For a flea market in corporate assets

D. Sampathkumar

GOING by the statistics put out by the Department of Company Affairs (DCA), the country does not have a problem of sickness among commercial enterprises.

Of the 5.12 lakh companies that the DCA says were in existence in March 1999, only 5,087 faced court orders to be wound up. Even from this number, only a little over 1,500 companies were being liquidated, and because their own members wanted this.

These companies are unlikely to have been under financial distress to the point where creditors having outstanding claims wanted immediate settlement. That leaves a mere 3,500, or so, where one might infer there is some kind of financial distress and, as a corollary, some monies belonging to creditors of the company are locked up. Now 3,500 companies in a population of over 5 lakh companies on the live register of the DCA is less than a percentage point. Not a strong indicator of all-round sickness.

That this runs counter to the perception in the Chambers of Commerce and Industry, which have been indulging in much breast-beating about the epidemic of sickness in industry is, of course, one aspect of the story. But a larger point needs to be made. It is just as well that the number of companies is such a small proportion of the total number of incorporated entities.

For any larger number would put an even greater strain on a legal machinery already creaking under the weight of accumulated cases. The DCA admits, rather candidly, that a mere 185 companies were wound up during 1998-99. At this rate, it would take nearly 20 years to complete the process in the 3,500-odd companies which creditors have a stake in winding up.

The problem is, however, not confined to these 3,500 companies. There are many more where suits for winding up of companies are still in the process of being heard. As Mr Justice Balakrishna Eradi, -- a former judge of the Supreme Court, who headed a committee on reform of the insolvency law for corporations -- noted some time ago, there are cases pending for over 20-30 years. In other words, it could take anything up to 20-30 years for a verdict of winding-up to be pronounced, and an equal number of years for the assets to be disposed of, and the creditors repaid their dues.

This is an extraordinary state of affairs. The amounts involved are by no means small. In the 3,500 companies where liquidation verdicts have already been handed down, the sums could be anything in the region of Rs 3,500 crore. The average paid-up capital of a company in the population of incorporated entities is about Rs 50 lakh.

In the circumstances, the capital employed in the 3,500 companies under liquidation as of March 1999, could be in the region of Rs 1,750 crore (Rs 0.50 crore times 3,500). For a rough idea of the size of creditor claims, we may take a debt equity ratio of 2:1. We could then be looking at a sum of the order of Rs 3,500 crore.

This is but a small portion of the total dues of all failed companies. The size of non-performing assets in the banking system alone, at last count, amounted to something of the order of Rs 60,000 crores. But the claims of the banking sector are only a part of the total sum due from the companies in financial distress.

There are other secured and unsecured creditors. If one adds up claims due to the other entities, besides banks, whose volumes can only be guessed at, we are looking at a colossal sum due in debts to investors and other economic agents in the system. The conclusion is this: The legal machinery in the country for the satisfaction of creditors' claims through a process of liquidation proceedings barely scratches the surface of third-party claims against delinquent companies.

The irony is that even the extremely limited scope of the legal machinery in this context hardly fetches any worthwhile results. It is astonishing to note that the entire legal machinery of official liquidators has collectively managed to recover a paltry sum of Rs 6.75 lakh in a whole year by disposing of the assets of companies under liquidation. The latest DCA annual report confirms this.

The Eradi Committee has recommended the constitution of special tribunals to adjudicate on suits of liquidation. But the success of this scheme depends on a number of factors. Not the least of these is the size of the Tribunal itself. According to Mr Eradi, the high courts detail one judge per day in a week to hear liquidation petitions. That works out to 750 man-days in a year for all the high courts in the country.

If these many man-days resulted in the clearance of a mere 180 cases, the liquidation of the backlog of 3,500 cases now pending would require a 75-member strong tribunal if they have to be cleared in a year. As to clear the backlog of cases where a verdict is yet to be arrived at, the strength of the Tribunal needs to be increased even further.

The expeditious disposal of cases does not only depend on the strength of the Tribunal to be constituted for the purpose. The rights of the workers who might be affected by a winding-up decision is another imponderable in this context. Then, there is the problem of politicians who, in the name of workers' rights, wish to stall any resolution on the fate of sick companies.

These politicians know only too well that, for the majority of sick companies, land is the only worthwhile asset they command. They do not want any frozen stock of land to come into the market whose wealth -- often ill-gotten at that -- is stored in the form of urban/agricultural lands. Such an increase in supply can only bring down the real estate prices. So, they are not in favour of any reform of the insolvency law.

This is bad news for investors. As it is, those who invest in the equity and loan capital of a company suffer from a heightened degree of risk of capital erosion, thanks to the global competition that liberalisation has unleashed on the economy. The least they have a right to expect is that they will be able to salvage what remains of the assets of the business after it has proved unviable. This requires an expeditious disposal of winding-up applications. But that is what politicians seem bent on holding up.