Businesses will share the costs of their own bad judgements, and not just lenders and taxpayers.
India’s 33-rank improvement on the ‘Resolving insolvency’ parameter of the World Bank’s Doing Business 2018 report is well deserved. The country’s rankings rose from 136 to 103 largely due to the Modi government’s bankruptcy code, and the launch of insolvency proceedings against hundreds of defaulter companies. At last count, around 400 companies with loan defaults or loan guarantees against their names had been referred to the National Company Law Tribunal (NCLT). One report suggests that nearly Rs 8 lakh crore of bad loans will end up before the NCLT by 2019.
It is interesting that it is not only defaulters, but also their loan guarantors who are being set up for insolvency. Take the case of Assam Company, a profitable company that owns tea gardens and also has oil and gas exploration activities. According to The Economic Times, it is being taken to the cleaners at the NCLT over a Rs 100 crore loan it had guaranteed on behalf of Gujarat Hydrocarbon & Power SEZ. Dues have now ballooned to Rs 596 crore.
Just as Vijay Mallya bet the farm on Kingfisher and ended up losing a lot of his profitable liquor businesses, the Jajodias, owners of Assam Company, made a strategic mistake in offering guarantees from their profitable tea company to help Gujarat Hydrocarbon get loans. What is surprising is that instead of paying up when the guarantee was invoked, Assam Co delayed matters to an extent where it now stands to lose its main business in bankruptcy proceedings. Given that the market value of Assam Co shares is now well under Rs 150 crore, the lenders (Srei Infra, in this case) will surely not get their money back fully.
But there are larger lessons to be learnt from this case, as in many other instances where big businessmen lost their profitable units when borrowing to fund their losers. The Ruias lost Essar Oil and Essar Steel, the Jaypee Group its profitable cement business, and GVK its Bengaluru airport stake, among others. The Tatas have had to exit their telecom business in a hurry with huge losses, and both Adani and Tatas are trying to offload their loss-making import-based power plants for Re 1.
The lessons to learn are the following:
One, you can’t take loans and offer guarantees in the expectation that political connections and crony power will save you from your follies. That era is now over under the Modi dispensation.
Two, all businesses must have a judicious mix of equity and debt. They must have skin in the game in the form of equity. The days of expecting banks to indirectly finance your own equity contributions by gold-plating projects and over-invoicing are coming to a close.
Three, businesses now need to ring-fence their unconnected businesses so that bad business decisions in one sector do not sink the whole group through cross-ownership and guarantees.
If nothing else, the Modi government has made India Inc learn hard lessons that no crony bailouts are possible. Businesses will share the costs of their own bad judgements, and not just lenders and taxpayers.