Swachh Bharat with Clean Banks

By Roopen Roy Jan 19 2016

Tags: Op-ed

There is no postponing anymore. Our banks ha­ve no choice but to bite the bullet of cleaning the dirt in their balance sheet this ye­ar. How do we sweep them cl­ean and not under the carpet? The heart of the problem lies in ‘sick’ companies that borr­ow from banks. They are in two distinct buckets. The first are companies that are not in an inherently sick industry and can be turned around. They are sick because the promoters have been systematically siphoning of funds or are mismanaging the company and pushing them to the brink of disaster.

We will call this category Rich Owners, Sick Enterprises (ROSE). There is a second category of companies, which are Distressed Owners and Sick Enterprises (DOSE). The diagnosis and prescription for RO­SE and DOSE will be very different. Ironic that I should call these stinking units ROSEs. But RBI governor Raghuram Rajan has used the famous line of Romeo and Juliet himself and let me quote him, “Mutilating Shakespeare, an NPA by any other name smells as bad!”

In the case of ROSEs, the owners and promoters have systematically diverted funds from the enterprise by incre­asingly borrowing from public-sector banks. They have transferred the risk of closing down an enterprise to the ba­nks, the workers, the government and the community.

Rajan has succinctly summarised this phenomenon: “In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken — the promoter threatens to run the enterprise into the ground unless the government, banks and regulators make the concessions that are necessary to keep it alive. No wonder gove­rnment ministers worry about a country where we have ma­ny sick companies but no sick promoters.

In the case of ROSEs, the enterprise is not inherently sick. It has been made sick by either diversion of borrowed funds by the owner or by inept management or in many ca­ses a combination of both. In wh­at the governor calls the game of chicken, the banks and the government continue to pu­mp in new money to keep the enterprise afloat so that jobs are protected and mayhem does not happen. The ROSEs promoters are past masters of this game. They stay in contr­ol of the enterprise, siphon part of the new cash pumped in by the government and pu­blic sector banks and sink the company into a deeper quagmire.

The solution then cannot be to perpetually pump in new money and subsidies while ke­eping the same promoter in the saddle. The right action is to flag the wilful and deliberate defaulter early in the game and show him the red card. Albert Einstein had famously sa­id that insanity is doing the same thing over and over ag­ain and expecting different results. The point really is to change the track.

If you show the red card, the player is out of the field. You bring a new player. To do so you need a quick exit policy and an institution of professional turnaround firms. The turnaround firms will consist of experienced business people with proven track record of running successful businesses with impeccable integrity. We have live examples in India.

On 7th January 2009 Ramalinga Raju confessed to his Himalayan fraud in Satyam. The government called in thr­ee wise men Kiran Karnik, Deepak Parekh and CK Ach­uthan to oversee the rescue operations of Satyam. They fi­rst stabilised the operations. Just three months after they took over management, the turnaround team kicked off a global bidding process to sell 51 per cent shares in the company. Towards the end of Ap­ril, the Mahindra Group eme­rged as the winning bidder. They took over the management and the rest, as they say, is history. I have no doubt in my mind that if the lenders had moved early, Kingfisher Airlines could have been sav­ed until it was too late.

That leaves us with DO­SEs. Companies that are inherently sick because of cha­nges in markets or swings in technology. In such cases it is important to quicken the insolvency process which may involve asset sales, conversion of fixed assets like land banks or factory facilities and sell off in parts and pieces providing as much cover as possible to stakeholders. I would include insolvent businesses and po­nzi companies in this category. The solution will lie in appointing professional administrators or receivers. For instance, in the case of the Caparo Group of Swaraj Paul in the UK, the courts have appointed a professional administrator.

There is a very high-profile case in India taking a new tu­rn. The Supreme Co­urt has agreed to hear on Fe­bruary 2, the plea of market regulator Securities and Exchange Bo­ard of India seeking appointment of a receiver for taking control of assets of two firms of the beleaguered Sahara gr­oup, to make paym­ent of Rs 36,000 crore to its investors. It is estimated that the total funds raised thro­ugh various ponzi schemes in Ind­ia exceed Rs 300,000 crore. There is very little option th­ere but to appoint receivers. Last week, the Bombay high court directed an official liquidator to take physical possession of all assets, books and records of real estate company Mantri Realty.

The Satyam model would be appropriate for ROSEs and the professional administrator/liquidation medicine wou­ld be good for DOSEs. I believe the RBI governor agrees with these prescriptions. Let him have the last word on this deeply disturbing subject: “The solution is not more drac­onian laws, which the large borrower may well circumve­nt and which m­ay entrap the small borrower, but a more timely and fair application of current laws. We also need n­ew institutions such as bankruptcy courts and turnaround agents.”

(The author is founder and CEO of Sumantrana, a

strategy advisory firm)