With bankruptcy rules, it won’t be easy now to game the system
Novelist Ernest Hemingway is an odd choice to lean on when one thinks of bankruptcy. But he wrote this: “How did you go bankrupt? Gradually, and then suddenly.” Indian corporate and the banking world are shocked, thanks to the Reserve Bank of India’s direction to banks to try defaulters in bankruptcy courts. Something impossible a few months ago is now a reality: founders of a dozen Indian companies, such as Essar Steel and Amtek Auto, could now lose their companies if they don’t stump up funds.
The unprecedented situation may appear to have cropped up all of a sudden, but it has not. Events such as corporate boom and bust and shareholders losing their shirts are not uncommon. Unscrupulous entrepreneurs’ conduct and benign banker behaviour gave life to the maxim: ‘In India, companies go bankrupt, not the promoters’.
When big defaults happened, minority shareholders and banks lost money, but promoters remained in control of companies. This unscrupulous tradition of running companies made former RBI governor Raghuram Rajan say: “Promoters don’t have a ‘divine right’ to be there after running a company aground.” Coming back to the latest RBI directive. What is underway in India is a norm in any developed market. Decades of regulatory and political interventions made corporate houses complacent. Gaming the system was a way of life.
But with bankruptcy becoming real, a new era has begun. In fact, Prime Minister Narendra Modi told corporate bosses what was in store when he said something that everyone knew, but was hardly talked about in public. At the Economic Times Global Business Summit on a chilly evening in January 2016 in New Delhi, he told corporate captains, “When a benefit is given to farmers or to the poor, experts and government officers normally call it a subsidy.
However, I find that if a benefit is given to industry or commerce, it is usually called an “incentive” or a “subvention”. We must ask ourselves whether this difference in language also reflects a difference in our attitude? Why is it that subsidies going to the well-off are portrayed in a positive manner?” That statement was perhaps a primer to the direction in which India’s policymaking was headed.
Uday Kotak, executive vice-chairman of Kotak Mahindra Bank, tweeted the other day: “India implements 3 momentous changes: GST, RERA (real estate), IBC (Bankruptcy). Can transform. But need focus on friction risk in short run.” These three enactments are poised to change the way entrepreneurs do business in India and the way banks behave unless a powerful lobby gets these diluted.
A lot of these go against what analysts and industry expected of Modi when he came to power in 2014. When everyone expected economic reforms from Modi, the popular narrative that came to mind was the legacies of Ronald Reagan and Margaret Thatcher. But Modi may be pitching himself as a version of Theodore Roosevelt who went after ‘robber barons’. The foundation for next election campaign in 2019 is being laid with a theme different to that of Atal Bihari Vajpayee government’s India Shining.
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Via:: Economic Times – Stocks