Seven years on, Indian Prime Minister Narendra Modi’s signature bankruptcy reform has failed to live up to its billing. The 2016 bankruptcy law was drafted when India was just starting to deal with a huge pile of bad loans: more than $200 billion at risk. With banks reaping bumper profits in a post-pandemic high-interest rate environment, the burden has become lighter with less urgency to deal with it.
This should not happen. Creditor recovery rates on bad advances have been low for the past few years—and they’re falling. Liquidation is the most common outcome of bankruptcy proceedings, which takes more than double the estimated 270 days. In a country where savings are in short supply, the priority was always to prevent productive capital from being wasted in unviable projects. Some mega proposals for steel plants raised hopes of creditors, but indiscriminate playing of the legal process by vested interests is dashing them.
This is why the bankruptcy protection sought by Go Airlines is so important. It has been temporarily closed. If the courts cannot quickly revive GoFirst, as the brand is now known, the risk is that it will be grounded forever, like Kingfisher in 2012 and Jet in 2019. The domestic aviation market will become even more monopolized.
But rescuing Go First could be seen as hurting billionaire Nusli Wadia’s SMBC Aviation Capital, ACG Aircraft Leasing Ireland and other aircraft lessors. SMBC, which claims its lease expired before Go filed, wants to take its jets away. Bankruptcy protection, Deficiencies allege, is a “fraudulent practice”. On Monday, the Appellate Authority rejected their plea: they need to approach the tribunal to recover the expired leased planes, or go to the apex court.
It’s a complicated bankruptcy. Nearly half of Goa’s Airbus fleet has been disabled by a Raytheon’s Pratt & Whitney engine failure. The airline has claimed $894 million in compensation. A Singapore-based arbitration panel asked P&W to “immediately initiate reasonable efforts” to locate suitable spares. The engine maker said it would honor the award. But since it has not supplied the first batch of 10 engines, which the tribunal said it is filed for bankruptcy to try to deliver by April 27, or so its filing said.
But those specifics are irrelevant to Go First creditors: Even if the airline was inefficient, under-capitalized or ill-fated, its shareholders would have to pay a price before lenders and lessors could be asked to make sacrifices.
Code has disappointed. Debtors become the cause of bankruptcy in only 6% of cases. And the recovery rate for creditors in such cases which get resolved is only 18%. Lenders are far more comfortable when they themselves drive firms into bankruptcy. According to India Ratings & Research, although still low by global standards, the recovery rate in resolutions initiated by financial creditors has almost doubled to a high of 34%. Two years back it was 45%.
What will be the fate of the cow? Air travel is back and customers are lining up at P&W. But assuming it manages to deliver 10 additional parts a month to Go First by December, as it has been directed by the arbitrator, it could fly again. But it must return as an operation that can sustain its debt, leases, salaries and delays in fleet repairs. One solution could be to leave Go Airlines’ corporate structure behind 11,500 crores owed to creditors and all its equity. This part may die. After that, the lenders can invite bids from anyone who wants to inject fresh capital into the new avatar of Go First. It doesn’t matter if the next owner is Wadia. If it isn’t, that would be fine too.
GoFirst is repaying banks and has recently defaulted on lessors and operational creditors. If any of its loans had gone bad for a year before the resolution plan began, the Wadia Group would have been ruled out as a potential bidder. It’s just fake puritanism. A pragmatic Bankruptcy Code would be enforcer agnostic. Give them back their bankrupt firms if they want them, but stop playing up consequences-game methods, such as forcing lenders to accept lowball out-of-court settlements: give them haircuts, Stand in line with everyone else, and bid.
Leaving the aircraft with a borrower who is not selling flight tickets is not ideal. True, this is likely to increase leasing rates for others. Still, it might be worth it. Consumers will pay a lot if the trio of IndiGo and Tata Airlines come to dominate air travel in India. Note that SpiceJet is also in some trouble.
There is a difference between protecting capital in a business and protecting the capitalist behind it. After some initial successes, Modi’s bankruptcy reform has often been unable to find that fine line. It has to show the bankruptcy court that this time will be different.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.
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