The catalyst for this has been the Insolvency and Bankruptcy Code (IBC) — arguably the Narendra Modi government’s biggest economic reform measure, ahead of even the goods and services tax. The catalyst for this has been the Insolvency and Bankruptcy Code (IBC) — arguably the Narendra Modi government’s biggest economic reform measure, ahead of even the goods and services tax.

Five years ago, or less, nobody would have imagined an Anil Ambani could face the prospect of a jail sentence or the Ruia family may not be far from losing control over their crown jewel, Essar Steel. That promoters can no longer treat their ownership of enterprises as a “divine right” and enjoy the benefits of “riskless capitalism”, to quote the former Reserve Bank governor Raghuram Rajan, is something India Inc is still finding difficult to reconcile with. The catalyst for this has been the Insolvency and Bankruptcy Code (IBC) — arguably the Narendra Modi government’s biggest economic reform measure, ahead of even the goods and services tax. The IBC has fundamentally altered the relationship between large borrowers and their creditors. Until recently, whenever the former defaulted, the latter invariably had to make the concessions. The promoter continued to be at the helm, even after mismanaging the business or diverting loans to avenues other than for which they were sanctioned.

That, thankfully, has changed. The IBC allows both lenders and operational creditors to move a dedicated bankruptcy court — the National Company Law Tribunal (NCLT) — and initiate insolvency proceedings against defaulting firms to recover their dues through a time-bound process. The Swedish telecom equipment maker Ericsson did just that, by filing a bankruptcy petition against Reliance Communications before NCLT to recover unpaid dues. It forced the Anil Ambani-controlled company to enter into a settlement that was approved by the Supreme Court. When the beleaguered telecom operator failed to discharge its payment obligations under the deal, leading Ericsson to file contempt pleas, the apex court ordered Ambani to cough up Rs 453 crore within four weeks or risk a three-month prison sentence. What the IBC has done is to provide a mechanism for enforcing the sanctity of debt contracts: The very threat of a company’s control passing to creditors, who would invite other prospective promoters to take over and pay off its dues to the maximum extent, is the best insurance against “riskless capitalism” and future bad-loans crises. The Ruias are yet to give up. But in the new regime, it’s the lenders and courts, not “divine right”, that will decide who will ultimately run Essar Steel.

The above transition to a more impersonal, rule-based capitalism is bound to face resistance from those used to the earlier system, where both sanctioning of loans and they being written-off in the event of turning bad could be seamlessly “managed”. One indicator of it is the resolution process in many cases taking much longer than the 270-days deadline (from any insolvency petition’s admission by NCLT) set under the IBC. This is where the higher courts need to step in and draw the line.

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