FOR a capital-starved economy, India shows little urgency to extricate good money stuck in failed businesses. That was going to change after the adoption of a modern bankruptcy regime in May 2016. Alas, legal improvements notwithstanding, the culture of extending the life of bad loans to big businesses and pretending nothing is wrong with them is proving too hard to end.
Take Reliance Communications. After more than a year and a half of kicking the can down the road, the erstwhile Indian telecom operator is filing for bankruptcy.
Even in March 2017, when RCom owed creditors US$7 billion, it was clear that tycoon Anil Ambani's telecom venture stood no chance in a crowded field against elder brother Mukesh Ambani's shiny new 4G carrier, Reliance Jio Infocomm, and its offer of cheap data and free voice calls. Yet in June 2017, creditors decided to go along with an out-of-court restructuring, wherein RCom would merge its wireless carrier with rival Aircel; sell its cellular towers to Canada's Brookfield Infrastructure Group; swap some debt for equity; and deleverage.
However, Aircel didn't survive; RCom was forced to shutter its own mobile service; Brookfield developed cold feet; and creditors demurred from taking RCom equity after its share price collapsed. But even then, Indian banks didn't knock on the doors of the bankruptcy courts.
In December 2017, after the company had defaulted on a US$300 million dollar bond, they backed a new plan by the younger Ambani brother to offload spectrum, towers, fibre and media convergence nodes to the elder sibling's Jio. Together with commercial redevelopment of RCom's Mumbai property, the proposal was supposed to lead to a decent recovery. This time last year, dollar bondholders expected to get back almost 70 cents on the dollar.
However, 2018 went by with little progress on the 250 billion rupee (S$4.7 billion) deleveraging plan. The spectrum sale didn't go through because India's telecom department wanted a guarantee for the fees it's owed for the airwaves before they would allow a new owner. Jio balked at that demand. An additional complication was equipment provider Ericsson, an operational creditor that threatened to drag RCom into bankruptcy; won a settlement offer; but never saw any cheques.
Ericsson asked a court to put Mr Ambani in civil prison. All this has made the bondholders pessimistic: the current market price of the notes, which a majority of investors agreed in August to restructure at a steep haircut, suggests recovery rates of 26 cents on the dollar. Even secured creditors of subsidiary GCX, which boasts the world's largest privately owned undersea cable system, are jittery.
Fitch Ratings has downgraded GCX's dollar bond, due for refinancing this year, and said a default looks probable. With RCom entering bankruptcy, what it owes GCX may be impossible for the subsidiary to recoup. RCom's insolvency filing shows how fruitless the out-of-court process has been. "Despite the passage of over 18 months, lenders have received zero proceeds from the proposed asset monetisation plans," the statement said.
HITHER AND DITHER
It's unclear if the older Ambani sibling might still be interested in RCom's spectrum and towers, or if other bidders will step up, and how much of a haircut is now inevitable.
So far, family members of "promoters" - India's term for controlling shareholders - were barred from bidding for their bankrupt firms without making banks whole first. But thanks to a recent court ruling, that ban now applies only to relatives involved in the business. Mukesh Ambani lost RCom to his brother as part of a 2005 division of their father's empire; so he can play white knight. The legal process may take another nine months if everything runs like clockwork, which it seldom does in India.
State-run lenders, having wasted so much time already, are answerable for their dithering. They beg the government to recapitalise them and whine when the regulator forces them to mark down soured exposures. But apart from harassing smaller businesses, what do they do to untangle capital and return it back to the economy?
In addition to Ericsson, China Development Bank, and even the telecom firm's PR agency had at some point sought to invoke insolvency proceedings. Only Indian institutions, with most to lose, stood still; and now they don't even get to appoint a resolution professional of their choice to run RCom once it's in bankruptcy.
The opposition Congress Party is hounding Prime Minister Narendra Modi for letting an Anil Ambani firm benefit from a French warplane contract. RCom's bankruptcy, though unrelated, may provide more political ammunition ahead of this summer's general elections.
Before 2016, the excuse for allowing large Indian businesses to fail in slow motion was that creditors didn't have recourse to a bankruptcy code. There's no such cover now. The blame for recovering less than 100 cents on the dollar from RCom will be on nobody else but India's banks.
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