Section 53 of the Insolvency and Bankruptcy Code (IBC) has suddenly become the punching bag and favourite whipping boy of employees and their retirement funds for relegating their dues to the residuary category i.e. at the bottom of the list of creditors in terms of the pecking order of repayment on winding up.
The IBC faithfully follows the time-honoured principle of pecking order of payment in the event of winding up with the secured creditors bagging top honours. Of course, the secured creditors have to yield to insolvency proceedings expenses which are bound to be a minuscule amount vis-à-vis what is owed to them. But what has been causing resentment among secured creditors is the mandate to share top-honours with workmen dues for the last 24 months.
Assuming such dues are equal to dues to secured creditors and the resources at the command of the liquidator are just half of the total dues to secured creditors and 24 months wages to workmen put together, both have to take a 50 percent haircut.
What is galling for provident and pension funds and their members is their dues get the same priority as an unsecured creditor like materials supplier gets. Hence their belated clamour for amending section 53 of the IBC to promote the dues to PF and pension funds to the hallowed ranks of employees’ wages for the last 24 months.
The government cannot obviously change the time-honoured pecking order though its heart would definitely bleed for the poor employees who would have the mortification of seeing their retirement war chest vaporising before their very eyes thanks to the avarice of the fund managers they had trusted their money with.
There is a double whammy for the employees in the sense that the trustees of these funds too cannot be proceeded against because they invested in good faith in the AAA rated bonds of IL&FS carrying interest upwards of 8.5 percent per annum. Obviously, the trustees were let down by the credit rating agencies.
If anyone should bear the cross and be hauled over the coals, it must be the callous rating agencies that have always had to live down the dubious reputation of doing shoddy work.
Of course, the government can legislate for the future---it can say that hereafter employees’ consent must be taken before risking their money. Leaf must be taken out of the National Pension Scheme (NPS). Members of NPS have the choice of whether to take risks and how much. They can plump for an equity mix of 15 percent to 50 percent with the younger ones having the appetite for greater risks. Investment in equity is by far the riskiest insofar as financial markets are concerned. In the light of the IL&FS fiasco, employees must also be asked to give their consent to bonds and commercial papers.
Some 15 lakh employees of who is who of India’s corporate world---- HUL, Asian Paints, Hindalco and M & M from the private sector, IOC, SBI and MMTC from the PSU sphere and HDFC AMC and Aditya Birla Sun Life from the mutual fund industry--- have been caught in the crossfire. Their anger is understandable but the solution they are seeking---parity with secured creditors--- would amount to a kneejerk reaction on the part of the government if it capitulates. Instead of changing the pecking order of priority of payment in winding up, the government in an election year might bail out these funds as a one-time measure but that looks unlikely given the fact that employees of the organized sector do not pack much punch in the voting sweepstakes.
One question has remained unanswered though---did employees provident fund organization (EPFO) pull its chestnut out of the fire on time? There are reports that it was lucky to get back some Rs 600 crore from the IL&FS group in September 2018 before all hell broke out but is cagey about admitting how much more is still due from it.
(The author is a senior columnist and tweets @smurlidharan)
Updated Date: Feb 18, 2019 17:18:46 IST