‘Startup India’ is an amazingly revolutionary idea of creating a novel industrial ecosystem. On the contrary, industrial sickness is a bane of the system and our laws for rehabilitation and insolvency are vague and misplaced. The JJ Irani Committee opined that “The Indian system provides neither an opportunity for speedy and effective rehabilitation nor for an efficient exit. The process of liquidation and winding up is costly, inordinately lengthy and results in almost complete erosion of asset value”. The Mallaya episode would have been a drastically different story had we had an efficient law to address sickness and bad debts. It is intriguing as to why the then law makers chose to ignore some of the finest recommendations of the JJ Irani Committee.
Many manufacturing units starve for power and raw materials. To add insult to injury, they are saddled with governmental and licensing fetters and finally fall genuinely sick of the ecosystem. The financial system cries foul of mounting NPAs and gears up for a recovery drive further tightening the noose around sick companies. The ‘dis’ease of doing business, is a price we pay for a Nehruvian mixed economy saddled with licence raj and entwined in corruption. Once sickness sets in, the remediation lies in either revival which is therapeutic,
or liquidation which is euthanizing in nature. It is appalling that the present legal system makes it near impossible for one to dismount the dying horse, revive or even euthanize it. It is laudable that this Government has initiated steps to notify Chapter XIX of the Companies Act 2013 and to issue the Companies (Revival and Rehabilitation of Sick Companies) Rules, 2016. The Chapter also gives an opportunity for the National Company Law Tribunal (NCLT) to objectively analyse the genuineness of sickness. However, it is worrisome that the Chapter and the proposed Rules seem to supplement, instead of subsuming, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). An effective corporate insolvency system is an important ingredient of a stable financial system. .
Companies like Kingfisher Airlines become a bottleneck for ‘good times’. While the law compels every scheme of corporate restructuring to be nodded by the creditor community, it is quite surprising that Chapter XIX leaves the creditors to fend for themselves individually and not as a Class. It takes 50% of the secured creditors to join hands to get a defaulting company declared sick. This action shall abate if 75% of the secured creditors have initiated recovery action under the SARFAESI Act. If ‘ease of doing business’ is the buzzword, it calls for introspection by the law makers as to why there are no takers for the types of SEBI (Collective Investment Scheme) Regulations, while ponzies flourish under camouflage.
The quintessence of development is innovation. If we yearn for investments into the country, law makers need to innovate on the functions of statutes too. The relief under ‘Class Action’ if crafted with the concept of ‘Tracking Stock’ and applied to both equity and debt segments, could prove to be a viable solution to industrial sickness. Let us examine how this concept would work for the industry.
What is Tracking Stock? This is a unit specific security issued by a corporate entity. Born out of a recent concept that has been gaining increasing acceptance amongst professional investors, this is a security that has underlying assets of an identified unit. The unit could be either sick or stunningly productive. In other words it is a stock that attributes a distinct legal existence of a unit well within a corporate identity. Tracking Stocks pave way for market disintermediation. The interest cost of reviving a sick industrial is currently around 25% and this makes the revival process self destructive. In case the unit could issue junk tracking stock at an IRR of say 20% to those with ample appetite for risk, the costs of market intermediation could be drastically reduced, thereby making the revival mechanism affordable. For a company with multiple units, the profit making units can issue Tracking Stocks for scaling up business, the cost of funds for which could be much lesser than those issued at an enterprise level. A company having two revenue segments, one being sick, could risk the assets of the profit making unit. The lien of the lender is on the assets of the enterprise and not on the units. Here the enterprise risks endanger productive units and the present law encourages this.
What is ‘Class Action’? This enables one or more persons to file and prosecute a civil litigation on behalf of a larger group or class, wherein such class has common rights and grievances. But the Companies Act 2013 (Section 245 yet to be notified) has a restrictive definition of the class that comprises security holders and depositors. The creditors cannot form a class and have to fight a common cause under the constraints of multiple laws.
Why class action should be restricted to ‘Securities’ and ‘Deposits’ only? Why not think of a ‘Class Identity’ in a Tracking Stock? By this, every holder of Tracking Stocks, apart from a direct lien on the unit specific underlying assets, will enjoy the benefits of Class Action too. Classifying creditors as a ‘Class’, say secured and unsecured, will further strengthen the lending phenomenon under Class Action. Ring-fencing the individual units against enterprise wide risks and vice versa will augur well not only from a governance perspective, but will act a shield against industrial sickness. The Security Receipts issued by Asset Reconstruction Companies, can typically be innovated into a junk Tracking Stock and also can be qualified for Class Action. Tax breaks could be considered for such junk stocks too.
A few innovations in law coupled with a new infusion of life to their enforcement will streamline the industrial ecosystem in a big way and ensure that business intents are never again Mal(ya)fied !
Founder Director and Chief Consultant
Finteglaw Knowledge Solutions Private Limited.