A report in Mint suggests that Jet Airways’ financial creditors may start proceedings against the airline under the Insolvency and Bankruptcy Code, 2016, in about a fortnight if they are unable to find an investor.
The report points out that the response thus far from the potential investors has been discouraging.
In the meantime, the airline has stopped operations. Consequently, IndiGo initially gained by way of a surge in its growth rate in yield. Subsequently, the market added capacity.
One way of looking at it is that the value represented by Jet today has declined since the time promoter Naresh Goyal stepped down from the governing board in March. Therefore, the question that comes up is why did the lenders led by State Bank of India not take the bankruptcy code route in the first place.
The bankruptcy code has been designed to keep an insolvent company as a going concern under an administrator. The main benefit of this approach is that it keeps intact the organisational capital of an insolvent firm.
In the case of Jet, had the lenders chosen the bankruptcy code route soon after the first default, the airline would still be operational. The result would have been an enterprise value in excess of the potential liquidation value, thereby, attracting investor interest.
In the event, the financial lenders approach the bankruptcy court now, they will have a relatively unattractive proposition for the market. Financial creditors will need a lot of luck to find an investor at this stage.
The bankruptcy code is the most important economic reform introduced by the Narendra Modi government in its first term. It has a turned out to be a powerful tool which remains underutilized. The ones to blame here are banks and the government.
As long as public sector banks remain reluctant to use this tool and the government is not willing to push them to do so in its capacity as majority shareholder, the bankruptcy code will represent a wasted opportunity.