Homing in on the code

Mythili Bhusnurmath

HOME BUYERS in the NCR, and the entire country, are relieved. In the latest twist in the ongoing tussle between home buyers on the one hand and corporates and banks on the other, the Insolvency and Bankruptcy Board of India (IBBI) has tweaked rules to protect home buyers’ interests.  

The revised rules are expected to ensure banks do not get away with protecting only their own interests. So, any resolution plan must state how the plan proposes to deal with the interests of all stakeholders, including home-buyers who have been left in the lurch by unscrupulous corporates.  

On the face of it, this is an excellent compromise. The problem, as with all compromises, is the unintended, and undesirable, consequences that are likely to follow whenever the heart is allowed to rule over the head in matters of commerce. The Insolvency and Bankruptcy Code (IBC), as enacted by Parliament, was meant to ensure that recalcitrant borrowers are not allowed to take their creditors, especially banks, for a ride but are brought to book. Quickly! 

If, instead, the IBC is used to resolve issues it was never meant to address in the first place, there is a genuine danger that it is only a matter of time before it goes the way of previous attempts to tackle bad loans in banks. Not only will it not help in the speedy resolution of bad loans, but worse, it will discourage banks from giving housing loans for construction-linked projects (the norm in most housing projects). The losers will be the public at large.   

What most people, including perhaps the judiciary, seem to lose sight of is that banks do not lend their own money. So, it is not a David vs Goliath battle with home buyers on one side and powerful banks on the other! The money banks lend, both to corporates and to retail consumers, belongs to bank depositors, including small depositors. When corporates do not repay their loans, or when home buyers are privileged over other dues to banks, it is ordinary depositors, many of who may be financially worse off than home buyers who lose out.   

This is not to say the buyers should be left in the lurch. Rather, that courts should be careful not to resort to the wrong tool, in this case the IBC, to enforce the rights of the buyers. Allowing such claims under the IBC is akin to opening the Pandora’s box and could end up burdening the code to the detriment of both banks and the larger economy.   

Remember, the verdict on the code, almost 10 months after the relevant sections were notified, is mixed. Take the supposed USP (unique selling proposition) of the resolution process under the IBC — its strict timelines: 14 days to decide whether or not to admit the case, followed by appointment of an interim insolvency professional (in case it is admitted) who will have six months, extendable by a maximum of another three to come up with a turnaround strategy along with a committee of creditors.

Based on the evidence to date, admittedly somewhat limited, the National Company Law Tribunal (NCLT) has not always been able to adhere to the 14-day deadline. The law is quite clear that all other judicial proceedings will be on hold once a case has been referred to the NCLT. But, in practice, the latter has tended to tiptoe round this, preferring to await the outcome of civil court proceedings. The case of Essar Steel, where it was only after the Gujarat High Court dismissed the borrower’s appeal that it finally came before the NCLT, being a case in point.    

Another reason to be sceptical about the NCLT is that like its earlier avatar, the Debt Recovery Tribunal (DRT), the NCLT, too, is plagued by lack of basic infrastructure. As on date, we have 11 NCLT benches, but the appellate tribunal has only two of the three members in place, one of who is a retired audit and accounts officer! And with almost anyone who has dues from the borrower, including operational creditors, employees being free to take borrowers to the cleaners it is only a matter of time before the NCLT is overwhelmed with the work and simply unable to tackle the workload. This is not a figment of imagination. There are reports of an employee of a Chennai-based hotel taking his employer to the NCLT.

As Arundhati Bhattacharya, former chairman of the State Bank of India, put it, we don’t have the supporting ecosystem in place. We don’t have enough insolvency professionals with experience of running complex businesses, nor do we have efficient markets for stressed assets where resolution fails. In a scenario where there seem to be no takers even for Vijay Mallya’s  Kingfisher House in Mumbai despite five attempts to auction it and after lowering reserve price each time, the chances that large steel, cement and power plants will find bidders willing to pay an attractive price is naïve to say the least. In which case, the IBC might possibly end up as a solution that’s worse than the original problem it was meant to tackle.

Sure, you may be able to force recalcitrant promoters to come to the negotiating table. But if the process, ultimately, results in banks taking such huge haircuts that they become sick themselves, it will serve no purpose. All we will have is sick companies being replaced by sick banks; in which case the damage to the economy is far worse! It would be a case of ‘out of the frying pan into the fire’.

More so, if the focus under the IBC shifts to asset stripping rather than asset conservation. If resolution through liquidation seems simpler and bankers feel they will have fewer questions to face from investigating agencies than when they try to turn companies around, there is a danger the IBC could end up as a simplistic solution to a far more complex problem.

All efforts must, therefore, be made to ensure the IBC delivers on the promise with which it was enacted, namely speedy resolution of NPAs. Ideally, while preserving asset-value where it deserves to be preserved in the larger interests of the economy. The NCLT and courts must not get carried away by extraneous considerations that could end up damaging the very objective with which the code was framed.

Sure, remedies must be extended to home buyers. But outside the IBC. Else we could end up with a remedy that is worse than the disease!

The writer is a senior consultant at National Council of Applied Economic Research