This is the second in a two-part series on Jet Airways’ bankruptcy resolution. Read the first part here.
As the first part of this series reported, the bankruptcy resolution of Jet Airways is not going well.
Not only has the process seen established players in the aviation sector back out early, with a bunch of unknown entities trying to bag India’s best-run airline instead, it has also yielded an outcome where a businessman with links to the infamous Gupta brothers of South Africa has won the airline.
That is just the start. The winning consortium paid just Rs 475 crore for the airline, despite its outstanding claims standing at Rs 24,888 crore. Of this small amount, most went to banks with operational creditors and employees taking large cuts.
The result? The two years since the Consortium bagged Jet Airways have been characterised by stasis, with banks, employee associations and the new management locked in court battles. In all, Jet 2.0 has missed multiple deadlines to resume operations (see this, this, this and this).
The question writes itself: Why is Jet, India’s best airline at one time, unable to regain the skies?
As this first part of this report said, answers to that question extend beyond the blame-game underway between Jet’s ex-employees, banks and the Jalan-Kalrock Consortium. Take a closer look at its bankruptcy saga and you will see larger deficiencies haunting India’s Insolvency and Bankruptcy Code.
How did we get here?
The broad contours of India’s non-performing assets problem are well known.
In the early 2000s, the country saw a new generation of infrastructure companies emerge. In those heady post-liberalisation days, these firms rushed to build empires that spanned industrial infrastructure like thermal and hydel power projects, highways, ports and mines. Most of their growth was powered not by public listings the way Dhirubhai Ambani had built his empire in the 1970s and 1980s, but by borrowings from banks.
By 2009, this boom was falling apart. Some promoters – aided by optimistic projections by bodies like the Central Electricity Authority – fell to irrational exuberance. Some gold-plated their projects and subsequently ran into trouble. A third lot got into hot water because of government policies – like successive Union governments’ decision to give free coal-blocks to handpicked firms while others had to buy coal from the market. Realising they couldn’t compete, a bunch of those projects were abandoned. Yet others buckled due to other factors beyond their control – like delays in delivery of equipment.
For a while, banks used evergreening – giving borrowers fresh loans so that they could retire older ones – and hid this problem.
In 2012, however, a report from Credit Suisse warned of unsustainably high levels of indebtedness among 10 of India’s largest infrastructure companies – a subsequent report from the financial services firm in 2017 would find 40% of all corporate loans (mostly in metals, power and telecom) were to companies not earning enough to even make their interest payments.
Representative image. Photo: rupixen/Unsplash
In 2014, Raghuram Rajan, RBI governor at the time, began cracking down, telling banks to make provisions for stranded assets – any loan in default for 90 days would be counted as an NPA – and clean up their balance sheets. A conversation began on how banks could reduce their losses. It was mooted, for instance, that banks should convert loans into equity. Banks countered saying they lacked the skills to run these projects.
It was a tricky moment. A struggling firm is more than just an NPA. It is embedded in a wider tapestry of employees, suppliers and customers. India had to find an answer – as it did with Satyam – which would create the least disruption.
Then came the NDA’s policy response.
Solving the problem of loan-defaulters
The RBI’s first list of defaulters was dominated by thermal power projects (TPPs).
While working on this report, The Wire met a senior official who used to work at Rural Electrification Corporation (REC). “These stranded coal-based power projects added up to a collective investment of Rs 500,000 crore,” said the executive who has since retired and didn’t want to be identified. “Of this Rs 500,000 crore, Rs 360,000 crore was debt. In all, these units would have added up to 60,000 MW of coal-based power generation capacity,” he said.
Of these projects, said the executive, about 15,000 MW had never gotten off the ground. “Another 15,000 to 20000 MW were at different stages of completion. About 30,000 MW were ready – plants had been constructed; machinery had been installed. Some were even functioning.”
Indeed. In 2018, this reporter had met the CFO of a functional 600 MW thermal power plant in Chhattisgarh that had found its way into the RBI list of defaulters. It was an odd tale.The unit’s financial troubles weren’t due to fuel supply problems or dipping demand for power – it had access to coal as well as buyers for its power. Its EBITDA margins were “on par with industry averages,” the CFO had said that day. Its bane lay elsewhere. Between delays in government permissions and the delivery of plant machinery, the project’s cost had gone up by 20%. After making all its payments (loans, taxes, running costs), the unit was not left with enough working capital.
Projects like this illustrate an important point. Projects slip into insolvency for multiple reasons.
“For that reason, each needed a detailed examination and specific counter-measures,” agreed the former REC official. These might range from, he said, working capital loans; securing coal supplies; arranging PPAs; completing construction; even criminal proceedings against promoters for fraud.
The Chhattisgarh thermal power plant, for instance, needed debt restructuring.
A thermal power plant in Haryana. Photo: Vikramdeep Sidhu/Wikimedia Commons.
Along with Power Finance Corporation, REC held equity in most of these power projects. And so, in 2017, it suggested the creation of an “intermediary vehicle” to take over stranded thermal power plants and rehabilitate them. “In the case of finished projects, we could have gotten firms like Tata Power or NTPC to take over ownership and manage them,” said the former REC official.
REC wasn’t the only body thinking along these lines. Feedback Infra’s Vinayak Chatterjee felt India should create a category of national assets and treat them according to their problems – not just as a banking problem. “Only in cases where the promoter was a wilful defaulter should the company be taken away.” Alternatively, the government could have asked public sector giants like Steel Authority of India or NTPC to take over stranded projects.
Such a move, a Mumbai-based steel analyst had added in 2018, would have given India better control over steel prices than a few private players buying most of these assets.
These ideas, however, went nowhere, said the former REC official. “The centre wanted all projects to be processed through bankruptcy courts.”
The Wire asked former power secretary – and current home secretary – Ajay Bhalla to react to what the REC official had said. This article will be updated when he responds.
With that idea nixed, India needed a new framework for managing NPAs – and overseeing their journey into a sale. This is when, said the REC official, the idea of the resolution professional (RP) came up. Typically a person from a consulting (or audit) firm, the RP would run the asset, report to the committee of creditors (banks), and find fresh owners for the beleaguered asset.
With banks’ interest driving the process, it was also determined that the committee of creditors would choose the eventual buyer. From there, it was inevitable that a central parameter for selection would be the quantum of bank loans getting repaid – not what employees or operational creditors would get.
A bargain basement sale
Large haircuts have been a major feature of India’s bankruptcy proceedings.
With even projects which could have been rehabilitated lined up for sale, as many as 2,511 companies – most of them large firms — stood before bankruptcy courts by 2018. To put that number in perspective, India has no more than 7,000 firms with a topline over Rs 200 crore.
The inevitable problem arose. There wasn’t enough depth in the economy to buy 2,511 companies.
Take TPPs. “Of 30,000 MW of power, no more than 5,000 MW changed hands,” said the REC official. The rest, he said, were sold as scrap.
In tandem, with many more sellers than buyers, India’s great bankruptcy sale became a bargain basement sale.
Three things followed. One, a handful of Indian business groups and global funds with access to capital began picking up choice firms at huge discounts. Two, a clutch of unknown firms – like Worlds Window Impex and Treasury RA Creator – began bidding for stranded assets. Three, despite NCLT being empowered to pierce the corporate veil in order to ascertain the real successful bidder, promoters began trying to covertly reacquire their firms.
Last November, The Wire decided to take a more systematic look at bankruptcy resolutions.
We started with a datasheet, titled Corporate Insolvency Resolution Processes Yielding Resolution Plans: As on 31 December, 2021, uploaded onto the website of the Insolvency and Bankruptcy Board of India. It lists all the firms whose bankruptcy proceedings had resulted in a change in ownership (till the end of 2021).
CRIP data by The Wire on Scribd
By the end of the year, new owners had been found for 448 companies. Another 182, not finding buyers, had been liquidated. Next, The Wire created a smaller dataset of 84 companies (firms with total admitted claims over 1,000 crore) and trawled the internet to find their buyers.
Here is what we found. Average recoveries (<Realisable Value by Fixed and Operational Creditors> divided by <Total Admitted Claims>) stands at just 22.56%. In addition, even this small cross-section of companies throws up at least four instances where promoters’ scrutiny had been suboptimal.
One Asset Reconstruction Company (ARC) on this list, UV ARCL, has been raided by the Income Tax Department. “A senior tax department official said some loan defaulters had themselves approached these ARCs to acquire their bad loans from lenders along with the assets pledged as collaterals,” wrote Economic Times.
The promoter of Indermani Minerals, which bought Sai Lilagar Power Generation, has been arrested for money laundering. Then, there is the Singapore-based company which tried to buy three companies belonging to the same promoter – MP Sujana Chowdary.
There is also the instance of Tantia Constructions which had only one bidder – EDCL (which used to be owned by Samajwadi Party leader Amar Singh). This is intriguing. Given the discounts at which these firms are selling, one would expect more bidders.
“Most cases do not have more than two or three bidders,” a Mumbai-based PR professional had told this reporter in 2021. “And the process is not very transparent. Anyone can be ruled ineligible at any time.”
There are other deficiencies. Powerful bidders have dissuaded others from participating in tenders. Resolution professionals have abused their position. ABG Shipyard, with defaults of Rs 22,000 crore, is one instance. Amongst other charges, its resolution professional was accused of appointing unregistered valuers, and influencing them to manipulate assets’ valuation.
Endgame
India’s IBC process is not getting the attention it deserves.
By insisting on pushing all defaulters into bankruptcy courts, it has resulted in a large transfer of ownership over India Inc.
As economic historian Adam Tooze wrote: “The new Insolvency and Bankruptcy Code (IBC) of 2016 has created an arena in which business groups with easy access to capital, amongst which the Adani’s figure prominently, can snap up the assets of ruined competitors.”
Political affiliation has played a role here. As The Wire reported in 2020, the Bharatiya Janata Party-led National Democratic Alliance government has extricated some firms from the threat of insolvency but not others.
In tandem, a handful of firms regarded as close to the BJP have brought several stranded firms on sale. Ruchi Soya went to Patanjali. Pipavav Shipyard went to Anil Ambani and then to Nikhil Merchant’s Swan Energy. Monnet Ispat and Bhushan Power and Steel went to JSW. Vedanta picked up Electrosteel Castings. Dighi Port went to Adani, as did Essar Power MP, GMR Chhattisgarh, Avantha’s Korba West TPP, and others.
All these firms – most of which had strong fundamentals but faced liquidity crises – changed hands at large discounts.
In the case of Jet too, political power has played a role. Despite misgivings, Jalan Kalrock got a security clearance. More recently, as Economic Times reported, North Block wanted banks to transfer ownership to the Consortium even before it made its payments.
This stance sets the stage for a fresh wrinkle. The value of Jet’s current assets is estimated at Rs 2,000 crore. At Rs 475 crore, fear employees, the Consortium could liquidate the company, pay off its dues and walk away with Rs 1,500 crore.
One way or another, the Jet story is reaching its denouement. One waits, watches and wonders what it will tell us about the winners and losers in this ongoing moment.
Another related question the Jet Airways proceedings at the NCLT raises is whether the government should allow shadowy entities from tax havens to bid for companies in the bankruptcy courts. The real beneficial owner in some of these buyouts by entities located at tax havens is often not clear. This again takes us back to the Prime Minister’s commitment at the G-20 about discouraging money flows from tax havens, especially in security sensitive areas. Of course, this important question deserves a separate discussion.
M. Rajshekhar is an independent reporter studying corruption, oligarchy and the political economy of India’s environment. He is also the author of Despite the State: Why India Lets Its People Down and How They Cope.