KAAND 22: The Too Big To Fail Kaand TACTIC: Employ enough people, owe enough banks, become systemically important enough that the government cannot let you collapse
THE TACTIC IN ONE PARAGRAPH The tactic is simple: grow so large that your failure would trigger a chain reaction—mass layoffs, bank defaults, market panic—that the government cannot afford to ignore. The mechanism relies on three levers: scale (direct and indirect employment), leverage (interconnected debt with public and private banks), and visibility (political and media exposure). Once a firm crosses this threshold, regulators and policymakers face a binary choice: bail it out or risk systemic collapse. The calculus is not moral but mechanical—cost of intervention versus cost of contagion. The larger the firm, the more its survival becomes a public good, and the more its private risks are socialized. This is not fraud; it is structural arbitrage. The smart 22-year-old will recognize this pattern in airlines, infrastructure conglomerates, and shadow banks—sectors where size is the ultimate insurance policy.
HOW IT WORKS IN INDIA SPECIFICALLY India’s political economy amplifies this tactic in ways that would be harder in, say, the U.S. or Europe. First, the concentration of economic power: a handful of conglomerates control disproportionate market share in banking, infrastructure, and commodities, making their failure politically untenable. Second, the state’s dual role as regulator and owner: public sector banks (PSBs), which hold 60% of banking assets, are directly controlled by the finance ministry, creating a conflict between prudential norms and electoral imperatives. Third, the legal architecture: the Insolvency and Bankruptcy Code (IBC) is designed to resolve distress, but its effectiveness is undermined by judicial delays (average resolution time: 653 days) and the RBI’s reluctance to push large defaulters into insolvency. Fourth, the "evergreening" loophole: banks can restructure loans under RBI’s June 2019 framework, allowing firms to avoid classification as non-performing assets (NPAs) by making token payments. Finally, the political economy of employment: in a country with 12 million new jobseekers annually, the threat of mass layoffs is a nuclear option. The government’s 2019 bailout of Jet Airways—despite its private ownership—was justified on these grounds: 16,000 direct jobs, 1.5 lakh indirect jobs, and the risk of a domino effect on aviation leasing firms and oil companies.
THE HISTORICAL RECORD The tactic has been deployed at least three times in India’s post-liberalization history, each time with documented outcomes. The first instance was the 1997 bailout of Unit Trust of India (UTI), then India’s largest mutual fund. UTI’s US-64 scheme had guaranteed returns to 2 crore retail investors, but its portfolio was stuffed with illiquid stocks of group companies. When the market crashed, UTI faced a run. The government, fearing a loss of faith in capital markets, injected ₹3,300 crore (₹14,500 crore in today’s terms) into UTI, effectively nationalizing its losses. The perpetrators—UTI’s management—were shielded from prosecution; the victims were retail investors, who saw their returns slashed by 40%.
The second case was the 2008-2012 Kingfisher Airlines saga. Vijay Mallya’s airline owed ₹9,000 crore to 17 banks, including ₹1,600 crore to SBI. Despite defaulting on loans and employee salaries, Kingfisher continued operations for four years, thanks to evergreening by banks and regulatory forbearance. The RBI’s 2012 asset quality review finally forced banks to classify the loans as NPAs, but by then, the damage was done. The government’s reluctance to act stemmed from Kingfisher’s 6,000 employees and its status as a "national carrier" in the public imagination. Mallya fled the country in 2016, but the banks recovered only ₹1,357 crore (15% of dues) after a decade-long legal battle. The victims were the banks’ depositors—public money, effectively—who bore the cost of delayed recognition of bad loans.
The third case is the 2019 collapse of Infrastructure Leasing & Financial Services (IL&FS), a shadow bank with ₹94,000 crore in debt. IL&FS had 348 subsidiaries, employed 13,000 people, and financed 1,300 infrastructure projects. When it defaulted on ₹450 crore of commercial paper in September 2018, the government stepped in, superseded its board, and initiated a ₹5,000 crore bailout. The RBI’s 2019 Financial Stability Report later revealed that IL&FS had been evergreening loans for years, with auditors (Deloitte, KPMG, and EY) signing off on financial statements that hid its liquidity crisis. The perpetrators—IL&FS’s management—were investigated by the Serious Fraud Investigation Office (SFIO), but the systemic risk was deemed too high to allow a collapse. The victims were mutual fund investors, who saw their debt schemes freeze redemptions, and infrastructure projects, which stalled due to funding gaps.
THE INSTITUTIONS THAT ENABLED IT No tactic of this scale works without institutional complicity. In India, the enablers fall into five categories. First, public sector banks: SBI, PNB, and Bank of Baroda repeatedly restructured loans to Kingfisher and IL&FS, despite clear signs of distress. Second, rating agencies: CRISIL, ICRA, and CARE maintained investment-grade ratings for IL&FS until days before its default, citing "strong parentage" and "government support." Third, auditors: Deloitte, KPMG, and EY signed off on IL&FS’s financials for years, despite red flags like negative cash flows and high leverage. The National Financial Reporting Authority (NFRA) later found Deloitte guilty of professional misconduct in the IL&FS case. Fourth, regulators: the RBI and SEBI failed to detect evergreening in real time, despite IL&FS’s repeated violations of exposure norms. Fifth, the judiciary: the National Company Law Tribunal (NCLT) took 18 months to admit IL&FS’s insolvency petition, during which time the government had to step in to prevent a market meltdown.
THE CURRENT STATE The tactic is alive and well. The IBC has made it harder to delay insolvency, but large firms still exploit regulatory gaps. The RBI’s 2021 circular on resolution frameworks allows banks to restructure loans without classifying them as NPAs, provided the borrower’s credit rating is above a certain threshold. This creates a perverse incentive: firms can game the system by securing a favorable rating (often from conflicted agencies) and avoid default. The government’s 2023 bailout of Go First, a budget airline, shows the pattern persists. Go First owed ₹6,500 crore to banks and lessors but was deemed "too important to fail" due to its 3,000 employees and 6% market share. The NCLT admitted its insolvency petition in May 2023, but the process is expected to drag on for years. Meanwhile, the RBI’s 2023 Financial Stability Report warns that 12 large borrowers (owing ₹4 lakh crore) are at risk of default, but no action has been taken. The system has not changed; it has merely adapted.
WHAT TO WATCH FOR Three red flags indicate this tactic is in play. First, a firm’s debt-to-equity ratio exceeds 3:1, but its credit rating remains investment-grade. This suggests evergreening or regulatory forbearance. Second, a company’s board includes retired bureaucrats or politicians—this is a signal that it has "insurance" at the policy level. Third, a firm’s default triggers a government statement about "protecting jobs" or "maintaining market stability." This is the clearest sign that a bailout is coming. If you see all three, assume the game is rigged.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.