KAAND: The Insolvency Kaand TACTIC: IBC was meant to punish promoters — how promoters learned to game the resolution process to buy back their own companies cheap
THE TACTIC IN ONE PARAGRAPH The Insolvency and Bankruptcy Code (IBC) was designed to strip failing promoters of their companies, transferring control to new owners who could revive them. But promoters quickly learned to exploit the process by engineering a controlled default, letting the company enter insolvency, and then bidding to buy it back at a steep discount—often through proxy entities or related parties. The mechanism works like this: the promoter defaults on loans, creditors file for insolvency, the company is valued at a fraction of its original worth, and the promoter (or an associate) submits the winning bid, often with the same lenders who took the haircut now financing the purchase. The original debt is written off, the company is "resolved," and the promoter regains control, cleaner and lighter.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic thrives in India due to three structural weaknesses: the dominance of bank-led lending, the glacial pace of the National Company Law Tribunal (NCLT), and the lack of cross-institutional oversight. First, India’s banking system is overwhelmingly state-controlled, with public sector banks (PSBs) holding over 60% of corporate debt. These banks are politically incentivized to avoid recognizing bad loans, allowing promoters to default strategically without immediate consequences. Second, the IBC’s timeline—meant to be 270 days—routinely stretches to 500+ days due to NCLT backlogs, judicial delays, and frivolous litigation. This extended limbo erodes asset value, making the company cheaper to acquire. Third, the gap between RBI’s oversight of banks and SEBI’s oversight of listed entities creates a blind spot: banks can take haircuts on loans while the same promoters manipulate stock prices through related-party transactions, ensuring the company’s market value collapses before resolution. Finally, the IBC’s Section 29A—meant to bar defaulting promoters from bidding—has loopholes: promoters can transfer control to family members or shell entities, or argue that their default was "technical" rather than willful.
THE HISTORICAL RECORD The first major documented case was Bhushan Steel, resolved in 2018. The company, saddled with ₹56,000 crore in debt, entered IBC in 2017. Tata Steel emerged as the winning bidder, paying ₹35,200 crore—a 37% haircut for lenders. But the original promoters, the Singhal family, had already transferred control to a Mauritius-based entity before insolvency. While they didn’t regain direct control, they retained indirect influence, and the resolution process took 480 days, during which asset values depreciated further. In Essar Steel, the Ruias defaulted on ₹49,000 crore, entered IBC in 2017, and saw ArcelorMittal win the bid for ₹42,000 crore. But the Ruias challenged the resolution in court, delaying the process by two years. By the time the Supreme Court upheld the sale, the company’s value had eroded, and the Ruias had already offloaded assets to related parties. The most blatant case was Alok Industries, where the original promoters, the Agarwals, defaulted on ₹29,000 crore. The company was sold to Reliance Industries and JM Financial for ₹5,000 crore—a 83% haircut. But the Agarwals had already siphoned off assets through related-party transactions, and the resolution took 600 days, during which the company’s textile plants deteriorated.
THE INSTITUTIONS THAT ENABLED IT No tactic works without institutional complicity. Public sector banks, under pressure to avoid recognizing NPAs, delayed filing insolvency petitions, allowing promoters to strip assets. The RBI’s Asset Quality Review (AQR) in 2015 forced banks to classify bad loans, but the subsequent IBC process was gamed by promoters with deep ties to bankers. Rating agencies, such as CRISIL and ICRA, gave investment-grade ratings to companies like Bhushan Steel and Essar Steel months before their defaults, signaling no distress. Auditors, including the Big Four, signed off on financial statements that understated liabilities or overstated asset values. The NCLT, understaffed and overburdened, allowed frivolous litigation to drag out resolutions. And SEBI, while monitoring listed entities, failed to act on related-party transactions that hollowed out companies before insolvency. The Insolvency and Bankruptcy Board of India (IBBI), meant to oversee the process, lacked the teeth to prevent promoter interference.
THE CURRENT STATE The tactic is still alive, but the playbook has evolved. The IBC’s Section 29A was amended in 2018 to tighten loopholes, but promoters now use more sophisticated structures: transferring control to private trusts, using offshore entities, or arguing that their default was due to "external factors" like policy changes. The NCLT’s backlog persists, and the average resolution time remains over 500 days. The RBI’s June 2023 circular on "compromise settlements" allows banks to strike deals with promoters outside IBC, creating a parallel track for backdoor resolutions. Meanwhile, the Supreme Court’s 2021 ruling in the Videocon case upheld the primacy of the CoC (Committee of Creditors), but this has led to banks approving resolutions that favor promoters—often because the same banks later finance the promoters’ bids. Nothing has fundamentally changed; the incentives remain misaligned.
WHAT TO WATCH FOR 1. Sudden related-party transactions before a default: If a company starts selling assets to entities with the same address or directors as the promoter, it’s a red flag. 2. Rating upgrades before a downgrade: If a company’s credit rating improves months before a default, the rating agency may have missed signs of distress. 3. Bank loans to promoter-linked entities post-resolution: If the same banks that took a haircut later lend to the promoter’s new company, the resolution was likely a charade.
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.