5 spectacular Indian failures that warns about the perils of excessive debt

5 spectacular Indian failures that warns about the perils of excessive debt

Updated: 6 days, 1 hour, 22 minutes, 1 second ago

5 spectacular Indian failures that warns about the perils of excessive debt | Unsplash - Melinda Gimpel

According to government data, in June this year, as many as 1,999 cases of corporate insolvency resolutions process were ongoing under the insolvency law. In total, the Insolvency and Bankruptcy Board of India (IBBI) have received 6,231 complaints and grievances, of which 6,172 have been disposed of post examination.

There have been questions about how effective the Insolvency and Bankruptcy Code (IBC) has been in reducing the damage done by companies that are going bankrupt because of an unsustainable policy environment or poor corporate governance, or misuse of funds by promoters or businesses. There may also be certain changes in the law that will help make the process faster.

Though the IBC is still undergoing updates and changes, we have had quite a few cases that have happened in India.

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The reasons for the bankruptcy may range from poor management of funds, increasing debts, to unstable economy. Let’s see the top 5 cases of bankruptcy due to debt.

Pramod Mittal Pramod Mittal

Pramod Mittal | PTI

Pramod Mittal, billionaire steel magnate Lakshmi Mittal's younger brother, was declared bankrupt by the London high court on June 19, 2020, after he failed to settle a judgement debt against him led by Moorgate Industries UK Limited of Rs 1,384 crore. But later, Promod Mittal proposed an individual voluntary arrangement (IVA) in which he had to pay back Rs 42 crore, after costs, of the total of Rs 24,000 he owed them.

This allowed him to get his bankruptcy quashed, and an interim suspension of the discharge was made in June, 2021. But despite the IVA, he was not able to annul his bankruptcy order, as Moorgate is challenging the IVA in court. According to Bloomberg, earlier this month he was also sued over 'sham' UK loans to exit bankruptcy.

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It was back in 2005 when Pramod Mittal-owned Global Steel Holding and Global Steel Philippines Inc. defaulted on payments to the government-owned State Trading Corporation of India due to an unprecedented meltdown in the steel industry and a depression in the global economy. STC filed a case in the Delhi High Court, which was later dismissed as the court said it lacked jurisdiction. It was then moved to the Supreme Court.

Finally, in 2019, the STC recovered the full settlement of Rs 2,210 crore from Pramod Mittal's companies, after which the Supreme Court quashed the criminal cases and the FIR registered by the CBI against Pramod Mittal and Balasore Alloys by the Enforcement Directorate as all the proceedings were settled as per court orders.

Alok Industries Alok Industries Limited - Logo

Alok Industries Limited - Logo | Alok Industries Limited

Excessive debt for extensive expansion planning has landed many companies in trouble. Alok Industries are no different, but with a twist. Alok Industries, which came into existence in 1986, was one of the leading textile industries that manufactured world-class garments. The company expanded its business to weaving, knitting, garment production, and home textiles with manufacturing plants in Navi Mumbai, Silvassa, and Vapi. But soon it all slipped and went downhill.

With the aim of expanding the company borrowed nearly Rs 10,000 crores. They were opening new plants instead of using the resources they already had at their disposal. The company failed to see that the textile industry was very volatile and kept producing in large numbers.

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In addition, it also received a very close fight from other competitors and ultimately lost a huge portion of the market share. With the poor decision in the textile industry the company entered into real estate in 2007 and acquired commercial property in Lower Parel, Mumbai. This cost them more money than the company was prepared for, and it started facing huge losses. They also entered the retail market, which pushed it even deeper into losses.

Soon the company had to shut down all its retail outlets in India and a few others in the UK. In addition to all the losses, they also had to pay back the loan, which grew over time. By 2013, Alok Industries was paying close to 13 per cent as interest on the loan it had borrowed up from the earlier 7.5 per cent.

The company had close to Rs 30,000 crore dues that were to be paid to creditors. This bought the company in RBI's list that was sent to the National Company Law Tribunal (NCLT) that was submitted to the IBC and was declared insolvent. In 2019, the Ahmedabad bench finally gave the bid to Reliance and JM Financial Asset Reconstruction Company, which had submitted a plan for Rs 5,000 crore.

Essar Essar Logo

Essar Logo | LinkedIn

Essar Steel is one of India's oldest and leading company operating in the private sector. It was founded in 1969 and is the second-largest steel-producing company in the country. It was in 2002, when the trouble began, as they had a huge debt of Rs 2,800 crore. The company had to restructure its entire debt, which kept the company afloat. But the company decided to expand operations and took huge loans from banks like SBI, Syndicate Bank, ICICI, etc. But as there was a delay in getting an environmental approval and shortage in the availability of natural gas, the expansion plan had reached a dead end.

Further, due to the financial crisis, the cost of steel in the global and domestic markets went down. Essar Steel had to pay a debt of Rs 43,000 crore to banks and Rs 11,000 crore to other creditors and suppliers.

RBI soon intervened and pushed the company before the NCLT, which formed a committee to look after the resolution of the proceedings. In December, 2017, the committee led by Satish Kumar Gupta called for proposals. In November 2019, Laxmi Mittal-led ArcelorMittal, a European steel giant, got control of the asset after a Supreme Court justice. This helped Mittal enter into India.

The company's promoters, Sashi and Ravi Ruia, tried everything to get the asset back, from making a Rs 54,000 crore settlement offer to bidding via Numetal. But the courts rejected all the attempts and ultimately closed the bidding with ArcelorMittal at Rs 42,000 crore, making it the best deal under the IBC. Through bidding, the lenders got 85 per cent in returns on the steelmaker's debt of Rs 49,000 crore.

Essar Shipping narrowly escaped going bankrupt after it settled up with creditor L&T Finance. That was not the only time, they had also been dragged to bankruptcy tribunal in 2018 by government-owned lender Punjab National Bank.

Jet Airways

Jet Airways

Jet Airways started as air taxi operators in 1993 and moved on to scheduled carriers in 1995. The problems began in 2007 when the company's profitability started to go down as it incurred debt to fund its expansion. Jet Airways bought debt-ridden Air Sahara and rebranded it as a low-cost subsidiary, JetLite. But soon the financial crisis hit and the demand fell while the oil prices surged. All of this just kept on adding to the company's debt.

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Soon the company was in fare war with carriers like IndiGo and SpiceJet and soon the company was incurring losses. It went so bad that Jet Airways moved from having 120 aircraft to only 7 planes by April 2019.

The company shut down operations in 2019 due to heavy debt and has been under insolvency for over two years. It is the first Indian airline to undergo insolvency proceedings under the Cross Border Insolvency Protocol along with the IBC of India. It was the State Bank of India that filed the petition in the NCLT against Jet Airways.

The total losses were close to Rs 25,000 crore, and according to reports by the Indian Express, it has been acquired by a consortium of UK-based Kalrock Capital and UAE-based businessman Murari Jalan. The airline was expected to start flights this year, but that has not happened yet.

Lanco Infratech

Lanco Infratech Limited

Hyderabad-headquarters Lanco Infratech was created in 2006, consolidating the 1960-founded Ganco Group's diverse operations under one single brand. But this consolidation could be blamed for the downfall of the company.

In 2015, Lanco Infratech reported a loss of Rs 2,036 crore on revenue of Rs 9,681 crore. The company was in deep waters after their managing director was caught at the Hyderabad airport with about Rs 34 lakh allegedly unaccounted cash. After this the firm was also disqualified in charges for misrepresentation from India's first ultra mega power project at Sasan in Madhya Pradesh. This was also the period when the companies had not paid salaries to the employees.

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Low capacity utilisation and high fuel costs were also adding to the financial stress. Another issue for the company was the reversal of the policy related to the sale of merchant power, which was earlier sold as a commodity on the spot market. This resulted in evaporated high revenues and the banks had also stopped lending to the sector. WHich ultimately pushed the company to a liquidity crunch.

Ultimately the company in order to prepare its debt sold some of its assets to Gautam Adani and Greenko Energies.

Finally in 2017 RBI pushed the company to NCLT but after the lenders rejected the insolvency resolution plan and bid by Thriveni Earthmovers the company went in for liquidation. The company owed over Rs 44,000 crore to the IDBI Bank-led consortium.

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