By Sapan Gupta
The new corporate insolvency regime has saved nearly four lakh jobs in India. Had it not been for the new law being enforced in December 2016, these jobs would have perished in the tepid business environment and ballooning debt of corporate India.
Under the insolvency regime, a total of 88 cases have been resolved so far, securing revenue of Rs 31,651 crore, with employee salaries of around Rs 2,350 crore.
At an estimated average salary of Rs 30,000 a month per person, this translates to a direct employment of 65,250. Then there are jobs of vendor partners, sales outfits, housekeeping contracts, transporting contracts and security services. Recent analyses by human resource firms show that one direct employee in a company creates five more jobs outside.
In the upcoming six months, with five more headline cases set to be resolved, the impact on business and jobs in India will be even higher. These five cases affect another 24,000-25,000 direct jobs and over one lakh jobs as part of the ecosystem.
In the boom years 2004-07, Indian businesses found cheap funding — local and overseas — in the form of bank loans, bonds, convertible bonds and derivatives. They embarked on ambitious expansion plans. By the time the global economic crisis hit in 2008, India had turned into a domestic focused consumer economy, one that attracted foreign investment. However, at the time, interest rates rose in tandem with global demand weakening, and revenues were no longer commensurate with finance costs.
By 2014, a large part of the national indebtedness came from over leveraged corporates, which impacted banks. The twin balance sheet problem inexorably pushed the country towards the brink of credit ratings downgrade, which would have made even small housing and car loans more expensive.
Until 2016, measures taken to tackle corporate sickness had failed. These included Board for Industrial and Financial Reconstruction (BIFR) under Sica (Sick Industrial Companies Act 1985), Sarfaesi and various RBI-framed restructuring schemes like Joint Lenders Forum. Cases lingered on for decades and the legislations acted as a shield against accountability.
Who was hit? The common worker. In companies like Jet Airways, employees went months without salary payments and eventually lost their jobs. The Insolvency and Bankruptcy Code (IBC) of 2016 reversed the restructuring regime in three key ways.
First, it took control from the promoters and handed it to creditors assisted by resolution professionals and qualified individuals, whose key role was to ensure the businesses keep running and salaries are paid at priority. Second, it created a forum to rationalise debt so that growth can be restored. Third, insolvency proceedings got a court-approved buyer for failing assets who could fund growth and successfully run these businesses. In some cases, it brought fresh foreign investment. It is a resolution, not recovery, process, so, the IBC was designed to support the hardworking Indian citizen.
It also created a fresh set of professionals in the cadres, expediting the move from promoter-driven to professionally-run businesses. Insolvency alone created around 4,000-5,000 jobs, with 1,000-plus registered resolution professionals.
Initially, IBC was tested. The cynics said this would be a mechanism to write debt off and give control back to promoters. As time passed, iterations in the law ensured this would not happen. By the end of a year, the law had struck fear in the hearts of defaulting business owners. Bankers tell of a large number of regularised accounts for fear that a default would trigger insolvency proceedings.
Yet, like all things new, IBC too has had its share of evolution. The results have not been as speedy as initially set out, at a maximum of 270 days. There are aspects that are yet to be clarified, as lead cases are still being argued in the Supreme Court. Any newly enacted law takes three or four years to settle. Even in the US, it took nearly a decade for bankruptcy law to take shape before it became a speedy and efficient mechanism to resolve financial trouble. In India, the learning curve has been shorter.
As IBC evolves, it could become the most potent instrument in driving good credit behaviour and ethical business practices among borrowers, and proactive, responsible behaviour among lenders. Obviously, that would be a boon for jobs, the economy and the nation.
The author is with Shardul Amarchand. Views are personal