Three lessons learned by Uday Kotak at IL&FS

Kotak’s day job as Managing Director and CEO of Kotak Mahindra Bank is a serious responsibility, and his primary charge may demand his specialized ministries, given the emerging adverse conditions for economic growth and resurgent inflationary pressures. .

Kotak probably has three reasons to look at his tenure as government-appointed chairman at IL&FS with some degree of pride. This would have given him a new impetus to move on; The job is done and on to the next challenge. His tenure also provides broad lessons for the insolvency and bankruptcy process in the country.

The first reason for Kotak’s satisfaction may be the ability of the government-appointed board to get a sense of the accounting and financial disturbances spread across about 350 companies, subsidiaries, associate firms, special purpose vehicles and other bodies corporate. The accounts were messy and given the prolonged deception by fee-hungry rating agencies and audit firms, it needed to take a special broom to separate it from the useful. This was necessary in order to get an understanding of the liabilities, the long line of creditors, the nature of assets and a working list in which assets could be liquidated to pay off lenders. Also, there was a politically sensitive hot-button issue of how to handle different categories of creditors, not to mention submitting reports to multiple regulators.

Once the corporate topography was in hand, it facilitated the next step, which helped the Board seek solutions to Against more than 55,000 crores 99,000 crore outstanding. Board’s earlier estimate of resolvable assets 61,000 crores and it expects the balance 6,000 crores to come during FY23.

While the extent of resolution is laudable, given that the ratio in the insolvency and bankruptcy courts is very low, Mr. Kotak has learned an interesting lesson: The widespread turmoil in IL&FS across various layers and legal entities made resolution more difficult. Is. Therefore, he argues that the IBC process should always have a group approach; Even though banks only drag one company to bankruptcy courts, the process should always be group-based. Money is fungible and flows from one level to another. Corporate walls are known to be porous and money borrowed in one company is not always spent in the same company.

Mr. Kotak has a point. In group after corporate group, especially in family-run businesses, it can be shown empirically that money leaks into group companies. Pursuing only a bankrupt company often frees defaulting promoters from spending money elsewhere, leaving little scope for the IBC process and recovery to legitimate creditors. This affects the credit health of the system and reduces the economy’s ability to grow. The broader view of the corporate crisis probably explains the IL&FS board’s ability to manage a 61% recovery rate as compared to the low 31% average recovery rate in the IBC process.

His observation of several lenders extending advanced loans to IL&FS without understanding the assets or cash flow generating capacity is worth considering. Many private banks, lured by an additional percentage point and driven by incentives based on credit targets, have rushed to support structured products without a basic understanding of the underlying risks, their eagerness to fake credit ratings or oven-baked audits. Inspired by the report. Kotak makes sure to take this lesson back to its bank, especially to its credit team, which has endured its fair share of past embarrassment over products structured based on the Swiss franc and the Japanese yen.

Kotak can also get relief from the fact that his tenure in IL&FS has come to an end. Given the number of actors involved, including states and public sector companies, in which governance has never been a high priority, the process of resolving under-performing infrastructure assets is a nightmare in India. Moreover, breaking of the legal process by bogus borrowers messes with the timelines. It is quite likely that Kotak will influence his board and his bank’s senior team to give wider berths to infrastructure projects, especially those undertaken by state utilities or central government agencies. This will be unfortunate as the credit deficit is the highest in the infrastructure sector.