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POLICY WATCH The Bitter Medicine A proposed law scrapping the BIFR leaves the financial sector aghast at its interventionist tone. By Seetha
Revival and restructuring of companies would now be handled by a National Company Law Tribunal (NCLT). And in order to bring different agencies dealing with commercial insolvency under one umbrella, the tribunal will also do the work of the Company Law Board (CLB) and conduct winding up proceedings. Right now, creditors approach the high courts and debt recovery tribunals for action against defaulting firms, small investors knock the doors of the CLB, while the rehabilitation of companies is handled by the BIFR, and high courts conduct winding up proceedings when revival does not work. In the new system, sick companies have to register themselves with the tribunal that must consider revival as a first option. Promoters, lenders, and other stakeholders must file their responses to a rehabilitation package in the form of affidavits. If a consensus proves elusive, the tribunal will lay down a scheme that will be binding on all parties. Banks and financial institutions (FIs) are dismayed over the proposed law (based on the report of the V.B. Eradi committee on the law relating to insolvency and winding up of companies). Laments Shashi Bhojani, Deputy Managing Director, ICICI: ''This merely renames the BIFR and burdens it with more work.'' Kishore Soni, Chief Executive Officer of Soni Industrial Restructuring Consultants, points out that while the BIFR merely attempted to revive dying companies, the NCLT will have to both cure sick firms and perform the last rites. As a result, he warns, revival and winding up of companies, each of which already take nearly four years to complete, will only get further delayed. It's not as if lenders are happy with the BIFR. Burdened with over Rs 70,000 crore of non-performing assets (NPAs), they had found this to be the biggest obstacle to recovering their money. Here's why. SICA insists that a sick company must compulsorily refer itself to the BIFR. Once that's done, Section 22 of the Act comes into operation, shielding companies from any proceedings before any other forum. Given the painfully slow progress of cases, companies file references under BIFR as soon as lenders filed recovery suits against them in courts. Says K.A. Najmi, Legal Adviser to the Industrial Finance Corporation of India (IFCI): ''The BIFR was being used solely to delay recovery.'' Not surprisingly, of the 3,296 cases filed till December, 2000, 20 per cent were dismissed as non-maintainable. Poor Recovery That's more, the BIFR rarely managed to turn around sick companies. Only 254 had been revived till December, 2000-a measly 7 per cent of the cases filed. Asserts Sumant Batra, Secretary, Insol India, an association of insolvency lawyers and professionals: ''The Act has been a complete disaster.'' The proposed legislation, unfortunately, is an improvement only in one respect. While SICA defined a sick company as one whose entire net worth has turned negative, the new law sets a 50-per cent erosion of net worth or debt default to a certain extent as the trigger for reference to the NCLT. This definition was first mooted in a 1997 SICA Amendment Bill that never saw the light of day and repeated in the Eradi Committee report. SICA's definition of sickness ensured that companies came to BIFR when there was no hope of revival. No wonder, then, that 25 per cent of the cases ended up as winding up cases, leaving secured creditors high and dry. That's why the financial sector had been insisting on debt default as the criterion of sickness. Says Soni: ''Erosion of net worth is nowhere as transparent as debt default. Fudging accounts to feign sickness and get protection of Section 22 is common.'' Subodh Bhargava, Adviser, Eicher Group, and member of the Eradi Committee, concedes the point but feels the two-part definition is a good compromise. Since debt default precedes net worth erosion, he argues, that will become the more often used criterion to determine sickness. Economist Omkar Goswami, author of a 1993 report on industrial sickness and corporate restructuring, fails to see the logic, but the lending fraternity isn't kicking up too much of a fuss. Says Bhojani: ''We are willing to live with this.'' They don't feel the same about several other provisions that, they say, will severely limit their freedom of operation. Take the proposal for compulsory reference for revival, though the Eradi committee had suggested that references be made voluntary. Explanations by the DCA that the mandatory reference would prevent companies coming for revival only in the final stages, aren't accepted. Points out Goswami: ''With debt default as a criterion, the number of cases will be far, far more than what's going to BIFR.'' Goswami reiterates a point he made in his 1993 report-that making references voluntary will give both the company and the lenders freedom to work out a rehabilitation package by themselves. In any case, he wonders how a 50-per cent erosion of net worth can make government intervention compulsory. For, technically the shareholders still have some funds available. ''The whole concept is flawed,'' he avers. What has left the financial sector aghast are the proposals to give the tribunal powers to force revival schemes on companies and creditors. The Eradi Committee had first mooted the idea, saying the tribunal must have the power to direct the preparation of a revival scheme ''under its supervision and for ordering financial assistance for such a scheme from FIs/banks''. Bhargava's argument that this was necessitated by the fact that each stakeholder invariably expect others to make greater financial sacrifices than themselves, doesn't convince many. Self-Medication
Rehabilitation, lenders point out, should be worked out among borrowers and lenders and cannot be dictated by a statutory body. Asserts B.D. Ushir, Executive Director (Legal) of the Industrial Development Bank of India (IDBI): ''Let the lender decide whether to kill the borrower or help his survival. The decision will always be based on practical considerations.'' After all, a healthy corporate sector is in the interest of the financial sector and it will not do anything to endanger that. A better alternative would have been to sanction a scheme if lenders holding 75 per cent of the monetary value of the secured debt agree, a provision contained in the 1997 SICA amendment Bill and in a corporate debt restructuring mechanism currently being formulated by the finance ministry. The statutory authority, argues Ushir, must only be a facilitator to bring companies and creditors together. In fact, there is a growing opinion that rather than scrapping BIFR, it would be better to retain it in a reformed manner, with strict time limits for each step towards revival. ''We must give the devil his due,'' says Ushir pointing out that SICA and BIFR helped develop expertise in formulating and packaging revival schemes. Concurs Soni: ''The BIFR must be reformed and given a new avatar.'' Soni and Goswami suggest a system where debt default triggers off bankruptcy proceedings and the case comes to BIFR only if negotiations (to be completed within a month) with secured creditors fail. After that there are deadlines for each successive step, whether sanctioning of a revival plan or winding up a company. Proceedings would, therefore, be completed within three months, a far cry from the endless delays in the present system. Both the Eradi Committee and the DCA, however, felt that a clean break with the old system would be better. But realising the need to speed up procedures, the proposed law sets a 180-day deadline for the NCLT, which will have to provide a written explanation for any delay. Few, however, expect this to be of any use, considering the fact that the tribunal is burdened with other tasks as well. The real solution to the messy issue of corporate insolvency actually lies in a slew of other reforms. Like stricter foreclosure laws, says Bharti Gupta Ramola, Executive Director of PriceWaterhouseCoopers, so that lenders don't have to wait endlessly to recover their dues. Unfortunately, that's missing in India. Banks and FIs also need to be more alert about the financial performance of their borrowers, so that they can initiate action at the first sign of trouble. Says Ramola: ''Prudent lenders will start talking to a company as soon as they sense imminent default. Right now, they start talking only after default happens.'' FIs admit laxity on their part in this matter but also point out that government ownership hampers their freedom of operation. Just as other outdated laws limit the operational flexibility of companies, because of which revival plans tend to fail. Bhargava has the last word: ''The full potential of industry can only be realised by a whole range of other reforms.'' Amen to that. -Additional reporting by Ashish Gupta |
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It
could become a classic case of the prescription being worse than the
disease. The Department of Company Affairs (DCA) is putting the finishing
touches to a Bill that will bring the curtains down on the Sick Industrial
Companies Act (SICA), 1985, and, with it, the Board of Industrial and
Financial Restructuring (BIFR) and the Appellate Authority of Industrial
and Financial Restructuring (AAIFR). But the rejoicing is muted. For, the
alternative mechanism being drawn up is perceived as an old tablet in a
new foil (See The New Prescription).