A sudden reversal can also be unconstitutional

A poster of the All India Bank Employees’ Association (AIBEA) has recently appeared on social media. It provides insight into the discounts taken by banks when resolving defaults by large corporate groups – three accounts imply a discount of more than 90%. The data not only provides insight into how India’s insolvency and bankruptcy resolution framework may have inadvertently inserted perverse incentives for defaulters, but also provides a compelling counterpoint to the ongoing debate over the “gifts”, made more urgent by the Election Commission (EC) recent forays. These two seemingly disparate trends are linked by a common thread: a sudden reversal.

Liberal haircuts on loans – some of which can arguably be justified – are fueling the ongoing “freebies” debate. The debate was sparked after Prime Minister Narendra Modi, in a July speech, launched an attack on a culture of giveaways in contemporary politics. The AIBEA poster forms part of the counter-arguments against the mainstream narrative, arguing that protests against social benefits for the poor tend to ignore an economic system custom-built to formally absolve the defaulters of the rich and poor. powerful. .

The latest to join the debate is the EC, which is proposing that all political parties provide in their election manifestos a record of the pledges made, showing how much each pledge was spent on and how they plan to deliver on them. Besides the strangeness of the proposal, the timing – just before the Gujarat assembly elections – is surprising. It also coincides with the growing crescendo of condemnations by the ruling party against a prominent opposition leader for promoting freebies. The EC decision may be a fluke, but the timing raises questions.

Apart from introducing a techno-financial rigidity into welfare considerations, a quirk in an economy that experiences a recurrence of increasing numbers of poor people, the EC also seems to ignore that, first, some welfare measures being not amenable to statistical measurement and, secondly, that it may be intruding into an area reserved by democracy solely for the interaction between political parties and voters.

What makes this proposal even more outlandish is the EC’s complete U-turn from April, when it submitted an affidavit to the Supreme Court declaring that it was unqualified to regulate policies and state decisions by a winning party and forming a government. Then, in August, when the Supreme Court proposed setting up an expert panel to examine the issue of gifts pledged by political parties before an election, the EC declined to join the same panel, arguing that it was going to contrary to its constitutional policy. status. Then, at the beginning of October, there was the inexplicable and sudden reversal of the EC.

Another example of a curious about-face is embedded in the AIBEA snapshot, which shows that in 13 loan accounts, involving a total loan amount of 446,800 crore, Indian banks recovered only 161,820 crores, implying an average discount of 64%. There are three accounts, representing a total loan outstanding of approximately 73,000 crore, in which banks took over 90% haircuts, namely Videocon, ABG Shipyard and Siva Industries.

The last name mentioned is likely to become an interesting legal precedent because the National Company Law Tribunal (NCLT) and its appellate court (the NCLAT) had ordered the company to be wound up, despite the resolution practitioner’s report to both courts. that over 90% of its creditors had accepted the promoter’s one-time settlement plan involving a discount of over 90%. Subsequently, in June 2022, a Supreme Court bench consisting of Justices BR Gavai and Hima Kohli overturned the NCLT and NCLAT orders, finding that both courts were wrong to ignore the business judgment exercised by the majority of company creditors.

Although the Supreme Court may be philosophically and legally justified, two issues merit further attention. First, the creditors – state-owned IDBI Bank in the lead – settled the 4,863 crores of debt for only 323 crore, negating more than 4,500 crores of public money. Interestingly, many creditors initially opposed the settlement terms, thus failing to reach the required 90% agreement; however, International Asset Reconstruction Company (with a 23.6% vote) had a mysterious U-turn a month later and changed its vote from ‘against’ to ‘approve’, giving creditors the required majority.

It is highly likely that this one-time settlement on generous terms could encourage future borrowers to default and then get away with paying far less than they originally owed, provided they are able to convince most creditors, even on a deferred basis, agree to such resolution terms. Certainly, there are tangible benefits at the end of the tunnel: with their default records whitewashed, these borrowers are then free to exploit the credit market again.

Neither the Election Commission nor the Asset Reconstruction Company, it seems, felt the need to justify their belated about-face. While the EC invokes the Supreme Court’s 2013 order to justify its latest proposal, the end result is not only much more ambitious, but also, curiously, nine years after that order, but months before a crucial election in the country. Life seems to imitate art, especially unscrupulous Bollywood movies.

Rajrishi Singhal is a political consultant and journalist. His Twitter handle is @rajrisishinghal.

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