Recently, on several platforms, Prime Minister Modi has finally been taking on the Congress over the issue of “phone banking” during the UPA years. Those were the days when the “naamdars” would call up the banks on behalf of big business and get them to hand out lakh crore loans like candy. Keep in mind that most of these happened to be Public Sector Banks, which means that the people of India would be on the hook when these loans went into default.
Now we were already aware of the sinister deals that would be finalized in secret phone calls during the UPA era. Remember the famous tapes involving a lobbyist, a celebrity journalist, a big business house and a Cabinet Ministry that later became the focal point of a now legendary scam?
But the true extent of the rot was revealed by PM Modi when he stated that while our banks had collectively lent Rs 34 lakh crore just between 2008 and 2014. This is nearly twice the entire amount of Rs 18 lakh crore that the banks had lent in all the years from 1947 to 2008.
When the NDA government was sworn into office in May 2014, a full disclosure of the UPA’s loan disaster would have led to unprecedented panic, further sinking the economy. But now the ship has been steadied, with India cementing its position as the fastest growing (major) economy in the world. In 2013, they would speak of India as being a “fragile five” economy. At the end of 2018, the world prepares to welcome India into the top five economies in the world by GDP. The journey of India from “fragile five” to “top five” is nearly complete.
The focus of Modi government was therefore to stop the bleeding, to see to it that loan conditions were strictly followed and to bring back whatever could be brought back. When the Insolvency and Bankruptcy Code Bill was passed in 2016, it received little fanfare. Quietly, the Modi government had enacted a sweeping reform. And now we have this:
So what was the Insolvency and Bankruptcy Code? In simple terms, it created a speedy time bound mechanism where a creditor can appeal if a company is not paying back its loans. Again, the key words here are *speedy* and *time bound*. The exact time limits vary depending on the size of the company, but in most cases, the matter must be resolved within 180 days. If the company refuses to pay up, the owners of the company will lose control, their assets will be seized and sold in order to pay back their loans.
In other words, the code puts an end to the days when a big business could take out all the loans it wanted and then turn into a wilful defaulter, bullying its creditors, refusing to pay back the money. They have 180 days to pay or else they will lose their company.
And pay they did. To the tune of Rs 1.1 lakh crore. In many instances, the creditors withdraw the case after filing, very often because the company pays up.
Modi’s IBC code is not just a boon for the banks. One must also understand how it helps small businesses. Very often, a big company will owe money not just to banks, but to a number “operational creditors.” Frequently, these are smaller companies like suppliers and contractors etc who cannot keep running their day to day operations without their dues being cleared by big corporations. While these small suppliers and contractors face bullying from big defaulters just as much as banks, the problems of these small businesses are rarely reported in the media.
Indeed, this is why the maximum number of cases under this new law have been brought by operational creditors and not banks. Remember that these small businesses are where the real job growth comes from. The easier life is for budding entrepreneurs, the more entrepreneurship we will have. And today’s small businesses might grow tomorrow into big businesses that employ thousands of people.
Finally, the IBC code also short circuits a number of scams that big companies have come up with over the years to beat the system. Let me explain with an example. Suppose that a big company wants to purchase a piece of expensive factory equipment that costs, say Rs 100 crore.
Let me show you a simple “scam” by which you can own the Rs 100 crore equipment for just Rs 10 crore.
Step 1 : Get a “naamdar” to call a big bank and lend you Rs 100 crore to buy the equipment.
Step 2: Forget the loan, let it go bad.
Step 3: Let the equipment be seized by the banks, who will now try to recover their money by selling it.
Step 4: But an expensive piece of factory equipment is not a toy that just anyone would want it. Often, at the auction, there is just *one* bidder, the same company whose equipment was seized. The same company now bids just Rs 10 crore.
Step 5: The desperate banks have no option but to sell the seized equipment back to the same company for the rock bottom price of Rs 10 crore.
Step 6: Scam complete. The Rs 100 crore loan has disappeared. The company now fully owns the Rs 100 crore equipment by paying just Rs 10 crore.
Where did the other 90 crores come from? If the bank was a public sector bank (most common scenario), those 90 crores came from *your* pocket.
You should be.
So, here is what Modi’s IBC Code did about it. Look what happened here:
The wilful defaulters, their parent company and even related persons are barred from buying back the assets at rock bottom prices. Sorry, Essar.
This is the story of how Modi government went out on a limb and took on the most powerful and most entrenched elements in the system to save public money. Our money. A story that is rarely told.
In recent weeks, we have seen one naamdar and his numerous minions in the ecosystem making all sorts of allegations against the man who calls himself the “chowkidaar” of India’s money. Perhaps you will now have a better sense of why these nonsensical allegations are being made and who might gain from getting the chowkidaar out of office. Here is something that I recently came across on Facebook.
Please try to remember that.
10 thoughts on “How Modi’s Insolvency Code made defaulters pay back Rs 1.1 lakh crore”
Dear Sir I am an Ardent follower of Mr Modiji and naturally your Columns.I really appreciate the way you put the factual position in a lucid way.While you write on various issued I find it little odd that you have never tried to educate your Readers about the reasons Mr Modi has miserably failed in reining the Corrupt and Scammers.PC Co is roaming around free PC chamcha BBus are detailing the Process to take action on these people.He even can not change a baby in the Fin Ministry and CBI despite Dr Swamy and we’ll wishers giving him voluminous proofs against these rogues
It is high time you write about Mr Modi Compulsions in these Matters.
Please do it early Sir.
As expected the SC has rushed in to stall this particular reform. Please see here:
Now the SC does not even bother to engage in the pretence of being honest. I wonder why those people paid Rs. one lakh crore when all they had to do was to approach the SC like your average urban naxal / terrorist.
Very interesting. You have explained a very complex issue in a simplest possible way. I am sure there must be numerous examples of “100 Crores Rupees” equipment in your example. My guess is there must be some highly expensive equipment worth hundreds of crores Rupees that there are no buyers as the big corporations may not have any competition. In such cases what do the banks do? Perhaps they allow foreign corporations to bid.
This game changing reform for small businesses is not at all covered by MSM and very few in SM would know about it.
CW, in your list of steps you missed the crucial and final step
7. In this step, the 90 crores that vanished magically finds its way into the hands of politicians, urban naxals, the tukde gang and other anti-nationals. After all, politicians are not going to let companies like Essar just have all the fun. The media was probably thrown a few free rides and a few awards to keep their mouth shut.
In other words, the banking system was being used as a conduit to transfer money from common people to a select few in power. The huge rate of savings instead of being used to create businesses and jobs was being used to enrich a select few.The same modus operandi outlined by CW also was used in real estate. That also ended after Modi came to power and hence real estate today is cheaper than it was in 2013.
I also remember – my monthly expenses went from about Rs. 10000 per month in 2009 to Rs. 25000 per month in 2014. It has stayed flat in the last five years and actually this amount goes much further than it did in 2014.
True. The correct amount spent is Rs 10 crore PLUS the fee paid to the naamdar for the “service”
I think this post is very timely.
I wish you have included the current IL&FS situation as well. Modi has to bring in I and B Code as a reactionary attempt to bring back the monies that were donated by banks. However with IL&FS, Modi has become pre emptive. The way their current board got sacked just before they tried to raise another round of public money to cover previous debts. This is Leadership. The way Jaitley convinced the stalwarts of industry to form the new board is also commendable.
Had the ILFS issue been left unattended, that would have caused lot of damage to Modi’s reputation as this one is 4.5 yrs into BJP rule.
The I&B Code is really a great transformative move by the Modi government. It has also brought in its fold the property developers’ liability to customers who booked for the property. In case of developer’s inability to deliver the customers automatically will be treated like any other Financial Creditor and can file for bankrupty proceedings under the I&B COde. This has given an avenue to the common people who had put their life savings for acquiring a property from being exploited by the developers. This has not been sufficiently highlighted anywhere. From personal experience I can say that this has benefited many common people from losing their entire money as they don’t have the means to go on lengthy legal proceedings individually against the developer. Now they can form a collective and can enforce the obligation of the developer to them. In case of the developers inability proceedings can be commenced under the I&B Code. If this is not transformative reform then what is? All the mighty people who enjoyed protection of the Cabal to exploit the poor and the common man now have to face the IB Code and from their reaction we can tell they don’t like it one it.
It doesn’t matter to us. Our cost of living was not affected much then as it does now. Today survival is difficult. I suppose it doesn’t matter to you as you are paid enough to write against UPA.
Are you sure NDA is not doing the same or even worse?
Are you sure you are not having memory loss? Inflation under UPA was MUCH MUCH MORE than inflation right now under Modi.
Regarding payment, I suppose it is difficult for you to believe that people will work so hard just because they believe in a cause. I have never been paid even 1 paisa for my political writings ever. You may please ask the writers of Troll, Liar and other anti-Modi hitjob websites if they can say the same thing.
Your statement is not borne out of data. My monthly spend went up from Rs 10000 in 2009 to Rs 25000 by 2014(all essential spend, no discretionary). My monthly spend has not increased in the last five years of Modi rule. This inspite of increase in salaries of household help. In fact, I withdraw the same amount of Rs 25000 from my salary but end up with some savings at the end of each month. So effectively, my cost of living has decreased.Also the heavy inflation during 2004-2014 was a tax on everyones income. The low inflation in Modi term has meant that the effective income from bank deposits (deposit rate – inflation rate) has been on the positive side.
If you look at big ticket spend, cost of house went up by 4-5 times from 2004 to 2014. This was because of all the black money being pumped into real estate. After 2014, housing prices have gone down (even from 2014 levels) in most areas. In some areas it may have stayed same but even that is an effective decrease because the house price has not kept up with inflation.
Cannot understand why everyone fixates on petrol price so much. It is not the biggest part of anyone’s spend. Just because news channels display the price morning and evening doesn’t mean it is a big issue. The bigger issue for common man is roads, electricity, infrastructure. News channels will rarely show these issues because it puts sixty years of one party rule in bad light.The big issues are always long term – education, health care, infrastructure, economic health of banks, reduction in corruption etc.