By Nantoo Banerjee
With the government and the Reserve Bank gearing up to enact a new bankruptcy law in India, certain sectors of industry and sections of entrepreneurs may have genuine reasons to cheer. Unfortunately, the same can’t be said about ordinary corporate investors, creditors and bank depositors unless the government guarantees a strong deposit or investment insurance regime to protect them. For ordinary investors, the fear of probability of the law providing protection to a bankrupt business, bank or financial institution and individual has become more acute than ever in the light of the recent collapse of even several large corporations such as Kingfisher Airlines, Ispat Industries, etc. alongside some non-banking financial companies and chit funds and real estate firms putting creditors and investors in deep distress.
It is not that the existing system provides any meaningful protection to ordinary investors in the case of industrial sickness and business collapse or condemns entrepreneurs with jail and confiscation of their personal property to pay off investors. In fact, industrial closure or sickness rarely impacts its promoters in term of their personal lifestyle and fresh business activity under the present legal framework. Yet, the questions that come to an ordinary person’s mind is: will the new bankruptcy law benefit debtors at the cost of depositors, creditors and workers; or will the law encourage more filing of bankruptcy suits by rogue firms, banks, institutions and individuals as is the practice in the western world?
In fact, the western world had witnessed the largest number of big bankruptcies in the last decade compared to those in the last 50 years despite the existence of several strong laws to ensure corporate governance and oversight authorities. Their financial collapse took a heavy toll on ordinary investors and creditors. While the media and analysts spent much of their energy in reporting and analyzing these bankruptcies, few bothered about what happened to the ordinary depositors, creditors and investors. The latter had little protection from deposit insurance companies (DICs). The compensation awarded to depositors or investors under the law was simply peanuts compared to their losses or exposures. The post-2008, some countries have amended their law to provide a higher investor protection, even that amount is too small or inconsequential to those who invested their entire life’s saving in more safe-looking banks, mutual funds and similar other instruments. Only the Central Bank and Financial Services Authority of Ireland is known to protect 100 per cent or unlimited amount of bank savings. Most Eurozone countries offer guarantee up to Eur 100,000 to investors and depositors.
India introduced deposit insurance way back in 1962 with the Deposit Insurance Corporation commencing operation on January 1, that year, under the aegis of the Reserve Bank of India. Nine years later, the government set up another institution called the Credit Guarantee Corporation of India Ltd (CGCI). In 1978, the two institutions were merged to form the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, it hardly served the purpose of ordinary investors who chose banks, including nationalized banks, for investing their savings in fixed deposits more for safety than earning high annual interest. Fixed deposits in a bank only up to Rs 1 lakh are insured under the DICGC scheme. When a major company or financial institution declares bankruptcy, the reverberations can be felt throughout the economy though few care about those unfortunate individual investors who turn pauper overnight. There are dozens of laws that come in aid of a bankrupt bank or corporation, but almost none to address financially-hit ordinary investors’ concerns. Bankruptcies of banking and industrial behemoths are invariably bailed out by national governments, including the USA, with taxpayers’ money, but DICs can at best offer a token consolation to thousands or millions of depositors or investors, the primary fund provider to business, under the capitalist system. There is almost no credible plan to protect depositors.
When ‘Bankruptcy’ gets a legal tag, it allows a legal declaration of inability or impairment of ability by an individual or organization or debtor in the case of ‘involuntary bankruptcy’ to pay its creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed. However, in practice, a bankruptcy proceeding is generally initiated by a debtor or an insolvent individual or an organization and not creditors. Normally, an individual debtor manages to perk his money, which he may have earned through unethical means, elsewhere beyond the legal jurisdiction of the country that decides on his bankruptcy petition. Thus, the debtor ensures his individual financial safety to a good extent, leaving the poor investors at the mercy of the legal system and DIC. Remember Raj Sethia, a Kolkata-originated businessman who struck big in the UK with the promotion of a nearly $ 1-billion business empire called Esal Commodities in the 1980s? One fine morning, heavily indebted Sethia declared himself bankrupt after splurging huge funds in his chic lifestyle in the UK and the Continent that included a posse of Rolls Royce cars and a private Boeing 707 with $600,000 spent additionally to install a boardroom, bedrooms, sauna and jacuzzi in the aircraft. After a short jail term, Sethia has been living happily and luxuriously in India though he can no longer travel abroad as law prevents him from having a passport and, also, voting right.
The biggest downside of capitalist economy is that in the times of crisis, which is often a product of greed, structured gambling or inability to read the business future in boom times, it hurts the common man several times more than those debt-ridden business barons and bankers. The global financial crisis of 2008-09 had hit the common man more than those bankrupt corporates, banks and institutions, including such big names as Lehman Brothers, Washington Mutual, General Motors, Chrysler LLC, Thornburg Mortgage, etc. They all too shelter under the US bankruptcy law and received massive bailout packages from the government or, in other words, taxpayers’ fund. As late as in November, 2011, Ireland’s richest business tycoon, Sean Quinn, filed a bankruptcy case for himself, forcing the famous Anglo-Irish bank lose Euro 2.8 billion. Depositors or investors in all those cases suffered enormously. Some died early of shock and heart attack. Others lived in penury.
Indian lawmakers must ensure that the new bankruptcy law does not become a legal shelter for rogue and greedy businessmen at the cost of the banks and millions of ordinary investors who keep their savings with banks and highly-rated corporates for the rainy days. For good reasons, most rogue Indian business barons, including NRIs, bank with India’s public sector banks where big loots are easy. For instance, Raj Sethia did it with Punjab National Bank and Vijay Mallya’s grounded Kingfisher Airlines with a consortium of PSU banks, led by the State Bank of India. Pramod Mittal too owed some Rs 6,000-crore to Indian banks before shutting down his Maharashtra-based Ispat Industries and moving to the UK as an NRI businessman with family. Could the new bankruptcy law be manipulated by both such varieties of businessmen and other smaller fly-by-night operators, including MSMEs, to legally loot government banks and ordinary investors? That is the worry. (IPA Service)
