Book Review | The Dirty Dozen: The Story Of India's 12 Biggest Corporate Defaulters

Japan's Kongo Gumi Co Limited, which specialised in constructing Buddhist temples, is considered the world's longest-running family business. It was established in 578 AD, at a time when the Golden Age of the Guptas was nearing its end in India, the Mayan civilisation was still flourishing in parts of Central America, and the erstwhile Roman empire had started disintegrating. Kongo Gumi had an independent run for 1,429 years. In 2006, the company filed for bankruptcy, unable to repay its debts. It subsequently was taken over by the Takamatsu Construction Group and continues to operate as a subsidiary.

India's IBC

The Kongo Gumi episode epitomises the double-edged nature of the insolvency and bankruptcy process. A company's inability to pay back its debts would eventually lead to closure of the business, and asset forfeiture. At the same time, if handled adeptly, a business could continue its run, albeit with a different promoter, or group of shareholders. India's Insolvency and Bankruptcy Code (IBC), which was enacted in May 2016, was a spirited response on similar lines to tackle the twin balance sheet syndrome that impacted the economy, engulfing both the banking and the corporate sectors. Over-leveraged businesses were finding it hard to pay the interest due on outstanding debt. Banks were saddled with non-performing assets, impacting their profitability, and constraining fresh lending. To break the logjam, IBC, with the full backing of the Reserve Bank of India (RBI) and the Central government, took on the top 12 biggest corporate defaulters. 

The catchy title given by seasoned business journalist N. Sundaresha Subramanian to these 'bad boys', The Dirty Dozen, may appear a misnomer. Unlike the characters in the iconic Hollywood movie, there is nothing heroic about this bunch. Their actions and deeds that landed themselves and the lending ecosystem in such a mess largely stemmed from corporate greed, corruption, political influence peddling, and a bit of plain bad luck. In hindsight, many captains of Corporate India would not be proud of the conduct of some of their peers in creating the distressed assets scenario.

The 'Big Twelve' Cases

The inability - in some cases bordering on incompetence - of the lending institutions to adhere to even rudimentary financial checks and balances while ever-greening loan books exposed the weakness of the regulatory environment.

Over the last eight years of its operations, the IBC has 'brought about a shift in debtor-creditor relationships, leading to ownership changes in many large companies", points out Dr M.S. Sahoo, former chairperson of the Insolvency and Bankruptcy Board of India, in the Foreword. "Some of the 'Big Twelve' managed to recover convincingly, others had to be liquidated, and a few are still in the middle of the process," he adds. Their resolutions tested the guardrails of the Code, setting the tone for the bankruptcy regime's operational success. A recent study by IIM-Ahmedabad finds that post-resolution, the companies have witnessed substantial improvement in their financial performance and governance practices.

Subramanian puts the spotlight on how individual business groups and their promoters landed up in this infamous club. He chronicles the travails of the Code in each of the 'Big Twelve' cases in finding the resolution. In some instances, the journey becomes more important than the destination. 

'We Were Financing The Promoter'

The book is divided into three sections. The first part gives a political-economic context to India's burgeoning stressed asset scenario in the early 2000s, which snowballed into a banking and financial crisis post-2008 following the global financial meltdown. The helplessness of the bankers in mitigating the fallout of portent financial crises is well-captured in the following scenario.

In a Joint Lenders Forum that was called to decide the course of action to deal with some stressed assets, the promoter of a small company tells a room full of public sector bankers that he has stashed enough money to take care of himself if things went wrong, bragging about his ability to pay-off even jailors. In another instance, which involved the financing of an infrastructure project, a retired bank official concedes: "We were not financing the project. We were financing the promoter."

There are instances of auditors looking the other way when promoters divert funds for personal use, or bankers ignoring red flags raised by auditors, or cases of blatant misuse of RBI circulars and schemes. Then there are governance challenges to deal with. As per a study conducted in January 2023, around 35% of director board positions are lying vacant in public sector banks.

The Nirav Modi and Vijay Mallya cases taught the bankers some hard lessons. They did not want a repeat of what Modi and Mallya did to them.

This laid the ground for how the banking fraternity rallied to deal with the 'Big Twelve'.

The Abuse Of Regulatory Mechanisms

The narrative picks up pace in Section II, which delves into the actions of delinquent promoters and how they use and abuse the legal, regulatory and administrative machinery to their advantage as their companies turn defaulters. The chapters in this section go into the back story of each of the promoters, chronicling the circumstances of their rise and fall. Perhaps the author could have elaborated a bit more about the current state of each of the promoters. One is left wondering as to what some of them are up to now.

One common thread through their respective narratives is that the 'red flags' of financial distress were there to be seen and picked up, just that someone somewhere chose to ignore or looked the other way. Though each of the accounts is gripping, at times one tends to lose the thread of the narrative in the details and descriptions.

The Devils Get Their Due

The final section looks at the institutional response to the stressed asset crisis and also how it has changed - or not changed - the behaviour of some corporate groups that continue to be highly leveraged. The response of the regulators, banks, and policymakers has evolved over time. They recognise that the Code's road to success in balancing the creditor-debtor relationship is always under construction, as Sahoo puts it.

Insolvency applications for the initiation of the IBC process against 27,514 companies - with an aggregate default of Rs 9.74 trillion - were withdrawn before admission. As Sahoo points out, perhaps the best use of the IBC is not using it at all. The Dirty Dozen gives the Devils their due as they became the test case for checking the efficacy and efficiency of the Code. It chronicles the saga of their rise, fall, demise, in some cases, a comeback - and the evolution of the attendant ecosystem. The winners from this churn: the 'good' spirit of enterprise and rule of law. Something worth fighting for, anytime, always.

(Sudipto Dey is a senior business journalist)

Disclaimer: These are the personal opinions of the author