Beware the New Raiders

FROM EACH ACCORDING to his failure, to each according to his ability. This, in essence, is the capitalist dictum for corporate ownership. It is also one that seems to make a lot of Indians uneasy, though it’s unclear if this is more on account of principle or cultural tradition; or, in many a case nowadays, a plain and simple matter of self preservation. As an assurer of corporate meritocracy, however, it has undeniable appeal across India as a policy. This is just as well, for the country is finally all set to adopt the practice more boldly than ever before. If 2017 was the year that saw the Insolvency and Bankruptcy Code acquire its bite, 2018 could be the one for it to demonstrate what it can do in favour of better business and market efficiency, if not the entire economy and aam janata just yet. Several large companies have gone bust lately, and how their firesale line-up pans out over this year will probably have many of us watching closely.

One thing nobody should waste holding any breath over is an outcry against ‘barbarians at the gate’ in case a big company gets taken over by ‘rank outsiders’. These acquisitions are to happen in an orderly fashion under state supervision, backed by law, and that too only of firms that have clearly failed in public view and need to be salvaged. Moreover, Indian attitudes towards owners losing companies they have run aground have come a long way since the pre-liberalisation era when terms like ‘raiders’ and ‘invaders’ were thrown around to brand takeover artists as greedy aggressors. While the cold prospect of new ownership might still scare interest groups with warm ties at risk of being snapped off, it’s fair to suppose that neutral observers would only want what’s best for the revival of these companies.

Ideological opposition to private takeovers—usually classified as M&As now, which makes them sound sexy and consensual— has been dead for at least a couple of decades now, and the idea that corporate affairs can do without old rigidities has made much headway in this era of globalisation. So long as the state doesn’t pick winners and losers in the process, assets being churned around to reach the most able hands ought to work out well.

One either shapes up or ships out, as the American saying has it, and this applies to a company’s management too. Harsh as it may sound, there is plenty to suggest that this has been the way of the world all through history even for larger enterprises. In an influential book called Barbarians to Bureaucrats (1989), business consultant Lawrence Miller argues that the standard ‘corporate lifecycle’ resembles the rise and fall of many a civilisation: it goes from vigour to vacuity over time as complacency and worse set in, turning it vulnerable to conquest by other ‘barbarians’ (in a manner of speaking). While Miller’s book is about how to shape up and stave off a swoop-in, its premise that a shift in control is the natural outcome of failure places the capitalist challenge of survival in sharp relief: ‘Every company begins with the compelling new vision of a Prophet and the aggressive leadership of an iron-willed Barbarian, who implements the Prophet’s ideas. New techniques and expansions are pushed through by the Builder and the Explorer, but the growth spawned by these managers can easily stagnate when the Administrator sacrifices innovation to order, and the Bureaucrat imposes tight control. And just as in civilizations, the rule of the Aristocrat, out of touch with those who do the real work, invites rebellion…. It will take the Synergist, a business leader who balances creativity with order, to restore vitality and insure future growth.’ This Synergist could well be a new CEO appointed by another owner. The objective, after all, is to save the enterprise.

Sometimes, a company just collapses regardless of its lifecycle et al, and rather than let its assets languish after such an event, it’s best that they’re put to use by somebody else at the earliest. From a business perspective, that’s the intent of India’s Insolvency and Bankruptcy Code enacted in 2016. Under its directions, once a firm defaults on its loan repayments to creditors, the latter must move in, take charge of its governance, and resolve what to do with it within 180 days. In case lenders can’t arrive at a consensus plan, a three-fourths majority vote prevails; and if this begins to look elusive, then they can ask for an extension of 90 days at most, failing which the company would be liquidated anyway.

Under NPA pressure, Indian banks apparently want quick selloffs to recover as much of their money as possible, even if bankruptcy auctions yield less than the sums they’re owed. In mid-2017, the Reserve Bank of India directed banks under its supervision to push a dozen of their largest defaulters—accounting for a quarter of the total Rs 10 lakh crore rotting on their books as bad loans—for insolvency proceedings under the National Company Law Tribunal. As a result, a clutch of steel and infrastructure companies, with names such as Essar Steel, Jaypee Infratech, Bhushan Steel, Lanco Infratech, Amtek Auto and Monnet Ispat and Energy among them, are no longer under the control of their owners. Since these cases were whipped into action last July and August, their 180-day deadline set by the Bankruptcy Code will approach no later than the early months of 2018. And there’ll be more assets on sale to keep us busy through the summer. Soon after its first dozen, the RBI issued a second list of companies that now await the same fate. Among others, Videocon Industries and Jaiprakash Associates could also have new owners—or be taken apart for asset auctions—by the end of this year. If all this happens as expected, it would mark one of India Inc’s most dramatic shake-ups on record.

Estimates of the sums owed by these companies are staggering indeed. Bhushan Steel had a debt burden of nearly Rs 44,500 crore to service at the end of 2015-16; Bhushan Power, about Rs 37,250 crore; Essar Steel, some Rs 37,280 crore. Jaiprakash had racked up about Rs 25,590 in loans by the end of 2016-17; and Videocon, Rs 20,900 crore. These figures don’t just outline the scale of the problem, they also serve as a warning to businesses with vaulting ambitions not to overleap themselves and fall on the other side.

Whether these companies ended up so frightfully over-indebted because of lousy business projections or crony capitalist relations with lenders is a question that appears to have no obvious answer, given the complexity of evidence in such cases. Suspicions of shady conduct, however, have persisted so strongly that the possibility of an errant owner buying his bust company back in an auction raised enough of an alarm last year for the Government to amend the Bankruptcy Code. Under the revised rules, a wide set of entities and individuals are barred from submitting bids for such assets. These include ‘wilful defaulters’ (apart from directors and promoters of defaulting companies and a bunch of others in the dock for various other offences). According to a statement issued by the Ministry of Corporate Affairs: ‘The amendments aim to keep out such persons who have wilfully defaulted, are associated with non-performing assets or are habitually non-compliant and therefore are likely to be a risk to the successful resolution of [a company’s insolvency].’ Some analysts fear that such an exclusion clause could complicate bankruptcy proceedings, particularly if a promoter disputes a default deemed ‘wilful’ by the authorities. But then, as the Centre has clarified, loan defaulters can regain eligibility to bid for their own firms by coughing up the cash needed to get off the RBI’s default list. This is an option a few industrialists are reportedly keen on exercising.

How Essar Steel’s auction goes will have the country’s corporate crowd agog, for sure, as will other selloffs. Tata Steel and Arcelor are reported to be vying for add-on steel capacity. What’s crucial, on principle, is that the eventual outcome of any asset reshuffle is determined by the market rather than the state. Only then will it work the way capitalism envisages, with its emphasis on making the most of all resources to generate utmost value.

In full-fledged capitalist economies, many large companies are owned by a vast spread of shareholders. All it takes is a single strategic error or market failure (as judged by investors) for share prices to crash and someone to buy up cheap equity in pursuit of a takeover. In theory, swift management shifts serve to revitalise floundering firms while keeping the profitable perpetually on their toes. In reality, such dynamism taken to extremes often ends up cramping the space available for CEOs to pursue long-term goals, forced as they are to meet investor expectations ‘quarter se quarter tak’, as the sigh goes. Even so, on balance, the sooner a faltering company finds itself in better hands, the better. In India, this happens only after a business fails, but happen it does.

This could be the year of new owners for bankrupt firms. Also, of a loud signal for India Inc. No one can afford to take bank loans lightly or ownership of a company for granted anymore. For the sake of an efficient economy, this is how it’s meant to be. In the inversion of a Marxist ideal doth lie India Inc’s vitality.

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