IBC bankruptcy resolutions see 80% haircuts

The story: For decades, recovering stuck money in sinking firms was a nightmare in India, given the multiple laws and resolution regimes. Then came th

IBC bankruptcy resolutions see 80% haircuts 

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• The story: For decades, recovering stuck money in sinking firms was a nightmare in India, given the multiple laws and resolution regimes. Then came the big promise in the form of the 2016 Insolvency and Bankruptcy Code, or the IBC. But now, in 2021, India’s bankruptcy resolution system is hit by very meagre recoveries and long delays, despite various attempts to streamline the 2017 regime.
• Videocon case: In July, the National Company Law Tribunal (NCLT) questioned the extensive "haircut" that lenders have agreed to take in the insolvency resolution of Videocon group companies. A "haircut" refers to the loss of money while recovering unpaid dues, from a debtor firm or promoter.

1. Vedanta billionaire Anil Agarwal’s Twin Star Technologies proposed to pay a paltry Rs.2,962 crore against admitted claims of Rs.64,838 crore, implying a 95.85% loss to all Videocon creditors. This is close to the liquidation value of these companies.
2. Steep haircuts are not new for lenders who have earlier taken bankrupt companies to the courts.

• IBBI data: Data from the Insolvency and Bankruptcy Board of India (IBBI) shows that in over 363 major NCLT resolutions since 2017, banks took an average haircut of 80% over the past four years. Some of the large haircuts include Deccan Chronicle (95%), Lanco Infra (88%), Ushdev International (94%) and Zion Steel (99%). Among the 40 large cases referred by the Reserve Bank of India, the highest recovery was in the case of Essar Steel, where lenders managed to recover 92% of the outstanding dues of Rs.49,000 crore. This case, which went all the way to the Supreme Court, saw the Ruias cede control of the firm to Arcelor Mittal.

1. In the case of Bhushan Power & Steel, banks recovered 41% of their dues. The resolution plan submitted by JSW Steel included payment of Rs.19,350 crore to lenders against outstanding dues of Rs.47,157 crore.
2. Since 2017, nearly 4,300 cases have been admitted for resolution under the Insolvency and Bankruptcy Code (IBC). Of these, 8% have seen resolution and 30% gone into liquidation, while 40% await resolution. (12% closed on appeal/review/settled, 10% closed by withdrawal).

• Delays: Bankruptcy resolution, which initially was prescribed within 180-270 days, now happens even beyond the extended timeline of 330 days. It is clear that the IBC is just another tool for loan recovery, and the main reason for the large haircuts may be the delay in admitting cases.

1. Lender should do it when the default looks imminent. The enterprise value of the company needs to be retained if it has to get a good value. Early identification is therefore the only way for better recovery.
2. IBC still remains a better option than other modes of recovery. According to the RBI’s Trend and Progress Report, recovery through IBC stood at 45% during fiscal year 2020. Barring the top nine accounts, the recovery rate has been just 24%.

• Other options: In contrast, other modes of recovery like debt recovery tribunals (DRTs) saw just 4% recovery, and Securitisation and Reconstruction of Financial Assets Enforcement of Securities (Sarfaesi) 26% and Lok Adalats 6%.

1. Banks may consider resolution outside IBC also. Pre-packs (pre-packaged insolvency resolution) could be expanded to mid-sized cases.
2. Relaxing Section 29 A if promoters are not dishonest or diverted funds, may be tried.

• Summary: The pandemic and the consequent suspension of IBC proceedings for the entire fiscal year 2021 led to a sharp slowdown in the resolution process. ICRA said that the realization for financial creditors from IBC declined to Rs.26,000 crore in fiscal year 2021. The rating agency expects financial creditors could realize Rs.55,000-60,000 crore in FY22, with 20% of the estimated realization coming from eight to nine big-ticket accounts.

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