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Big promoters using IBC to file frivolous appeals: Raghuram Rajan

ET Bureau|
Updated: Sep 12, 2018, 11.40 AM IST
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Raghuram Rajan
He also blamed the government for not being prompt in appointing chief executives on time.
MUMBAI: Some of the promoters of companies in default are still attempting to game the system and the judiciary should resist its temptation to encourage frivolous appeals by defaulters, said Raghuram Rajan, former governor, Reserve Bank of India. “The Bankruptcy Code is being tested by the large promoters, with continuous and sometimes frivolous appeals,” Rajan wrote to a parliamentary panel. “Higher courts must resist the temptation to intervene routinely in these cases, and appeals must be limited once points of law are settled.”

Rajan’s submission comes at a time when a bunch of power producers are trying to stall the RBI’s February 12 circular that would have ensured that loan accounts worth about Rs 2 lakh crore are tried under the bankruptcy laws. The Supreme Court has given a relief to appellants and said it would hear the matter later. Earlier, the Allahabad High Court had declined to stay the RBI directive.

The former governor also highlighted that some of the promoters were looking at a back-door entry to buy their assets which had already defaulted after heavy borrowing. “Until the Bankruptcy Code was enacted, promoters never believed they were under serious threat of losing their firms. Even after it was enacted, some still are playing the process, hoping to regain control though a proxy bidder, at a much lower price. So many have not engaged seriously with the banks,” he said. One of the biggest defaulters, Essar Steel which was part of the first list the RBI sent in June 2017 to be tried under the bankruptcy law, is yet to see settlement with litigation dragging on.

The National Company Law Appellate Tribunal recently said that Numetal, a Russian bank led consortium that initially had a member of the Ruia family that owned Essar Steel but dropped him subsequently, and ArcelorMittal which was ineligible due to defaults by its other companies, could bid for the assets. The issue is pending in Supreme Court. Rajan said part of the blame, with the benefit of hindsight, could be placed at the doors of the regulator which permitted some restructuring schemes in the absence of a strong bankruptcy law.

“The RBI should probably have raised more flags about the quality of lending in the early days of banking exuberance,” he wrote. “With the benefit of hindsight, we should probably not have agreed to forbearance, though without the tools to clean up, it is not clear what the banks would have done.”

He also blamed the government for not being prompt in appointing chief executives on time.

“There is absolutely no excuse for banks to be left leaderless for long periods of time as has been the case in recent years,” he said. “The date of retirement of CEOs is well known and government should be prepared well in advance with succession. Indeed, it would be good for the old CEO and the successor to overlap for a few months while they exchange notes.”
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