CRISIL recently published a report about the Rs.70,000 crore collected through NCLT in the fiscal year 2018-19. The collections in the current fiscal are likely to be closer to Rs.1 trillion. According to CRISIL, this represents 43% realization that is at par with global best practices. That is the good news. But it also, at the same time, highlights our systemic inadequacy when it comes to dealing with soft bankruptcies. With hardly any fixed assets, these soft bankruptcies post the big challenge to India. How to go about addressing this issue?
Kingfisher, Jet and IL&FS
One can also include in this list, other companies like Gitanjali and Satyam, which are cases in soft bankruptcy. The big challenge in these cases is that they hardly have any worthwhile fixed assets on the ground and most of their assets are either in the form of goodwill, claims or skills. When the cookie crumbles, there is hardly anything on the books to dispose off. That is where the problem arises, because the implosion in value is substantial. Look at Kingfisher and later look at the way Jet has been handled. IL&FS is another case of corporate bankruptcy which could have been handled better. At the end of the day, it is really doubtful what shareholders could really get back and what would happen to these employees. All the three cases have highlighted India’s inadequacy when it comes to handling cases of soft bankruptcy.
Satyam versus Jet Airways
A test case of handling soft bankruptcy was the way Satyam was handled. It is not just about banks recovering their debt but companies like Satyam, IL&FS and Jet have larger social and economic externalities. In case off Satyam, the government and the MCA moved in quickly to assume control and also brokered the deal with Tech Mahindra. Of course, there was a restructuring and there were job losses too. But, the entire situation was handled with a lot of finesse and speed. Above all, the social and economic costs were kept at the bare minimum. In comparison, Jet and IL&FS look like ending up with nothing. That is where the US model could come in really handy.
Wheat from the chaff
In the US, the government is quick to intervene where the problem is cyclical or where externalities are huge. For example, the US government intervened to save Fannie Mae, Freddie Mac, Citi and GM due to the larger implications. However, the US government was also quick to let the likes of Enron, Bear Sterns and Lehman vanish from the scene altogether. India needs to adopt this model quickly when it comes to handling soft bankruptcy. Soft bankruptcy allows promoters to get away through forced liquidation. India cannot afford to repeat the mistakes SBI made with Jet. It is time to act fast! ©