How Modi’s Insolvency Code made defaulters pay back Rs 1.1 lakh crore

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:

And 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.

Outraged?

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.