May 22, 2018 @ 2:00 am

22 MAY 2018

Miles to go

The new bankruptcy code yields its first success, but many wrinkles remain

Good news has finally started to roll out of the refurbished bankruptcy courts. Tata Steel acquired 73% stake in the bankrupt firm Bhushan Steel for about ?35,000 crore last week, making it the first major resolution of a bankruptcy case under the new Insolvency and Bankruptcy Code (IBC). Bhushan Steel was one among the 12 major accounts referred to the National Company Law Tribunal at the behest of the Reserve Bank of India last year to ease the burden of bad loans on banks. The proceeds from the acquisition will go towards settling almost two-thirds of the total outstanding liabilities of over ?56,000 crore that Bhushan Steel owes banks. While it may be unwise to read too much into a single case, the Bhushan Steel resolution is nevertheless an encouraging sign for banks because they typically manage to recover only about 25% of their money from defaulters. In fact, between April 2014 and September 2017, the bad loan recovery rate of public sector banks was as low as 11%, with non-performing assets worth ?2.41 lakh crore written off from their books. The Finance Ministry now expects banks to recover more than ?1 lakh crore from the resolution of the other cases referred by the RBI to the NCLT. If the banks do indeed recover funds of this scale, it would considerably reduce the burden on taxpayers, who would otherwise have to foot the bill for any recapitalisation of banks. Even more important, speedy resolution would free valuable assets to be used for wealth-creation.

The resolution of one high-profile case, however, should not deflect attention from the many challenges still plaguing the bankruptcy resolution process. The IBC, as the government itself has admitted, remains a work in progress. This is a welcome piece of legislation to the extent that it subsumes a plethora of laws that confused creditors; instead it now offers a more streamlined way to deal with troubled assets. But issues such as the proposed eligibility criteria for bidders have left it bogged down and suppressed its capacity to help out creditors efficiently. Also, the strict time limit for the resolution process as mandated by the IBC is an area that has drawn much attention, and it merits further review in order to balance the twin objectives of speedy resolution and maximising recovery for the lenders. To its credit, the government has been willing to hear out suggestions. It would do well to implement the recommendations of the Insolvency Law Committee which, among other things, has vouched for relaxed bidder eligibility criteria. Going forward, amendments to the bankruptcy code should primarily be driven by the goal of maximising the sale price of stressed assets. This requires a robust market for stressed assets that is free from all kinds of entry barriers.

Victory amid violence

Trinamool Congress’s sweep in the West Bengal panchayat polls comes at a high cost

The exact scale of the ruling Trinamool Congress’s victory in the May 14 panchayat elections in West Bengal is still a matter of conjecture, as the fate of the uncontested seats is before the Supreme Court. The next hearing is on July 3. The Opposition, comprising mainly the Left Front and the Bharatiya Janata Party, did not field a candidate in more than a third of the 58,792 seats in the three tiers put together. Should the court clear the TMC’s claim to these seats, it will be the first time since the three-tier rural poll was instituted in 1978 that one-third of the seats have been bagged without even a semblance of a fight. When the results of the contested seats were announced on May 17, it was clear that the TMC had outperformed its rivals, bagging two-thirds at the lowest gram panchayat level. Across the three levels, the TMC secured 76% of the contested seats, the proportion that the Left Front had won in the 2003 panchayat election. Some smartly tailored cash transfer schemes directed at the rural poor, combined with a reasonable upgrade of rural-urban infrastructure, appear to have paid off for the ruling party. Yet, instead of being upbeat and relaxed, Chief Minister Mamata Banerjee has sounded defensive, alleging that many interest groups had “ganged up” against her. Her defensiveness drew from the unprecedented violence in the run-up to the polls. Around 50 people were killed; the security provided for the election was clearly insufficient, and lumpen elements had a free run.

The TMC and the BJP accuse each other of fomenting the violence. In West Bengal, panchayat elections have always been marred by trouble. But the kind of ferocity of the violence before and during last week’s poll has not been seen since the Left Front was ousted after 34 years in power in 2011. The TMC is run as a tight ship, with the party exercising complete control over its cadre. The State government clearly failed in checking the violence, either on account of incompetence or some deep sense of insecurity. The rise of the BJP in the State is not that sharp, but it appears to be enough to have unsettled the TMC. The BJP captured one-fourth of the contested seats in these panchayat elections. In five years, the BJP’s vote share at the gram panchayat level has gone up from 1% to 18%, whereas the Left Front’s share dropped from 32% to 5%, and the Congress’s from 11% to 3%. In fact, the BJP’s growth curve is rather similar to that of the TMC a decade ago, and it has made no secret of its ambition to try to dislodge the TMC in the 2021 Assembly polls. Ms. Banerjee has been extremely vocal in rallying anti-BJP parties to band together at the State and national levels. But it remains to be seen whether her party has, in fact, ended up damaging itself with the no-holds-barred tactics at the ground level in the panchayat polls.

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