In the second half of 2018, as media reports of the collapse of Mumbai-based Infrastructure Leasing and Financial Services, or IL&FS, surfaced, the headline of an article on the group’s results was “India’s Lehman Moment”.
Fears of a similar domino effect were further heightened a few months later with fresh reports of defaults and financial irregularities at another firm, Dewan Housing Finance Corporation Ltd., or DHFL. A decade ago, in 2010, the country’s biggest corporate fraud was reported in Hyderabad, with Nasdaq-listed Satyam Computers revealing that its accounts had been rigged.
Strikingly, and in each of these corporate fraud and governance cases there is a common thread running through the resolution process to maximize the value of assets and restore trust between investors and the market. And those who are at the center of these frauds have not managed to escape punishment as per the law.
What are the conclusions drawn from the other solution cases? In all three cases, if the resolution process was successful enough, either the government or the regulator has done enough to oversee the process by hiring top-notch and respected professionals, fully supporting them, and protecting them from legal challenges. Took a step
In Satyam’s case, the new board, with carefully selected experts from the fields of information and technology, law, corporate governance and banking, including former Nasscom chief Kiran Karnik and HDFC chief Deepak Parekh, was able to douse the fire and sell the money. Firm for Mahindra Group. The promoter of the company is in judicial custody.
In IL&FS, the new board, led by banker Uday Kotak, has been able to resolve close to outstanding debt over the years. 55,000 crores, reducing the total group entities from 347 to a little over 100 now.
And DFHL’s administrator or resolution professional, Subramania Kumar, former head of Indian Overseas Bank appointed by the Reserve Bank of India, has managed to fulfill the housing finance firm’s resolution, receiving cash advance payments to banks. 14,700 crores. Last week, the Central Bureau of Investigation, or CBI, said it has registered a case against the promoters of DHFL and others for defrauding a consortium of banks. 34,615 crore, the biggest such case by an anti-corruption agency.
The message is that even in a difficult operating environment, it is possible to derive value from distressed assets if a credible, committed and empowered group of professionals is ready to do the work.
But in other similar cases the success rate for large numbers is low. This is a reflection of the state’s failure to dodge or defraud by all players involved, including firms, lenders and insolvency resolution professionals, a reform like an insolvency law aimed at speedy resolution of troubled firms.
One of the chiefs of India’s central bank once said that the plethora of bad loans and the challenges arising out of it were due to the inability of banks to enforce their powers in a timely manner. He warned that unless the judicial process is corrected, it will affect the development path of the country.
Over the past two decades, India has experimented with Debt Recovery Tribunals, SARFAESI Act, Asset Reconstruction Companies and now the Insolvency and Bankruptcy Code.
State intervention to address market or corporate failures, as in the three cases mentioned earlier, may unfortunately not be the template to follow every time. There should be institutional, regulatory and market mechanisms for this purpose.
Ensuring that the NCLT functions while building institutional capacity and a pool of resolution professionals should help. Hiring robotic lawyers or legal robots to conduct summary proceedings may be working in China as a way to handle a growing number of cases; This will not happen in India.
Another option might be to consider the model of a corporate fraud investigation agency that combines investigation and prosecution of criminal cases, such as in some jurisdictions.