The unforgettable line, “We are not asking you to change the country — that has already happened without any court’s permission — but we are asking you to protect the rights of the country to change”, is not the only reason that India’s judiciary, currently ruling on bankruptcy and the bad loan regime, should watch the spectacular new movie on the early life of US Supreme Court justice Ruth Bader Ginsburg. On the Basis of Sex not only chronicles using a tax case involving a man to create precedence and attack 178 laws that discriminated against women, but it is also a wonderful meditation on how courts can react to societies that are changing despite precedence, personal preference, and vested interests.
I’d like to make the case that courts must reflect deeply on how their interventions are enabling frequent violations of the 270-day bankruptcy IBC deadline. These delays are raising the ambition of defaulters, and converting possible restructurings like Jet Airways into probable liquidations. This matters because India’s government, regulators and citizens have already changed their minds and broken with the past in letter and spirit in handling loan defaulters. As Ginsburg’s professor tells her in the movie “a court should not be affected by the weather of the day but ought to be by the climate of the era”.
Bankruptcy is like ice cream; the more you wait, the more it melts. Starting today, Jet Airways will no longer be freely traded on stock exchanges. Shareholders aside, it’s often forgotten that the consequences for lenders are the same whether a bankruptcy arises from fraud, competition, unrealistic ambition, poor execution, flawed strategy, sectoral issues, or government policy. The concept of willful defaulter is a distinction without a difference, liquidation is the worst possible bankruptcy outcome, and flexible deadlines guarantee poor outcomes. I hope I am wrong, but Jet Airways may be India’s first liquidation that should have been a bankruptcy.
This is sad because Jet was a textbook IBC case; an operationally viable entity that was financially unviable whose operations should have been unaffected as restructuring distributed the financial pain unevenly across lenders (Rs 9,000+ crore), operational creditors (Rs 4,000+crore), customers (500+ flights a day), shareholders (11 crore+ shares outstanding) and employees (16,000+). Banks should have acted earlier but they will confidently embrace the immediate and automatic consequences under the IBC for management, shareholders and board members only if the litigation fog is lifted, time value of money recognised, and there is certainty after due process for legitimate buyers.
India’s policy choices around bankruptcy over the last four years — remarkable teamwork between the Ministry of Finance, Ministry of Company Affairs, Department of Financial Services and the RBI — represent a rupture with the past. The IBC went live in 12 months and was subsequently amended to make the RBI’s role explicit (Section 35A) and ban promoters from re-bidding (Section 29A). The RBI evolved transparent criteria for bank IBC referral of two defaulter batches (12 and 28 accounts) and their February 12 circular atoned for 20 years of sins in bad loan recognition. A new Fugitive Bill diluted the attractive economics of emigration. And the courts upheld IBC constitutionality.
Collectively, they create a regime for loan defaults where what happens before the IBC because of the IBC (equity infusion, strategic sales, higher collateral, board reconstitution, etc) is more important than what happens in the IBC (bank haircuts or liquidation). Obviously, there is room for improvement everywhere. Banks should stop lobbying for accounting solutions (deferring Ind AS accounting standards, amortising losses, etc) because their bad loans would have stopped at Rs 4 lakh crore instead of Rs 14 lakh crore if the RBI’s now dead February 12 circular had existed since 2008. They must also institutionalise the wisdom of Kenny Rogers from his song “Gambler”: “You’ve got to know when to walk away and know when to run”, with a bias towards running. The government must avoid taking sides like in the power sector; this only encourages the original sin of “show me the person and I will show you the rule”. It must also consider sustainable solutions for nationalised bank governance, human capital and equity capital like an independent holding company, mergers, or sales. And the RBI must continue to raise its structural, human capital, and technological game in supervision, regulation and enforcement.
Any new law is fine-tuned by litigation. But should courts decide when lenders should make bad loan provisions? Should courts influence the relative ranks of unsecured and secured creditors? What is the cost of banks not being able to accept thousands of crores from selected stressed company buyers 700+ days after the IBC filing because of operational creditor quibbles? Has justice really been served by replacing the blind and rules-based February 12 RBI circular with a “specific”, case-by-case dispensation? Shouldn’t aligning the RBI’s and IBC’s definition of default be a policy objective? Is the law really not clear about the RBI’s mandate in the Banking Regulation Act (Sections 35A, 35AA, 35AB) and the RBI Act (Sections 17, 18, 19, 42 and 45l)? Couldn’t “one pill for all ills” and a “180 day guilotine” that applies to defaults of above Rs 2,000 crore also be called a rule?
India changed its mind about socialism because it didn’t generate the resources to fund public goods and because it became capitalism without competition and bankruptcy. India won’t reach its new tryst with destiny — a $5 trillion dollar economy — without raising our credit to GDP ratio from 50 per cent to 100 per cent. This can’t happen without the ability of lenders to deal with their mistakes swiftly via the IBC. Courts are supreme but the IBC will only be viewed as climate change rather than a passing shower if we restore the sanctity of the 270-day deadline. As Ginsberg requests the court in On the Basis of Sex, “Please fix the law in line with the legislative intent”.