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RCom and Jio: The Double Standards of India’s Bankruptcy Code

Founder and CEO, Transfin.
Jan 2, 2018 10:08 AM 3 min read
Editorial


RCom and Jio: The Double Standards of India’s Bankruptcy Code

RCom’s 2017 ended on a better than expected note - the over-leveraged company struck a deal with big brother’s swashbuckling telecom business Jio. The estimated INR24,000cr ($4bn) acquisition by the latter forms part of RCom’s management plan to reduce its debt from INR45,000cr ($7.5bn) to INR6,000cr ($1bn), and is expected to close by March 2018. Moreover, lenders are expected to “hold off” repayments of their dues till December 2018.

 

Though being cited as a landmark transaction, this is a story of the double standards omnipresent within India’s relatively new bankruptcy framework. Consider this – while in case of RCom, the Joint Lenders’ Forum i.e. the syndicate of lending banks decided to approach RCom’s case flexibly by granting it a 7-month window for planning and executing its resolution, most large defaulters did not get this benefit. Ironically for many it is the RBI that has played jury - “directing” lenders to the bankruptcy court (“NCLT”) and publicly releasing their names. Why such a market oriented approach in the former and a statist approach for the latter?

 

It can be argued that since RCom’s borrowings were only on the edge of non-performance and they had a better resolution plan in place – a more flexible approach was warranted. But how fair is that point? Jio’s acquisition was not even envisaged in the management’s original resolution. The planned transactions with Aircel and Brookfield had collapsed. Three major Chinese lenders (China Development Bank, Industrial and Commercial Bank of China, Export-Import Bank of China) meanwhile even approached the NCLT directly out of desperation! The company’s net debt is almost twice of that of several top defaulters going to the NCLT. Its debt-to-EBITDA has doubled in the last 8 years. To top it, the company in November became the first Indian defaulter on US Dollar bonds in 15 months.

 

The second argument has been that lenders are hesitant to go to the NCLT against RCom to avoid higher provisioning charges naturally arising from the action i.e. the said charges would worsen their financial burden and hence must be avoided if possible. While the technicality of this point may stand some ground; when taken from the perspective of a fair process it comes across as disingenuous. What made RCom an exception where a flexible approach was deemed acceptable and management was permitted to stay in the driver’s seat while structuring and pacing its resolution? And this latitude when International ratings agencies has designated the company as on the verge of default, withdrawing their coverage altogether? 40 other companies were not granted this allowance by the RBI, by lenders, or the government at-large.

 

It seems clear that the system has consistently placed a lot more “faith” and “benefit of doubt” in the promoters and management of RCom. The reasons for this favouritism may be commercial, political, or both. This article is not to demystify the why, but the how. Its objective is to showcase one of the biggest structural weakness of the Insolvency and Bankruptcy Code 2016 – that it doesn’t apply equally to everyone and permits the benefit of selective memory to create holy cows.