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Mukesh Ambani vs. Jeff Bezos fight for Future points to lacunae in India's bankruptcy law

A telecom company and a store are shining a light on India's experience with aided corporate death and rebirth. The vision that stares back at you is one of victory snatched from the jaws of loss. As the five-year-old bankruptcy experiment falters, blame it on what development academics call "isomorphic mimicry": emerging countries imitate the appearance of successful Western institutions while leaving them dysfunctional and empty of content, practically ensuring their failure.

India's 2016 insolvency law (IBC) piqued the interest of international investors, who hoped to benefit from the 19 trillion rupees ($260 billion) in bad loans, including those written off by banks in the previous eight years. The first success in finding new homes for troubled steel facilities fuelled expectations that the savings-depleted economy would be able to extract significant capital from unsuccessful businesses. Creditors are already objecting to 90 percent haircuts, and bailout funds are disillusioned by everything from protracted delays in tribunal admissions to a chronic judge scarcity.

Large, indebted companies are still turning into zombies. Vodafone Idea Ltd. will be unable to repay the $30 billion it owes the government and banks unless a miracle occurs. Future Retail Ltd. planned to stay solvent by selling assets to Mukesh Ambani's larger conglomerate. However, the purchase has been legally halted by Inc., from which Future's founder Kishore Biyani had received money after vowing not to sell out to India's richest man. Unless Biyani and Amazon can reach an agreement, Amazon's survival appears to be in jeopardy. Corporate death is a feature, not a problem, of capitalism. India adopted the British strategy of placing creditors in the management of bankrupt companies. Debtors can file for bankruptcy in court, or lenders can stop the process. On paper, everything appears to be in order. But, like the legendary cat in quantum scientist Erwin Schrödinger's thought experiment, India Inc. would not be struggling with enormous companies that are both alive and dead if the institution was truly operating to its original goal.

Other insolvent phone networks' history does not inspire confidence that it will be permitted to keep its licences even if it goes bankrupt. The carrier, which has 255 million members, would be worthless without them. Banks are worried about the loan-loss provisions they'll have to make if Future's $1.4 billion in onshore debt is dragged to a bankruptcy tribunal, having just extended the maturity of Future's $1.4 billion in onshore debt. It's a Catch-22 situation: subsequent recoveries might be disastrous. Future paid the payment on its offshore debts within the grace period of 30 days last week. The notes, however, are still selling at around 60 cents per dollar.

There are several delays, not only in authorising a sale or liquidation in 270 days, as the legislation initially suggested (the time limit was later raised to 330 days), but also in accepting cases to begin the clock. Since November 2018, Punjab National Bank has been attempting in vain to bankrupt Indian Steel Corp. A year ago, KKR & Co.'s India business filed a lawsuit against Sintex-BAPL Ltd. However, an operating creditor filed its own petition against the car parts manufacturer, which was eventually negotiated, and the company was able to emerge from bankruptcy. Only last month was KKR's application accepted. Leaving aside the top nine bankruptcies ordered by the central bank in 2017, creditors have only recovered 24% of their losses. The existing business environment is a colonial heritage. With relatively little money, a few British management agencies used to have control over huge swaths of productive assets. The agencies were prohibited in 1969 after being controlled by Indian business dynasties, but a largely state-dominated banking system still permits politically connected borrowers to create empires on a fraction of loss-absorbing equity. When government-owned banks lose money, taxpayers are on the hook to make up the difference.

When parliament passed the bankruptcy legislation, it was well aware of the power imbalance and perverse incentives. As a result, legislators crammed it with creditor-friendly provisions. But there was always going to be opposition. Politicians who must compete in expensive elections funded by corporate money have simply lost their courage to be harsh. Urjit Patel, the former governor of the central bank, tried and failed to make large borrowers more responsible by halting banks' evergreening of bad loans.

It is yet possible to convert the bankruptcy regime into a functioning institution. It's possible that it won't happen until the government is no longer a significant participant in the lending sector. Even if banks are not privatised, procedural flaws can be corrected relatively quickly if governments wish to eliminate capital misallocation. Maybe they don't. Isomorphic mimicry, as highlighted by economist Lant Pritchett and others, is an excellent strategy for guaranteeing continuous, successful failure.

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