with promoters out of the process, bids are likely to turn less aggressive. There are multiple reasons for that. Most of the 12 companies are in steel, power and infrastructure sectors. To start with, all of these are industries where an enormous amount of local operating domain knowledge is critical to successful operations. Second, all 12 are large, complex enterprises — typically insiders have a lot better handle on the complexities of effective management. Put both factors together, and it is clear why existing promoters would have greater confidence in running these companies, and therefore bid more aggressively, compared to any other third-party bidder. The cherry on the cake —– structurally, all three are what economists call oligopolistic markets, i.e, industries with few operating players. In other words, in the best of times, there are relatively few viable bidders, and removing the promoter from the fray takes away a large chunk of active interest in the auction.
Less aggressive bids, naturally, would cause the banks to accept a price that demands a higher haircut on their loans (initial market estimates range from 10-20 per cent higher haircuts in bids). This, in turn, would mean banks requiring more capital to clean up their balance sheets. Given that the recently announced bank recapitalisation plan is fully taxpayer-funded, this would check all the wrong boxes — higher public debt, higher interest rates, potentially even an expansion of the recapitalisation required, and all their downstream adverse consequences. The economic impact, therefore, is clear, that we have (yet again) sacrificed economic gains at the altar of politics. Or is it?
Let us examine the economics of it. There has recently been a great deal of excitement around Richard Thaler’s Nudge Theory (primarily driven by, as is usual for arcane subjects, by the Economics Nobel Prize awarded to Professor Thaler).
Simply put, a Nudge is an act (or influence) that alters behaviour, while not precluding any options for the user. Now, a law is somewhat more than simply a nudge, it is perhaps more akin to a shove. From a signalling standpoint though, this shove makes for interesting potential outcomes. Fundamentally, a strong, almost unforgiving insolvency law sends a strong message to promoters across the board. The message fundamentally seeks to alter promoter behaviour. It does not preclude the option of promoters taking loans in their enterprises but puts the fear of God on ensuring prudence, analytical rigour and above all, integrity, in the utilization of loans.
India’s promoters don’t fall sick, only their companies do — has been an oft-quoted, and sadly, accurate description of Indian capitalism. The spectre of promoters of distressed companies remaining in a saddle, infusing no additional equity, even as banks take large haircuts on loans — militate against a very fundamental definitional tenet of the market economy. Under that tenet, creditors are senior to equity shareholders over assets of a company.
In other words, creditors need to be repaid in full before equity-holders can own any assets of a company that has defaulted on servicing its loans. Seldom has this been honoured in its letter and spirit in India. The new law and the ongoing resolution process should, hopefully, establish the seniority of the creditor in the capital structure, for perhaps the first time in India.
All policymaking is political. In this case, the good politics of the law makes for good economic principles too. Ben Graham, the legendary investor, described markets as being a voting machine in the short term (tallying up stocks that are popular and unpopular) and weighing machine in the long term (assessing the substance). In the case of the new Insolvency law, the nomenklatura representing the markets is seemingly in its voting phase. Ironically, the vote-driven government seems to have “weighed” it in a lot better!
The author is Managing Partner of ASK Wealth Advisors. Views expressed are personal.
Mukesh Ambani's SUPERHIT plan for Jio users, offers unlimited 5G access for 1 year for just Rs...
IND vs AUS 1st Test: KL Rahul's dismissal sparks DRS controversy in Perth Test
Dense fog, heavy rain predicted in these states till November 25; check here
Oreshnik Hypersonic Missile: Which nations are within its range?
Bihar teacher, principal reach school in drunken state; know what happened next
'I have faced a lot of...': Arjun Kapoor REVEALS his biggest fear amid break up with Malaika Arora
How millions of Indians may get affected due to US indictment of Gautam Adani in bribery case
Amid divorce rumours with Aishwarya Rai, Abhishek Bachchan says 'missing someone is okay but...'
After Bibles, watches and sneakers, Donald Trump is now selling autographed guitars, price is...
Delhi pollution: Air quality improves to ‘very poor’ category, AQI at...
Vladimir Putin's BIG threat, warns he could strike UK with new ballistic missile if...
Shillong Teer Results TODAY November 22, 2024 Live Updates: Check winning numbers here
Somebody misbehaved with Alia Bhatt on Highway sets then Imtiaz Ali had to...
Zomato CEO Deepinder Goyal reveals twist behind Rs 200000 job fee, closes application window
Days after Ratan Tata's demise, Tata Group's Rs 131000 crore company inks pact with ADB for...
WATCH: Woman makes Biryani with Parle-G biscuits, viral video fumes internet
Only train in India in which passengers can travel for FREE; check route, timings and more
'Justice for biryani': Parle-G biryani takes internet by storm, video goes viral
DNA TV Show: Why Gautam Adani charged with bribery and fraud in US
IND vs AUS: Records Virat Kohli can break during Border-Gavaskar Trophy
Diljit Dosanjh fans get angry over Ananya Panday's birthday post for her grandmother, here's why
Reddit suffers outage with ‘upstream connect error’ message, says 'currently investigating...'
Border-Gavaskar Trophy: How has Jasprit Bumrah fared in Tests in Australia?
Delhi records coldest night of the season, temp drops to...
Crossing the Line: Ukraine's Use of Storm Shadow Missiles and the Escalation of Conflict
When Malaika Arora talked about the controversial ‘instant pleasure’ ad, it was for…
This is the world’s most expensive shopping street, not Fifth Avenue, New Bond Street, it is...
Big setback for Gautam Adani, Kenya cancels Rs 6216 crore deal with Adani Group due to...
Viral video: Man’s jugaad to stay warm in winter will leave you SHOCKED, watch here
Hinduja Group firm gets key approval for acquisition of Anil Ambani's debt-ridden Reliance Capital
Viral video: Middle-Class man lives dream of having tea at Taj Hotel, netizens applauds
Shloka Mehta looks stunning in white floral kurta as she clicked with Akash Ambani, it costs Rs....
Who is Sagar Adani, Gautam Adani's nephew, accused of bribery, fraud charges in US?
PayPal down: Several users face issue while logging into accounts, say 'no one could...'
IND vs AUS: Jasprit Bumrah, Pat Cummins eye historic captaincy milestone in Perth Test
BGT 2024, Ind vs Aus: Can Shubhman Gill be the new Cheteshwar Pujara? Is he really ready?
The Ultimate Guide to Luxury Gifting: Discover Heirloom Pashmina by Pashmina.com
Effortless Relocations: The Perks Of Professional Removalists In Melbourne
Watch: Pakistan fan with 'Imran Khan' poster asked to leave Hobart stadium in Australia
International Criminal Court issues arrest warrant against Israeli PM Benjamin Netanyahu for...
What is demisexuality? Everything you need to know about this lesser-known sexual orientation
WATCH: World’s shortest woman meets world’s tallest woman, video goes viral
IND vs AUS 1st Test: Predicted playing XIs, Perth weather forecast and pitch report
IND vs AUS: When will Rohit Sharma join India squad? Check latest update
'Scam 2024': Diljit Dosanjh lookalike pranks people on Pune streets, video goes viral
Delhi Air Pollution: Centre announces staggered work timings for govt employees; check details
Mukesh Ambani's Reliance Jio loses nearly 80 lakh subscribers in just 30 days, BSNL adds...
IND vs AUS, 1st Test Dream11 prediction: Fantasy cricket tips for India vs Australia match
This country has most expensive passport in world, not US, UK, UAE, it costs Rs...
Amitabh Bachchan opens up on Aishwarya Rai-Abhishek Bachchan divorce rumours
Amid rising air pollution, Delhi-NCR's crematorium records cleanest air; check AQI here
Revolutionising Medical Imaging: Venudhar Rao Hajari’s impact on healthcare technology
Abhishek Gupta and Onevision Media: Scaling brands on social media
Video shows Korean girl eating jalebi for first time, her reaction to Indian sweet goes viral
Cristiano Ronaldo confirms THIS YouTube star as his next guest, says, 'Will break Internet'
Delhi Assembly Elections: AAP releases first list of 11 candidates for 2025 polls
Adani Group's FIRST REACTION after US indicts Gautam Adani in alleged bribery case