Learning to let go
Three years after India’s Kingfisher Airlines was grounded, creditors are still fighting to recover loans extended to the carrier backed by Vijay Mallya and squabbling over the tycoon’s Goan villa. A proposed overhaul of insolvency rules offers hope to lenders that future disputes won’t be such long-haul affairs.
India will get its first unified bankruptcy code if a draft bill published on Nov. 4 becomes law. The proposal aims to deal with troubled companies quickly, stop large shareholders from stripping assets, and limit the role of the stagnant courts.
Change is overdue. The current system is fragmented and dysfunctional. Tycoons typically stay in control of companies long after a default. Reaching a decision to liquidate can take many years. Meanwhile, incumbent managers remain in charge and what value remains gets eroded.
Banks currently have some power to repossess fixed assets but disputes over collateral are common. Other creditors are worse off. The World Bank reckons creditors in the country typically recover just 25.7 cents on the dollar, or one third the average in high-income OECD countries. That’s one reason why India’s corporate bond market remains tiny. Total issuance last year was worth less than 3 percent of GDP, according to Thomson Reuters.
The new code aims to wrap up the insolvency process within 180 days and give oversight of the company to an independent professional. Creditors would stay their claims. If 75 percent of creditors cannot agree to a sale or restructuring in that time, liquidation would follow.
The new system will only work with proper implementation. It might take India two years to pass the bill and create the extensive infrastructure required, including a new regulator and private companies to store information on company debts. Other details need ironing out too – like whether the new code will apply to cases currently stuck in the courts, such as Kingfisher.
Success would allow the many Indian businesses that are highly leveraged, but otherwise viable, to revive under new ownership rather than staggering zombie-like through endless court battles. And India’s tycoons might finally have to learn to give up control.