Scuppered and Scalped at Seventy !

In amendments published yesterday (23JUL19) relating to Regulations covering Insolvency Professionals (IP) and the three Agencies (IPA)  that register them , the Insolvency and Bankruptcy Board of India (IIBI) has brought into play two major changes .

• 1.       No IP may take up an assignment without the concurrence of its Agency.
• 2.       The Agency shall not give concurrence to any IP above the age of 70.

 In this note my focus is on the second change-

 As an affected IP, with respect to the age bar, I have been thinking hard to appreciate the logic of the age bar. Two critical requirements of an IP as stated in many a discussion paper are that (1) s/he should not be in employment and (2) that s/he should have a minimum experience to be able to understand the nuances of the business. Many an early applicant taking the test were senior retired Bankers and (like me) professional managers with over 15 years of work experience. I viewed this Code as an opportunity to contribute to restructuring businesses. The freedom from a regular employment, and also the financial security at this age (after having worked at a CEO level for decades) are two strong reasons to expect a focused approach from persons like us.

Just because “…a few elderly IPs have sought discharge from the responsibility on account of health issues” [1] , the Board decides to place an age limit is a travesty of justice. If the statement above is true, then this proves the responsibility and maturity of the individuals concerned, and is NOT a general situation that all above 70 are incapacitated. These few elderly IPs have on their own accord decided to call it a day. They need not give reasons even if it were due to health .It is a voluntary act. Professionals like lawyers, Doctors, Advisors, Counselors, Senior Adjunct Faculty in Academic Institutions etc have no retirement ages. There is no need for me to prove this statement by giving examples.

Another reason highlighted in the Discussion note is a comparison with the CA regulation on MDs. The age cap in the CA is certainly not based on health or capability grounds, but more to do with the harm of long term incumbency. The IP on the other hand is a Professional in the market place, selected by the client on his own volition. 

Retirement in Organizations – Government, Corporations etc., serve a very useful purpose. In an Organization there is a hierarchy and aspirations of individuals within the Organization to climb up the ladder. A Professional on the other hand competes with himself. As long as s/he thinks s/he can contribute to a cause they are relevant. Else, the reality of the market place would sideline them. There is no need for an age stipulation. The market is perfectly able to take a call on hiring IPs.

The Senior Advocates in the Supreme Court, the reputed Doctors in Hospitals, the reputed columnists in journalism, the Senior Adjunct Faculty in Academic Institutions are living examples of why seniority has its role and need. To dispense with them on account of “physical” capability is indeed unfortunate and presumptuous.

To expect (as the Discussion paper states) that the over 70 Years IPs may act as advisors to their younger colleagues, is naïve at the least and adds insult to injury. Which Financial or Operational Creditor would like to pay for the services of two IPs? Also, which 70+ IP would like to play second fiddle to someone else years junior to him/her? In my long years of professional management I have witnessed first- hand the importance the bureaucracy places on seniority. Why should professionals be any different?   

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[1] IBBI Discussion Paper dated 12 May 2018

Jet Airways, SBI and the IBC .

And the winner is ...

I am pleasantly surprised at the developments relating to the bailing out of Jet Airways. The alacrity shown by SBI and the decisions taken in days (not months), is a far cry from the usual bureaucratic process. Irrespective of where the motivation has come from, clearly the speed of decision making would put the best of Corporates to shame. Agreeing to write offs of a portion of debts (taking a “haircut”, in finance parlance), readiness to convert a substantial portion of the debt to equity (and thereby saving the Company from annual interest costs) , forcing the Promoter Directors to step down, the short deadlines for bidders to consider a management takeover etc is truly novel from an Indian Bank perspective.

But you know who the winner is in all this…? My vote is for the ubiquitous IBC (Insolvency and Banking Code 2016, often referred to as the Insolvency Code), an Act that would have seized the opportunity of a settlement away from the Banks and other Financiers and placed it in the hands of a process rigor to be monitored by an Insolvency Professional (IP), a creature of the IBC statute. The IBC process compels the Lenders to follow a process and be subject to offers of take over from bidders. This transparent process would leave little or no leverage with the Financiers, who would only need to vote on the bids and not “influence” them in any manner.

It is because the IBC has not been invoked that the SBI is able to “control” the entire resolution process. They obviously do not want the IBC to be invoked.  It has also enabled the erstwhile Promoter to bid even when not in control. This would not have been possible under the Insolvency Code.

So whilst Mr. Goyal plays his hand and the SBI monitors the game, let us credit the dear old Insolvency Code for being the Damocles sword and forcing the pace!

And let us wonder what would have happened to a pretty bird of an Airline that just vanished into the air, if the same alacrity were shown in its case as well!

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13APR19

Section 35AA and the IBC: Is the Recent Supreme Court judgment a dampener?

For a legal novice like me, the Supreme Court judgments are opportunities to add to my vocabulary of English. Three that I came across recently   for the first time are “manifest arbitrariness”, “speaking statutes” and “de Hors”.

Fortunately, as with all the SC judgments that I have come across, my lack of lexicon does not hinder my appreciation of the final “Orders”.

So I am clear that in a recent Order the Court judged that the RBI did not have the “authority” to set out a “procedure” for bringing delinquent accounts in excess of Rs 2000 cr. under the ambit of the IBC. This procedure was highlighted in an RBI Circular dated 12FEB2018. The RBI has claimed its powers to issue this Circular as coming under Section 35A of the Banking Regulation Act (BR Act). The Supreme Court, pointed out that a sub section under this Section (Section 35AA) , actually stipulates that only the Central Government could direct the RBI to refer matters in respect of specific accounts to the  taken up under the IBC. The Court was clear that that the RBI could not under this section pass “general” directives.  All cases referred to the IBC based on this Circular was, therefore, null and void (“non est.” another new word for me)     

As with any judgment there would be opinions galore and I am not about to share my views on it. My take is on three issues

ISSUE 1:

What of the cases referred by the Banks under the IBC, not on the basis of the RBI Circular, but on their own volition? To me it seems that they are not touched- and so we hard working IPs are not yet out of a vocation! Its business as usual …

ISSUE 2:

 What was the motivation for the Centre to bring in Section 35AA in the first instance? The Code is driven by two major objectives of:

 (1) Resolving defaults primarily through finding resolutions for continuing operations- with liquidation being a last resort

 And

(2) Ensuring this is speedily effected within a reasonable time frame.

The Counsel for the RBI informed the Court that when the Centre inserted (through an Ordinance no less!) the Sub Section, they had no intention of curbing the powers of the RBI. The Counsel quoted verbatim the Finance Minister on this point. The Court, however, was not impressed – that’s where I learnt about speaking statutes.

The large delinquent accounts have large Corporates behind them. Large Corporates have tenuous and powerful networks to protect their interests. If the 12FEB18 Circular of the RBI was found to be valid by the Supreme Court , each and every account would have to come before the IBC , if no resolution is found within 180 days of the first default. And we all know what happens thereafter- the existing Promoters are not permitted to put up a Resolution Plan. Mercifully the Court Order has released them from this Damocles sword.  They can now work through the corridors of the bureaucracy and the political hierarchy and prevent any reference for years to come. This affects the prospects of Banks, who are repositories of public deposits. The Counsel for the RBI stressed before the Court that the BR Act was to empower the RBI to pass directives in the (1) public interest, (2) in the interest of banking policy and (3) in the interest of depositors. The Court whilst defending the constitutional validity of the BR Act and the Circular was concerned with the violation of the specific Sub Section 35AA. 

  

ISSUE 3:

180 days… As any Banker would vouch, it takes a few hours to arrive at what is wrong with an Account. Add a few more days, and a serious banker can come up with the causes of a default and the possible remedial measures. I found it so painful to read of the SBI and the REC, two financial behemoths stating before a Parliamentary Committee that 180 days is just not enough to come up with a solution. Instead of being strong proponents of a shorter time bound resolution, it is sad to note these Institutions seeking more time. They undermine the very purpose of the IBC. Currently in the JET Airways case, we see the same SBI proactively attempting at a quick resolution, knowing that any period as long as 180 days would only worsen the situation. I do hope the RBI and the Ministry of Finance and the IBBI would not give credence to these statements of the two Institutions.

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SAMADHAN and The IBC

The recent SBI led SAMADHAN of over Rs 70,000cr of stressed assets in the power sector, makes interesting reading especially in view of the furor raised by the Power Utilities to the 12^th Feb 18 circular of the RBI. That circular gave powers to Banks, either singly or jointly to resolve the debts in a manner quite akin to the IBC code. Further for stressed assets in excess of Rs 2000cr it even set similar deadlines. Power Utilities had got a stay from the Supreme Court against this Circular.

..And here we have Rs 70,000cr covering seven accounts being settled, with three of the Companies handed over to one Group.

The “interesting” aspects for me are twofold:

The 12FEB18 Resolution Framework was clearly an attempt to make the Banks proactive, and resolve the debt problem early, instead of entering into the IBC mechanism at a subsequent stage.  A laudable objective, for if problems can be solved “within the family” why risk time and reputation facing a legal mechanism? Except, that the manner of resolution is nowhere as transparent as the one the IBC provides for. I am not sure whether the RBI Circular provides for advertisement to seek bids, or the Bank Managers and the debtors allowed striking deals on their own? I do not for a moment doubt the fearless independence and the integrity and sincerity of the Bankers to find the optimal solution in the best interests of the shareholders of the Bank. After all they need to get the deal vetted by one of the three Rating Agencies.  Absolutely! But then what if the losses (“haircuts” as the word goes) suffered by the Lenders from amongst the Public Sector Banks are then made up by the Government from the tax payers money? Would a certificate by one of the three Rating Agencies be an adequate clean chit? We are all aware of the performance of these noble entities.

Secondly, I am intrigued by the fact that four of the assets have been handed over to the A Group (in these days of codes, one is best playing the game!), which, a Parliamentary Committee Report had listed amongst 34 stressed power projects! That would never have passed the IBC!!!

In a Moody's to celebrate..?

Which political party  would give up the opportunity to capitalize on any scrap of positive "data" More so during election time? Mercifully, the pink dailies were more sober in their reaction to Indias sovereign debt rating by Moodys  ..

The moot question is how does it impact us , the common folk ? Would prices fall, would income disparity reduce, would jobs increase? The manner in which political parties claimed credit on all these fronts on the back of the rating is unfortunate. The simple fact is that sovereign ratings are just pointers to lenders to "assist" in their decision to extend loans  to Corporates. Country to country grants ( which are few and far between) and World Bank/IMF bailouts do not need these ratings.

Let us not forget that the lender too is in the marketplace and has to compete. Any lender , if convinced of the merits of the case, would use the rating only as a bargaining chip when it comes to fixing interest rates and tenures. He keeps looking over his shoulder at the other lender in the queue. No Indian Corporate with a good proposition has failed to tap the international markets . On the other hand an excellently managed Corporate like HDFC Bank is rated below Citibank, solely on account of its location.

Our economy needs far more scrutiny on its performance then a Corporate centric  rating from a "for profit' body. It needs other metrics , like the progress on alleviating unemployment, reducing prices of common consumables, improving access to health care, and  education to name a few. It's not time yet for our mood to turn positive on any of these fronts. Our much publicized growth rates, despite the so called 'trickle down" effect , is only widening the gap between the rich and the underpriveleged.   
   
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25NOV17

7 is the new 13!

Amongst the various policy guidelines from the RBI and the modifications to various Acts by Government in recent years , the Insolvency and Bankruptcy Code (IBC: made into law in 2016), is creating ripples in Corporate India. The preamble stresses on the objective of speedy resolution of disputes on bad loans keeping in mind the interests of both the Borrower and the Lender, minimizing loss of asset value which otherwise occurs due to prolonged litigation.

The Code has laid out a procedure to resolve all disputes on bad loans between Borrower and Lender  ( or Debtor and Creditor) within a 180 day time frame.

Clause 7 in the Code provides for any Financial creditor ( as contrasted to an Operational creditor-one who is due for goods delivered or services rendered) to file an application before the National Company Law Tribunal(NCLT) with all facts. If the documentation is in order and the Authority is convinced , he/she just needs to "admit" the application and the process commences... within 14 days of the application . The first blow to the debtor is, that without the opportunity of being heard   an advertisement in a prominent newspaper of the Insolvency process is released again within 14 days. Pretty hard!

The harder bit  is, even if a settlement is reached with the applicant creditor, the process MUST still go on and the debtor has to settle with all creditors, irrespective of whether they raised the matter in the first instance!

Fortunately in the latter case, the Supreme Court have stayed proceedings in two cases. Hopefully that should set a precedent. But the damage to the debtors reputation is done.    

And as far as the first one of admitting the application without a hearing from the debtor, the Authority themselves seem to have realized the unfairness of it, and in recent applications an opportunity has been given to the debtor.

Else 7 is the new unlucky number !