Stakeholders in the corporate insolvency resolution would do well to heed the advice of veteran banker Uday Kotak for his tenure as non-executive chairman of IL&FS last week. Following the collapse of IL&FS in 2018, Kotak took over and oversaw the resolution of more than Rs 61,000 crore of the group’s total debt of Rs 94,000 crore. Part of this is either awaiting delivery or is awaiting recovery due to ongoing legal challenges. Compared to the average recovery of 33% (as of December 2021) of creditors’ claims under the Insolvency and Bankruptcy Code (IBC) regime, the IL&FS recovery record is outstanding, especially due to the complex work involved at various levels and legal entities. Some experts argue that the IBC should not be judged by recovery scores alone because the law is simply a facilitator of restructuring that is ultimately determined by market power. But Kotak’s advice should be taken seriously for better recovery and even resisting corporate pressure.
It took years of IL&FS resolution; In the case of the IBC, about three-quarters of the ongoing resolution issues exceeded the 270-day deadline set by law. Part of the problem, Kotak noted, is the “complex” group structure. In addition to the resolution challenge, it creates a challenge for regulatory control; In fact, it is probably designed for Outfox controllers. To that end, the regulatory framework needs to be modified as needed – real-time responsiveness – to ensure that bugs and gaps do not lend themselves to dangerous leverage without attention.
Kotak himself took up the challenge from the Sovereign. Governments, especially states, must respect treaties and pay their dues. State governments have called for a review of the projects after they entered into the agreement, or simply reject them – Andhra Pradesh, Gujarat and others have sought to reconsider power purchase agreements with Maharashtra and called for a review of the bullet train project that the Center had promised. Policy uncertainty is one of the reasons behind the corporate pressure, along with unfavorable business environment and poor credit decisions and fault of promoters.
States have become infamously bad at paying arrears; At the end of March, the discs owed Rs 1.09 trillion to power producers, according to the Receipt website. It is not difficult to imagine the domino effect on generations of companies and their lenders. The MSME Solutions Portal shows pending claims of Rs 6,484 crore against the states (government and their PSUs), of which less than one-fifth have been settled under the MSE Council process. If SMEs that bleed during an epidemic get a little help, it is better to understand what big business owes and how it has affected credit services. To be sure, he said the NPA situation is improving, but that is because of the delivery of large corporates, whose muscles may be in a position to prevent states from delaying payments and not honoring contracts. Kotak pointed out that PSU banks also had a relatively good position in IL&FS compared to other lenders due to their reliance on rating agencies’ reports. Rating agencies and auditors, of course, have not come out clean with many bankruptcies. There is not enough emphasis on the need to reduce incentives for raters and auditors to play to the tune of the company.
Also, the government must ensure that infrastructural and personnel constraints are addressed soon if these are not associated with delays. Filling vacancies, enabling fast resolution with pre-packs, etc., can be effective counters against asset depreciation.