The business environment they operate in has only worsened, yet the Insolvency and Bankruptcy Code has increased the cost of their failure
Six years ago when I was managing a large multi-strategy global hedge fund out of Paris, my team would be sceptical and altogether keep off making investments in India. Some of the main reasons for this omission were cited as the lack of transparency in the goings on of the companies, unpredictable Government policy environment, and limited availability of sophisticated financial instruments that were permitted in India at that time. Another reason for our hesitation to invest in India was also the difficult environment India offered for businesses to flourish, which made it a rather risky growth proposition to invest in small or medium sized Indian companies.
During the past three years living and working in India, I see — from the opposite perspective — that not much has changed, if not worsened, ever since. In the World Bank’s Doing Business Report of 190 countries, India ranked 132 in 2012 and now is only slightly better at 130. The rank improvement is mostly on the back of us achieving greater ease in starting a new business. But we are now somewhat worse than earlier in dealing with construction permits, ranking 181 in 2012, but lower down at 185 in 2017. And we are far worse than a few years ago in trading across international borders, ranking 109 in 2012 but by 2017 sliding to rank 143!
Earlier as an investor, our confidence in India was dampened also, thanks to the poor and dreadfully slow insolvency procedures prevalent in India. In 2011, it took an average of four years to resolve insolvency in India and the recovery rate of debt was dreadfully low compared with other countries. This meant that if we invested in an Indian company that was eventually unable to repay its loans, then we would have to wait it out about four years before we would get our money back! In the World Bank’s resolving insolvency ranking, India ranked 128 in 2012, but now in 2017, we are even worse at 136! On this indicator, we are lagging behind most developing economies today, including China, which ranks 53.
This is why, for investors now, India’s new Insolvency and Bankruptcy Code (IBC) issued in June 2017 has been a welcome change. The new IBC decrees that on day one of default, a creditor or a borrower can approach the National Company law Tribunal
to initiate insolvency proceedings. lenders can thereafter create a committee to appoint an insolvency professional to run the borrower’s company in the interim period. Within 180 days, the lenders’ committee has to decide a debt recast plan. An additional 90 days can also be provided for this, if required. If 75 per cent of lenders agree then the committee restructures the debt, else after 180 days the company’s assets are liquidated.
From the point of view of Indian corporations, this development is good but not entirely fair. The business environment they operate in has only worsened in many aspects, yet the IBC has increased the cost of their failure. It would have made more sense if the Government would have first worked on improving the conditions for companies in India to flourish, and then put in place strict rules of penalty if these companies still failed. Can the Government make the process less bureaucratic for gathering permits to do businessIJ Is it possible for the system to be cleansed of nepotism and corruptionIJ Can international trade and financial transactions not be so darned difficult to do in IndiaIJ Only after some progress is even begun to be made to solve these problems can companies be penalised for a loan paid one day late. A child needs to be taught to walk, and then given the right conditions to run, instead of starting off by punishing him for a fall!
Corporations are also finding it unfair that the private sector, which is the engine for India’s growth as well as major job creators, is now suddenly demonised on account of its real or perceived failure to perform. For instance, as part of the ongoing clean up drive of our banks, half the companies in the list of 12 largest corporate loan defaulters handed over by commercial banks to the RBI this summer, were from the steel sector. Besides this list, there are other companies in the steel sector that are also stressed. A popular perception is that all these companies have been irresponsibly managed. But this is far from the truth. In the steel industry, for instance, there were several external factors that squeezed the companies. Over the last three years, the falling steel price realisations have adversely affected the margins of companies in this sector, and this time period coincided with additional stress from unprecedented retrospective policy changes related to the reallocation of mines that provided raw material for producing steel, as well as these companies’ obligations to repay their debt taken to increase production capacity. Some of these steel companies will be poised for recovery in a few months.
My point here on this issue is to present both views — of the investors and the corporates — because I have been on both sides. We need to remember that the banks need to be capitalised as much as our businesses need a much healthier environment to thrive in.
Having said that, we should note that improving the environment in India for people to do business efficiently and ethically is a long drawn process. There are many changes required for this, including stronger policies, and also a revamped education system that emphasises on ethics. Implementing a robust IBC is no magic wand either, and as I have explained, it must require a more case specific investigation of defaulting companies, besides other challenges such as the creation of a much larger pool (than what exists now) of credible insolvency professionals in India. Yet the latter is comparatively faster to implement, and so it perhaps takes precedence over the former — even as a case of running the marathon backward by starting from the finish line.
The writer is the CEO of Sustain labs Paris, the world’s first sustainability incubator. She is a Global leadership Fellow alumna of the World Economic Forum. miniya@labsparis.com