The Centre has brought in the bankruptcy code bill (Insolvency and Bankruptcy Code) to help banks clear the mess in their books. This will help banks sort out the spiralling problem of non-performing assets (NPAs). In sync with the government’s action, the Reserve Bank of India last week announced the names of 12 major defaulters, who, between them owed nearly a quarter of the nation’s cumulative NPAs at Rs8 lakh crore.
The joint efforts by the Centre and the Reserve Bank of India are likely to bear fruits sooner than later with regard to tackling the NPA bug. The government and the central bank’s efforts got a shot in the arm Wednesday with market regulator Sebi relaxing its takeover norms for restructuring of listed companies with stressed assets.
The relaxation would exempt investors from making mandatory open offers subject to shareholders’ nod and some other conditions. The Sebi also tightened the P-Note norms and eased entry rules for foreign investors. In the absence of the latest Sebi move, defaulting firms would have found it tougher to come out of the mess.
The 12 largest defaulters who between them owed a whopping Rs2 lakh crore to banks will face bankruptcy proceedings if they do not come good on their loans. The first set of six troubled accounts are Bhushan Steel that owes Rs44,478 crore, Essar Steel ran unpaid loans of Rs37,286 crore, Bhushan Power and Steel Rs37, 248 crore, Alok Industries Rs22,075 crore, Amtek Auto Rs14,074 crore and Monnet Ispat Rs12,115 crore. The other accounts named for bankruptcy action include Lanco Infra (Rs44,364 crore), Electrosteel Steels (Rs10,273 crore), Era Infra (Rs10,065 crore), Jaypee Infratech (Rs9,635 crore), ABG Shipyard (Rs6,953 crore), Jyoti Structures (Rs5,165 crore).
Last week, the RBI’s internal advisory committee (IAC) had sent the list of 12 accounts to bankers for immediate reference under the IBC. These 12 banks are led by SBI (six), PNB, ICICI Bank, Union Bank, IDBI Bank and Corporation Bank. Out of Rs8 lakh crore of NPA, nationalised banks account for over Rs6 lakh crore.
Most of these firms are in the infrastructure and steel sectors and more interestingly, at least four of these major defaulters have operations in Orissa. They include Bhushan Steel, Essar Steel, Bhushan Power and Steel and Monnet Ispat accounting for a jaw-dropping Rs1.31 lakh crore.
Considering the fact that all four companies are operational in the state, any negative impact arising out of their possible reference to the bankruptcy proceedings will have a domino effect on the state’s political and economic space. Although, Orissa is basically an agricultural economy, the spate of industrialisation over the last decade has brought in qualitative change in people’s lives, especially in the state’s urban landscape.
A freeze on the operations of these firms may result in a loss of direct jobs while thousands employed in the ancillary industries will get be sorely hit. Going forward, the sudden joblessness, that too on such a large scale, will not be without political ramifications. Indicating to what could be in store for these companies was the fact that lenders to Monnet Ispat Tuesday gave the mandate to the State Bank of India, the lead lender, to move an application before the National Company Law Tribunal (NCLT) under IBC to start the resolution process for the ailing steel company.
The development holds a lesson for the state government. The promise to bring in capital by industrial houses is good, but it will do the government good if it also vets the nature of investments raised by private firms. The government should also insert a clause in the agreement for periodic monitoring of its debts.
This is because these firms not only get a lot of incentives from the state government in the form of land, mines, raw materials and water, but also cause lot of collateral damage to the environment. Failing this, numerous sops provided by the government to industries would go down the drain and the environment, too, would suffer heavy damage.
