Bankruptcy law is a big test for public opinion and entrepreneurship. It’s also a coming of age for Indian capitalism.
No capitalism comes of age without its bankruptcies, just as nobody learns to ride a bicycle without falling occasionally. Social acceptance of failure helps conquer the fear of public shaming and encourages entrepreneurial risk-taking. If you succeed, the rewards are yours. If you fail, the rest on your bandwagon: taxman, employees, creditors, lenders, suppliers share whatever remains. You lose everything in that business. This is bankruptcy.
In India’s “log kya kahenge” (what will people say) hypocrisy, bankruptcy has been a shame and disgrace to entrepreneurs, their family, and often even to their community, especially if it is a traditional entrepreneur/mercantile caste. So, nobody is allowed to fail. This is why, 70 years after Independence and 25 years after the 1991 reforms, we still didn’t have a bankruptcy law.
Contrast this with deeper capitalism: Americans elected Donald Trump despite multiple bankruptcies. Some of the most iconic global entrepreneurs have had bankruptcies. You fail in a business, give up what remains (including your equity).
Risk in business is also shared by investors, lenders, and suppliers, and least of all, by employees, who usually have the first share of the leftovers of failed employers’ assets. When money is recovered from Vijay Mallya, for example, it will first go towards paying his employees’ old salaries and their statutory dues: income tax, provident fund and gratuity contributions.
It is hypocrisy because a society which accepts no orderly bankruptcy also detests and distrusts its businessmen. In the past, they were mocked as exploiting ‘Lalas’, ‘Seths’ or ‘Birla-Tatas’. Now we’ve moved on, but only in our choice of words: ‘crony capitalists’, or just Ambani-Adanis. We don’t want them to fail. But if they fail, we want to see them all in sack-cloth and ashes, better still, in jail. It’s like wanting to see a kid who falls while learning to cycle, to be then run over by a truck, while we applaud.
That isn’t going to happen, and has never happened. In the past, failed businesses could count on perpetual “evergreening” (fresh loans to help pay earlier loans) by banks. Or they just vacuumed their shareholders, looted the banks, dumped the employees and carried on lighting up page-3 circuits in their Versaces and rocks.
What’s happening now, on the other hand, is that India has its first bankruptcy law. There are also courts to administer this. The cycle, in whatever state, is being taken away, and the rider goes home to nurse his wounds. The entire process is public.
In these polarised times, nobody wants to be confused by facts, and people calmly accept any view that agrees with their own. As with the allegation that the government is refusing to reveal the names of top 10 corporate defaulters. Check any pink paper — the names of not just 10, but 12, the entire ‘Dirty Dozen’ of the biggest Indian defaulters, are published freely. As are the bankruptcy proceedings of the National Company Law Tribunal, to settle their dues to various stakeholders.
This is a big test for public opinion and entrepreneurship. It’s also a coming of age for Indian capitalism. After this list, another, larger one is in process, and all those names are also in the public. The redoubtable Ruias (Essar Group) have sold their crown jewel Essar Oil to repay their bankers part of the dues. Now, their efforts to save Essar Steel from a similar fate have failed. Their audacious bid to “buy it back” in their personal capacity has also been foiled with the latest amendment barring failed promoters from the resale process.
GMR, GVK, Jaypee, all blue chips until recently, are carrying out a garage sale of assets to repay loans. It is corporate India’s true bonfire of vanities. And to those who might ask, “but what about Ambani and Adani?” an ‘unhappy’ fact — neither is a defaulter, at least not yet.
The older Ambani has such a strong balance sheet he can raise perpetual debt (where the principal never has to be repaid as long as you are paying interest) at no more than 100-150 basis points (1-1.5 per cent in layman’s language) over LIBOR (London Inter-Bank Overnight Rates), the global gold standard. It will today be just over half the rate at which Indian banks lend.
The younger one is stressed, put under watch by lenders as “accounts of special concern”, and has been given time to sell his assets, repay his loans, and deleverage. Of course, critics say he got an undue reprieve. So, while he has put his assets in the market, analysts and critics of the Modi government should both be keeping close watch on this process.
Adani, I am afraid, is not a defaulter at all. All his accounts (from publicly available data) are what the bankers call “standard”, where principal and interest are being paid as committed. He is, in fact, acquiring other businessmen’s stressed assets across India, especially in the power sector. So, fight with him over a hundred things, but bank loan defaults can’t be one of these.
The new bankruptcy law was set in motion by the UPA. Narendra Modi has taken it to its logical conclusion. Both deserve appreciation.
For the first time now, India will have a star cast of bankrupt billionaires. We will get our cheap thrills. Many will restart lives and become rich again and hopefully, by then, we would have also matured to understand the logic, value, and morality of keeping limited liability of corporations and individuals apart. We aren’t there yet. One generation of Indians has to see a parade of bankrupt billionaires. The next may then understand and accept limited liability, the essence of capitalism.
The first step, however, is a few headline bankruptcies. Because, as the latter-day darling of the Left, Nobel laureate economist Joseph Stiglitz, said: “Bankruptcy is to cope with those times when markets failed to allocate capital wisely and monitor its use.”
Failed businessmen have to pay for this first.
Here are other sharp perspectives on wilful defaulters:
Rajeev Chandrasekhar, MP
Jaithirth Rao, entrepreneur and writer
Prashant Bhushan, Supreme Court lawyer
1. I learnt to ride a bicycle without falling even once.
That should end the argument.
But hypothetically, even if I had fallen off once, it would have been my bicycle, my bum, my bruised hand or leg.
Not even a scratch on the public road.
Are you next gonna justify a few dozen ppl being run over as a necessity because I needed to learn how to drive a car?
2. Donald Trump is a very poor example, and you know exactly why Americans voted him in.
3. The humanities part of Economics will tell you this, not the Science & Numbers: it is generally not right to rationalise sufferings of few / many for the sake of a greater cause like Capitalism coming of age. Noones saying turn Communist, but it’s preferable to not play with lives in the present for some grand imagined benefits in the future. Big businesses can take risks as long as its own Bicycles, own bums, own bruises.
This author missed crucial points. In the process of Indian entrepreneurs becoming bankrupt – companies running by them are becoming bankrupt, but personally they are becoming richer, richer, and richer. I personally feel, more than these contractors turned entrepreneurs, political system which is helping these people to even escape from country needs to be tightened. Otherwise, any measure will become ineffective, waste of resources, and damaging the economy.
Uber Rich owners/promoters of Super Sick companies, are rich with NPA money at the cost of public’, ruining the country.
A small rider to this fine column : we can take away the little boy’s cycle, but a whole fleet of Harley Davidsons is already tucked away in his offshore garage. There really are no broke billionaires, waiting to start life afresh.
What you say is well portrayed in the American TV series ‘Billions’; the contingency resources have been put aside for getting away.