Bankruptcies, despite being a common occurrence in the global business world, are considered a taboo subject in India. Promoters would rather conceal the fact that a company is going bankrupt than create a false sense of success. Understanding this, the government was compelled to enact the Insolvency and Bankruptcy Code.
The Modi government’s reform would allow creditors/lenders of a business to approach the National Company Law Tribunal (NCLT) if they have given up on receiving any loan amounts from the company. They would then be able to recoup some of their losses by selling the company or its assets in bids to others.
- Dewan Housing Finance Ltd. – US$13.93 billion
Dewan Housing Finance Ltd. (DHFL) is a non-banking financial company founded in 1984 by Rajesh Kumar Wadhawan. The company was founded to assist low- and middle-income individuals in obtaining housing financing in India’s tier 2 and tier 3 cities. Following HDFC, DHFL was the second housing finance company to be established.
For more than three decades, the company has performed admirably, maintaining steady growth and even acquiring companies such as Deutsche Postbank Home Finance. In Maharashtra, the company also took on slum development and slum rehabilitation projects.
These and other projects were funded by debt raised by the company. This planned development of DHFL was cut short on January 29, 2019, when Cobrapost, a group of journalists, published an expose on DHFL.
According to the expose, DHFL diverted Rs. 31,000 crores from loans to various shell companies for the personal gain of its promoters, including Kapil Wadhawan, Aruna Wadhawan, and Dheeraj Wadhawan.
Cobrapost also claimed that DHFL had made crores of rupees in donations to political parties in order to keep them safe. Loans worth Rs. 14,282 crores, for example, were diverted to these shell companies under the guise of slum development rehabilitation.
In addition, the Bharatiya Janata Party received Rs. 20 crores in donations. What appeared to be a well-planned expansion of DHFL now appeared to be a well-planned scam.
- DHFL Responds
Initially, the company denied these allegations, but Indian credit rating agencies reaffirmed DHFL’s high safety rating. However, the company’s actions said otherwise. They began selling a variety of businesses in order to pay off their debt. Later that year, DHFL missed bond payments and interest payments totaling Rs 900 crore. This compelled credit rating agencies to take action. The stock price has now dropped by more than 97 percent.
Because of their defaults, the RBI was forced to supersede DHFL’s board of directors and begin processing a resolution for DHFL under the Insolvency and Bankruptcy Code. DHFL would soon be taken to NCLT as well. In the background, investigations revealed more troubling information.
In 2010, investigations following the trail of money led to Sunblink real estate. This led them to gangster Iqbal Mirchi, a Dawood Ibrahim associate. By December 2019, DHFL was in bankruptcy court for failing to pay Rs 90,000 crores in debt, and their promoters had been imprisoned on money laundering charges. Meanwhile, the RBI has approved the Piramal Group’s takeover of DHFL.
- Bhushan Power and Steel – US$6.9 billion
Bhushan Power & Steel Ltd. (BPSL) was founded in 1970 and has since grown to become one of the country’s leading steel manufacturers. Between 2007 and 2014, the majority of the company’s expansion needs were met through loans. These loans were used to fund working capital, the purchase of plant and machinery, and other expansion-related activities. As a result, the company raised over Rs. 47,204 crores from 33 banks and other financial institutions.
Despite this, the company maintained healthy growth and profit margins. This would have meant that the loans were at least being put to good use. BPSL, on the other hand, consistently missed payment deadlines.
The CBI launched an investigation into the company in April 2019, and it was later revealed that the money was diverted to 200 shell companies. This resulted in massive NPAs for the banks, forcing the company into the National Company Law Tribunal (NCLT). BPSL was eventually auctioned off to JSW Steel, which offered a repayment proposal of Rs. 19,700 crore. As a result, banks lost 60 percent of their loan amount.
- Essar Steel (US$6.9 billion) – Biggest Bankruptcies in India
Essar Steel was a subsidiary of the Essar group, which was founded in 1969 and is controlled by the Ruia family. The company first fell into debt when it underwent Corporate Debt Restructuring for a debt of Rs. 2,800 crore in 2002. Essar, fortunately, survived and was back on track by 2006.
Essar resumed its aggressive expansion plans. Unfortunately, these plans were hampered by delays in environmental approvals and a lack of natural gas. By 2015, Essar was once again engulfed in debt, this time totaling Rs 42,000 crore. The plans to save the company were thwarted by falling commodity prices.
In June 2017, Essar was named to the RBI’s list of 12 stressed accounts that would have to go through insolvency proceedings under the IBC. As a result, the company was referred to the National Company Law Tribunal (NCLT). Essar Steel was auctioned off and later purchased jointly by ArcelorMittal and Japan’s Nippon Steel. ArcelorMittal Nippon Steel India (AM/NS India) was the new name for the company.
- Lanco Infra – US$ 6.3 billion
Lanco Infra was founded in 1986 by Lagadapati Amarappa Naidu and his nephew, Lok Sabha member Lagadapati Rajagopal. The Company’s growth in its first year was unparalleled, as it received several large contracts, primarily in the construction industry.
Soon after, the company expanded into other fields such as power generation, transportation, solar energy, coal mining, and so on. Lanco was one of the world’s fastest growing companies by 2010. It was also one of India’s first independent power producers, as well as the country’s largest private power provider.
The UPA government’s policy reversals in 2012, which were otherwise encouraged by them, had a significant impact on Lanco’s business. According to India Energy Exchange, monthly average merchant power tariffs were around 3 per unit in January 2012, down from a high of 10.78 per unit in April 2009.
Lanco’s revenue quickly declined, making it difficult for the company to obtain bank debt. Due to its poor financials, interest payments accounted for 60% of their expenses by March 2017.
Lanco Infra was named in June 2017 as one of 12 stressed accounts submitted by the RBI that would have to go through insolvency proceedings under the IBC. Lanco, once one of India’s largest infrastructure companies, was now facing insolvency proceedings before the NCLT.
- Bhushan Steel (US$6.2 billion) – Biggest Bankruptcies in India
Brij Bhushan Singal and his sons purchased a steel factory in Sahibabad in 1987, and Bhushan Steel was born. The family quickly expanded the business by incorporating sophisticated Japanese steel-making machinery into their operations.
The nascent Indian automobile industry, which began to emerge in the country, aided their expansion even further. This aided Bhushan Steel’s expansion and allowed them to acquire clients such as Maruti Suzuki, Mahindra and Mahindra, and Tata Motors. Its client base also enabled Bhushan Steel to obtain loans for their expansion needs.
However, the dream run took a turn for the worse following the 2008 financial crisis, when commodity prices began to fall for Bhushan Steel. Bhushan Steel was already saddled with debts totaling more than Rs. 11,000 crores.
Steel prices had fallen to $300 by 2012, from a high of $1265 in 2008. This had an impact on the steel industry as a whole, but companies were still able to obtain loans because both banks and Bhushan were confident that prices would soon rise.
On this bet, banks had extended nearly Rs. 18,000 crores in new loans. However, the good times never came. Despite continued growth, the company was unable to keep up with the debt, which stood at 31.83 billion rupees, or 3.5 times its equity. The company quickly fell behind in its debt repayment obligations.
Bhushan Steel was also named on the RBI’s list of 12 stressed accounts that would have to go through insolvency proceedings under the IBC. The company was merged with Tata Steel in 2019 and is now known as Tata Steel BSL Limited.
- Reliance Communications – US$4.6 billion
Reliance Communications (RCom) is now widely regarded as Anil Ambani’s most egregious failure. Rcom, on the other hand, was once one of the most ferocious competitors. Anil Ambani received RCom following the division of assets between the Ambani brothers following their father’s death.
One of the first mistakes the company made was choosing CDMA over the other option, GSM, early on. This was a bad bet because GSM technology advanced, leaving CDMA in the dust.
Anil Ambani, on the other hand, was quick to recognise this and began investing in 3G and GSM technology. This was followed by an aggressive pricing strategy in which he offered services at up to 60% less than other telecom companies. This benefited him because RCom was India’s second largest telecom provider in 2008. RCom, on the other hand, had already spent Rs 8,500 crore to acquire 3G spectrum in over 13 circles. Trouble began to brew for RCom as it became entangled in the 2G scam storm.
The 2G scam enabled nearly 14 players in the industry, further reducing profit margins. RCom gradually lost market share and fell to fourth place in the telecom sector by 2014.
The entry of Jio into Indian markets, which also began providing free data services, was the final nail in Rcom’s coffin. Rcom’s debt had ballooned to Rs 43,000 crore by 2017, up from Rs 25,000 crore in 2010. According to estimates, nearly half of the company’s debt was used to purchase spectrum. RCom ceased operations in 2017 and began selling assets to repay its debt. The company was then referred to the NCLT, and Anil Ambani is still facing a trial over its debts.
- Alok Industries – US$4.1 billion
Alok Industries, founded in 1986, was one of India’s leading textile manufacturers of world-class garments. The company’s growth and profitability remained strong.
In 2004, Alok Industries made one of its first mistakes by borrowing Rs. 10,000 crores for expansion purposes. The worst part was that Alok chose to use this to open new plants rather than enhancing or fully utilizing their existing plant. What Alok failed to consider was the possibility of a drop in industry demand. These factors contributed to Alok’s asset turnover worsening; in addition to low demand, they were subjected to cutthroat competition.
Alok made another blunder when he entered the real estate market in 2007. It purchased properties in Mumbai’s Lower Parel. The real estate market was harmed by the aftermath of the 2008 financial crisis.
Consistent losses and mounting debt exacerbated Alok’s situation. Lanco Infra was named in June 2017 as one of 12 stressed accounts submitted by the RBI that would have to go through insolvency proceedings under the IBC. Alok Industries owed its creditors a total of Rs.30, 000 crores. With a plan of Rs. 5000 crores, Reliance and JM Financial Asset Reconstruction Company won the bid for the company.
- Jet Airways – US$2 billion
Jet Airways was the largest and longest-serving private airline in the country. The airline, which was founded in 1992, was the first to operate a fleet of Boeing 737-400 aircraft. It even flew 650 flights per day at its peak. When Jet went bankrupt, many wondered if any airline could ever operate profitably in the Indian market. This was due to Jet’s failure to follow Kingfisher’s failure. Jet was also a victim of the airline industry.
One of the major reasons for the Jet’s failure was the enormous fuel costs that the airline would have to bear. In general, fuel accounts for 40% of an airline’s expenses. When aviation fuel prices rise, this is not always passed on to customers. This is due to the fact that no single player has a large enough market share to influence the price. As a result of the competition, the airlines’ profit margins are reduced.
In addition, Jet was hit by the rupee’s depreciation. This has an impact on international airlines because they must now pay more in dollars to other countries for rent, maintenance fees, and refueling at international airports. The Rupee was also dubbed Asia’s worst-performing currency.
These factors eventually contributed to the Jets’ demise.
Bottom Line
It’s difficult to believe that such massive bankruptcies have occurred at first. However, in retrospect, they also provide valuable business lessons. The ‘Debt’ has been a recurring theme in all of them. If used correctly, it may help the business grow or it may suffer the same fate as the companies mentioned above.
