Company promoters, who have led their firms to bankruptcy, could try to manipulate the system again to retain control directly or indirectly.
The concern has risen among experts even as provisions of the Insolvency and Bankruptcy Code (IBC) have kicked in. The Centre had brought in the IBC to resolve India’s significant non-performing asset (NPA) problem.
The experts also suggested the lenders and the NPA resolution mechanism must go after the promoters to recover as much monies as possible, including through unmasking of corporate veils, searching for assets globally and establishing proof of any diversion of funds and initiating criminal proceedings to create a deterrence.
Forensic audits are being undertaken to establish any fund diversion and identification of benami properties of the promoters in India and abroad, confirm investigators involved in the process. Efforts are also underway to trace fund transfers through shell companies.
This comes at a time when wilful defaulters have reportedly mopped up dues worth ₹92,376 crore, which is about aneighth of the total ₹8 lakh crore NPA.
‘60% haircut’
Crisil, in a joint report with Assocham, recently said banks may have to take 60% haircut worth ₹2.4 lakh crore to settle 50 large NPA accounts.
While companies might have genuinely run into problem due to market conditions, there are also wilful defaulters. Further, there are defaulters who are trying to take advantage of the current situation and slow recovery environment to get away without repaying the banks.
Since the Indian business environment is typically promoter-driven, it will not be easy to achieve resolution without involving him/her in some way, said industry watchers and consultants.
“Can one incentivise the promoter to really step aside and let the insolvency professional take control of the business?”asks Reshmi Khurana, managing director, Kroll India, which provides intelligence, investigation and advisory services.
“No promoter would like to lose control. So, these 12 cases are going to be very important test cases of how the insolvency professionals and promoters and creditors behave with each other,” she said.
As more cases are being referred to National Company Law Tribunal (NCLT), some questions that have been raised include: will Insolvency Resolution Professionals (IRP) remain independent and not be influenced by promoters; should the promoter be allowed to go scot free; and, should he/she be roped in by the IRP to ensure business continuity.
As the clamour to penalise the defaulter grows, forensic consultants said there was no single solution to help make the promoter accountable.
‘Fine balance needed’
“A fine balance needs to be worked out,” said a professional involved in the process.
“A number of these ambitious borrowings were led by promoters who may have misjudged the market and hence borrowed too much and defaulted wilfully. At the end of the day, the promoters were running the company and if they have today led to the poor environment, then they have to be held accountable,”
“This why these 12 cases that have been referred to NCLT are so important in terms of setting a precedent. Will all the promoters get a free pass and get more money and be allowed to continue? I don’t think so,” the professional said, requesting anonymity.
In case of fraud wherein promoters have siphoned off money, consultants suggested strong action against the promoter, including a jail term. In case of genuine distress and mismanagement, the cases must be dealt with separately.
As the (NPA resolution) process has gained momentum, banks have hired the services of investigators to get complete details on all the assets held by the promoters in case of personal guarantees or assets of the companies, affiliates and related parties in other cases. The process also includes lifting the corporate veil whereby an offshore entity can be located. This, they said, would help give the complete picture of the promoters’ assets.
‘New buyer, a front?’
“We typically work with banks and other creditors to understand the background of potential buyers. One of the key concerns of banks today is that the potential buyers should not be linked to the promoters in a way that presents a conflict of interest,” said Ms. Khurana.
“The banks want to understand the link between the new buyer and the promoters,” she said.
She said banks can flex their muscle to find out about assets which had been diverted out of India. “They should not limit their world to India only.
Promoters may have diverted funds intentionally. They may be running companies internationally that are not in distress. It’s important to link the application of the funds diverted to their source,” Ms. Khurana said.
“Banks can treat recovery of assets as they would in any commercial dispute and must go after [them] in full force,” she said.
Analysts said courts should make it clear that their forum will not be misused by promoters trying to manipulate the system. TheNCLT should be the sole adjudicating authority, they said.
Since there is apprehension that promoters would drag the cases on for years so that the other party would lose interest, ‘the timeliness of this process was very important.’
The challenge, consultants said, was to find out assets which are not attached or known.
In many instances, the assets are outside the country and under others’ names. “How to create deterrence that sets an example so that promoters do not turn hostile and don’t manipulate the system?” asked a consultant. Similarly the independence of the Insolvency Resolution Professional is very important.
Confirming the apprehension, a Crisil-Assocham report said, “The challenges include inter-credit conflicts, and the ability of large corporates to delay the recovery process.”
Asked if all the monies can be recovered from the promoter, Rajeev Suneja, partner, Deloitte India, said, “It is very important to differentiate between the promoter and the company and differentiate between a wilful defaulter and a defaulter.”
“The promoter’s liability is limited to the capital he has infused in the company unless and until he has agreed to give personal guarantees. While the resolution professionals work towards finding a resolution for the company, the personal guarantees of the promoters remain to the extent as agreed between the parties in the resolution plan,” Mr. Suneja said.
Personal guarantees
He said promoters could be made responsible to the extent that they had given personal guarantees. If it was established that the promoter, who was also managing the affairs of the company, had wilfully taken action to harm the company for personal benefit, then, potentially, action could be taken against such promoters, he said.
Mr. Suneja said though the IBC ensured time-bound resolution, certain parties may still move to superior or different fora delaying the resolution process.
Sanjay Doshi, partner, KPMG in India, said the entire intention behind the IBC was to try achieve resolution in a time bound manner and not let the company close unless a workable resolution was not available. “This is a process aimed to get all stakeholders to work in a time bound manner and the resolution [which] will benefit all. Initiation of the process does not mean the company is going for liquidation. The approach is to solve the problem,” Mr.Doshi said.
