Rajan: Allow promoters to renegotiate under IBC

Mumbai: Former RBI governor Raghuram Rajan has said that, instead of closing the insolvency option completely for Covid defaults, borrowers should have been allowed to renegotiate the loans under the bankruptcy platform and retain their businesses.

Currently under Section 29A of the Insolvency Act, defaulters cannot bid for their own business under the bankruptcy process. Lenders are extra careful to ensure that bidders have no connection with the defaulters. Rajan was speaking at a webinar hosted by Princeton’s Bendheim Center for Finance.

Rajan said that after Covid, there was a tendency to take a stand that this is a new kind of situation and requires a new kind of process and therefore cases cannot be referred under the Insolvency and Bankruptcy Code (IBC). “This is unfortunate because it treats bankruptcy as some kind of punishment rather than a necessary way of restructuring capital structure and ownership. We need to look at it carefully as a lot of distressed cases will be coming out,” said Rajan.

Calling for a more effective Chapter 11-like structure, Rajan said that currently under the insolvency process at the National Company Law Tribunal, the defaulting firm is auctioned to the highest bidder even if it is a reasonably viable firm. “There were reasons why it went to that structure. The bias under the old structure for removing management can be relooked at. Banks want some court blessing so that they can remove their own liability. These are complicated cases, but rather than close the court down, we need to look at what will work,” said Rajan.

Pointing out that private banks were ahead in raising capital, Rajan said that government banks also need recapitalisation. “If you do not do anything, you have much less working capital and much less investment and there will be many more zombies — the living dead — holding back growth,” he said.