It is certainly the end of crony capitalism in India and conduct of business as we know it. Proof is in the pudding as they say and the list of promoters who have lost their crown jewels is a long one.
Bye-bye crony capitalism. Despite three long decades of liberalization, crony capitalism was entrenched in India’s economic system. Businessmen thrived not for their ideas but for connections. Promoters borrowed from state-owned banks knowing very well that there were no consequences for defaulting on such loans. Corruption, political and bureaucratic associations worked like a magic wand that got them out of trouble as well as allowed them to retain control over their enterprises.
Not anymore. Something unimaginable and unthinkable is happening. Corporate India has been hit by a tsunami. Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman are slowly but surely changing the culture of Corporate India. After successfully getting the Insolvency and Bankruptcy Code (IBC) passed through Parliament in 2016 and making it the law of the land, amendments that followed in the last two years have strengthened the law. Promoters can no more default and try to bid for their own assets for a pittance. And the latest ruling of the Supreme Court in which the Honourable Court granted the Creditors Committee unfettered powers in decision making, corporate captains can no more take anything for granted. The message has been strong and stern to promoters who default on borrowings – pay up or lose control.
That in itself is a major achievement of Prime Minister Modi and the message is truly inspirational for young entrepreneurs and current industry executives.
Connections are no more the magic wand. And pouring money through middlemen into political and bureaucratic coffers is passé. Promoters’ phone calls to ministers and bureaucrats go unanswered these days. CCTV cameras in ministries closely monitor people and businessmen entertained by various Ministers. With a single-minded focus on eliminating corruption, Prime Minister and Finance Minister have thus far successfully thwarted promoters who otherwise would have reneged on their legal commitments ostensibly believing in the power of the erstwhile magic wand.
Several Enforcement agencies have bolstered their regulatory powers and are working in concert with other agencies and state police and taking swift action to arrest loan defaulters, irrespective of their connections to bigwigs and political heavyweights. Notably, the Enforcement Directorate tasked with the prevention of money laundering has acted speedily and arrested Managing Directors’ and CEO’s of companies in money laundering cases with cross-linkages to multi-crore bank fraud.
Even banking and mindset of bankers have transformed. Bankers especially those in public sector banks, at the branch and retail level, have been empowered and are now emboldened to take credit decisions based on the merit of loan applications. In the past, such decisions were made in the banks’ Corporate Office with scant or little regard for the creditworthiness of the borrower. Most banks have appointed highly paid Risk Assessment Officers and periodic risk assessment audits are mandatory. Borrowers with a loan of more than Rs 50 Crores have to submit certified copies of their passports. This will allow bankers to alert authorities who can, in turn, prevent promoters from fleeing the country in case of a default. Banks have also ensured that it is difficult for promoters to divert funds to other purposes by tightening lending norms.
It is certainly the end of crony capitalism in India and conduct of business as we know it. Proof is in the pudding as they say and the list of promoters who have lost their crown jewels is a long one. Starting with IL&FS, the poster child of crony capitalism, Board was superseded and top executives sent to jail. Former billionaire now pauper Anil Ambani relinquished management of Reliance Communications and had to be bailed out by his brother Mukesh Ambani to avoid jail time. The Ruia’s lost control of their flagship steel company Essar Steel and coughed up Rs 46,000 crores to the creditors after the recent
ruling by the Supreme Court in favor of Arcelor Mittal. Subash Chandra, despite being a Rajya Sabha MP, sold his entire stake in Zee Entertainment to pay off existing bank debts. Rana Kapoor was booted out of Yes Bank, Wadhwanis were kicked out of DHFL, Vijay Mallya, who fled the country lost management control of United Breweries and had all his assets auctioned off to compensate for bank loans. Singh brothers too were forced to sell Fortis Hospitals to repay loans and are in jail for diverting proceeds and committing fraud. Singhal’s were forced out of Bhushan Steel and Power with senior Singhal recently arrested by Enforcement Directorate for bank fraud.
Prime Minister Modi has set an ambitious goal of India becoming a $5 trillion economy by 2025. To achieve this target, animal spirits have to be unleashed, economy must be reflated and anemic job creation has to revived in a big way. Corporate India and budding entrepreneurs must have enormous confidence and trust in the functioning of financial markets especially the way corporate credit and loans are disbursed. That the government of the day has cleaned up the economic system and laid a strong foundation for rapid economic growth augurs well for CEO’s, entrepreneurs and young India.
Going forward, ideas and business insights are far more important than political and bureaucratic connections. Economic success now is a factor of business acumen, grit and execution and not who you know at North Block or Lutyens. That in itself is a major achievement of Prime Minister Modi and the message is truly inspirational for young entrepreneurs and current industry executives.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.