Seeing bankruptcies as opportunities

The advanced industrial economies of the West in the first half of the last century underwent a major structural transition which is now taken for granted. This was the transformation of most founders’ family-run large enterprises into board-run professionally managed companies.

In the first few decades of the twentieth century, family enterprises were the norm in these countries. Some of these firms, such as Ford and Siemens, still carry the names of their founders.

The history of this transition is complex and country-specific. In the US, the prolonged Great Depression of 1929 led to a large number of bankruptcies and quite a few suicides. Out of the turmoil emerged the professionally managed companies.

In Germany, defeat in War, occupation and reconstruction afterwards led to the pre-war national companies becoming government supported professionally managed companies. In his 1967 best seller, The New Industrial State , economist John Kenneth Galbraith describes the phenomenon of the rise of transnational corporations and how power was shifting to them from nation-states and from traditional elites to the new managerial elite.

The US went on to develop its obsession with iconic larger-than-life CEOs such as Lee Iacocca of Chrysler and Jack Welch of GE. They became the successors of legendary owner entrepreneurs like Rockefeller and Carnegie of the earlier era.

Large corporations are essentially business empires. The age of young daring military leaders with sound judgment, intuition and luck creating physical empires has gone. Now entrepreneurs with similar traits create business empires. But the future of empires through history depended on the ability of the succeeding generations.

The Mughal Empire became great due to the extraordinary abilities of Akbar. It collapsed after Aurangzeb as his heirs just did not have it in them. This is the case with business empires as well. There is the current example of two brothers inheriting one of the largest business empires in India. One has made his empire bigger and the other is on the verge of bankruptcy.

Merit matters

Succession of the reins in a large corporation to a CEO selected on merit increases the probability of long-term growth and success. It leads to the corporation having greater stability and better growth. This in turn makes for a more competitive and stronger national economy. This is the reason that in some cases founders of successful companies themselves choose to pass on the reins to professional management. Bill Gates and Microsoft are a good recent example.

In India, promoter-family controlled enterprises are still the norm. The few examples that are there of professional board managed companies are the result of unusual circumstances. L&T and ITC became board-run companies due to the forced dilution of their foreign promoters’ equity mandated by FERA at the time of Mrs Gandhi. With professional and visionary management at the helm, these have been extraordinary success stories. They have had phenomenal growth and impressive diversification. They are now among the largest and best companies in India.

HDFC and ICICI, made possible by RBI’s special dispensation, have again been tremendous successes due to their dynamic founding CEOs. These show the untapped potential that India has in terms of management ability. With a bigger number of large professionally-managed companies, the vision of private investment-led higher growth trajectory in the Budget could become a reality much sooner.

The spate of recent bankruptcies of large groups in corporate India have created a window of opportunity for creating a number of new professionally managed board-run companies. But this opportunity can be utilised only if there is conceptual recognition of the great advantages that would accrue from having more professionally-managed companies. This has not been the case till now. It does not feature in the wish lists on economic reforms nor in policy discussions. Once this is accepted as a desirable objective, the rest is not difficult.

Instead of sending a firm, unable to clear its debts but still having reasonable underlying value, to the NCLT, the creditor banks could convert their debt into equity and take over control of the firm from the promoters. A new board should be put in place and this should then induct a new professional CEO from outside. If the board and the CEO do a reasonably competent job, the company should begin to turn around and market valuations should begin to rise in a few years. The losses of the banks would be far lower than through the distress sales that are now taking place. From getting 30-40 per cent of their outstanding dues through the NCLT route, they could end up getting over 60 per cent on a net present value basis. This is a win-win situation for all concerned.

Ideal candidates

Jet Airways is a good example where this can be done. A market leader with good assets, staff and brand value should not be difficult to bring back to health with new management and patient capital in a market which is growing so rapidly.

The JP group has been a leading construction company and it would serve the public interest if its capacities survived through a bank-led takeover. The group, in a fit of hubris, invested in the Formula 1 racing track and the Agra Expressway and through the over-leveraging that resulted is going under.

A large number of power plant developers are going bankrupt for a variety of reasons. A creditor-led takeover and induction of new management which would complete the ongoing standstill projects speedily could probably reduce the losses of the lenders to less than half. Housing developers who are bankrupt could also be taken over in the same way. Their home buyers could be given immediate relief by getting the stalled projects completed. India certainly needs many more good professionally managed housing companies.

The foundation for a stronger stabler market economy with a much higher growth potential would be put in place.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP

COMMENT NOW