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Future-Reliance Deal: IBC, or ‘Indian Babudom Code’, Is Bureaucracy Repackaged

The collapse of the deal shows that the IBC process is a case of rubbing judicial salt on bureaucratic wounds.

Updated
Opinion
4 min read
Future-Reliance Deal: IBC, or ‘Indian Babudom Code’, Is Bureaucracy Repackaged
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A plaintive Bob Dylan song played in my head a few days ago in the glitzy DLF Mall of India in Noida as I walked past what once used to be a milling, robust, aromatic outlet for Cafe Coffee Day. The Dylan sang goes:

Come gather 'round friends and I'll tell you a tale

Of when the red iron pits ran a-plenty

But the cardboard-filled windows and old men on the benches

Tell you now that the whole town is empty

The Dylan song, made famous by Joan Baez’s eerie, mournful voice, was about a mining town fallen on bad days. I had to peep through the dark spaces of the empty place to see the legendary red Cafe Coffee Day (CCD) logo on the furniture of the closed cafe. Just a few feet away, a Costa Coffee outlet was doing brisk business.

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CCD, Kingfisher, Jet Airways: A Long List of Fiascos

CCD is now a pale shadow of the globally ambitious chain that it once was. I asked myself if this iconic brand could have been handled better after it began sinking in a flood of debt, which led to the watery suicide by drowning of its founder, VG Siddhartha. I recalled visiting in the mid-1990s the place on Bangalore's Brigade Road to check out what was touted as India's first ‘cyber cafe’ and the nationwide chain of hangouts that it bred eventually, before facing unforeseen difficulties.

Earlier this month, the National Company Law Tribunal (NCLT) in Bangalore dismissed an insolvency petition against CCD Enterprises, which owns the cafe chain, one year after it stood on the verge of bankruptcy, marking another painful milestone in what looked like a downward journey involving a tussle between the company and its lenders.

Could such pain have been avoided by a more inspired, pragmatic, creative version of the Insolvency and Bankruptcy Code (IBC) touted by the Bharatiya Janata Party (BJP)-led government as a grand achievement in economic management?

Think now of the Future Group, owner of the Big Bazaar chain of stores, and its on-off sell-out to Mukesh Ambani’s Reliance Retail, which, like CCD, is going through a blow-hot-blow-cold journey of pain after the COVID-19 pandemic arrested its debt-driven growth.

It is a long ride for a troubled company to go past creditors to the IBC, where there is no guarantee of an early resolution. The wait seems to get longer there.

Think Kingfisher Airlines. Think Jet Airways. Both airline brands were hit as bad loans came to bite. Jet managed to avoid bankruptcy but is yet to see the skies again. Kingfisher is now grounded.

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A 'Course-Correction' That Corrects Nothing

The story of IBC is the saga of brands losing sheen, real estate going haywire, and employees losing morale and incomes. Lending banks that bled their balance sheets are often unable to let go of a debtor, as in the Future Group case, because they sense an unfair deal.

What’s the point when creditors only get a fraction of their money back, brands sink, employees go hither-and-thither and the country’s economic recovery suffers a setback in the name of a course correction?

A report by rating agency CRISIL said late in 2021 that since 2016, the IBC has helped recover Rs 250,000 crore from non-performing assets (NPAs) or bad loans compared with claims of Rs 700,000 crore. That is 36%. Would you, if you were a lender, settle for only about a third of the money you lent in a recovery process?

About 1,350 of the 4,450 companies that came for resolution were liquidated and more than 1,000 were closed – whereas the intent of the government was to run the companies as “going concerns”.

A laboured article describes the IBC as a potential “disciplining device” as well as a “resolution mechanism”, while the hard reality is that it looks more like a bureaucratic tool intended to perfect slow-grinding solutions and gridlocks that block recovery in a dynamic economy. In economics, opportunity costs – what is lost in undone business and delays – are important for a growth story to sustain. Would we trade entrepreneurs for bureaucratic accountants in a huge economy where one million people are said to enter the workforce seeking jobs every month?

The current IBC process involves financial creditors first approaching the National Company Law Tribunal, which, in turn, appoints an insolvency resolution professional who then sets up a committee of creditors. Then begins a process of protracted engagements.

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Efficieny & Creativity are Not IBC's Strong Traits

Personally, I would have preferred a government department (at least in the case of large companies) to cut to the chase and initiate private equity investors in league with non-promoter managers and employees to save sinking companies. A buyout partner as a strategic minority investor and banks as fellow travellers in partnership with asset reconstruction companies would have made more sense. Given the quasi-judicial nature of the IBC process, the equivalent of an out-of-court settlement would have put less burden on the system – much like arbitration processes do in the judicial framework.

Thinking fast and being creative is simply not part of the current IBC mechanism. Also, long-term uncertainties have been thrust upon companies in the middle of a lingering crisis, it seems.

It is important to note that retail, airlines, and cafes are jobs-oriented service industries. A blunt, bureaucratic instrument like the IBC is better applied to old-world smokestack manufacturers whose assets have sturdier resale value. Only Tata Steel’s acquisition of Bhushan Steel’s assets and JSW Steel’s acquisition of Monnet Ispat may be shown as rare, major success stories in the IBC process.

Officially, companies have to complete the entire insolvency exercise within 180 days unless creditors raise objections to the deadline, which they often do. Who wants to give up money through haircuts in a hurry?

In the case of the Future Group, lenders, mostly public sector banks who have between them lent Rs 28,000 crore to Future, are planning to bring in other companies of the Future Group under the bankruptcy process after Reliance called off its buyout deal, already caught in a wrangle with the global giant, Amazon. You get the picture. New objections and alternatives can be raised throughout the process, it seems. The 180-day deadline is just window dressing that sounds good on paper. In effect, the IBC process is a case of rubbing judicial salt on bureaucratic wounds.

(The writer is a senior journalist and commentator who has worked for Reuters, Economic Times, Business Standard, and Hindustan Times. He tweets @madversity)

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