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Road to recovery: IBC sets itself on firm footing

The Hindu Business Line |

30 August 2021

But massive haircuts taken by financial creditors have led to questions from some quarters on the efficacy of the insolvency code

The Parliamentary Standing Committee recently stirred up a hornet’s nest by suggesting a possible cap on haircuts banks can take while approving the resolution plan of a bidder under the Insolvency and Bankruptcy Code (IBC).

As the insolvency process has fairly matured now, “it is imperative to have a benchmark for the quantum of haircut comparable to global standards”, the committee noted.

The suggestions were made by the Committee on Finance in its report on the ‘Implementation of Insolvency and Bankruptcy Code - Pitfalls and Solutions’.

A clear deviation

The committee flagged that “the low recovery rates with haircuts as much as 95 per cent, and the delay in resolution process with more than 71 per cent cases pending for over 180 days, clearly point towards a deviation from the original objectives of the code intended by Parliament”.

In the report, which was tabled in Lok Sabha recently, the committee said that about 13,000 IBC cases, worth ₹9-lakh crore, are pending with the various benches of the National Company Law Tribunal (NCLT).

Banks and financial institutions have taken a cumulative haircut of ₹3.22-lakh crore or 61 per cent of their admitted claims since the IBC regime was implemented.

Both financial and operational creditors have taken 4,376 companies to the NCLT under IBC between December 2016 and March 2021. In a few cases, the recovery for banks has been abysmally low, with the haircuts ranging between 90 and 95 per cent. In at least 58 of the 348 cases where a resolution plan had been approved until March 31, operational creditors recovered nothing, even as financial creditors managed to recover a substantial portion of the dues owed to them.

It is pertinent to note that operational creditors are also borrowers of banks, and any adverse impact on their recovery will indirectly hit the banks.

No need for cap

Addressing a webinar on five years of IBC recently, Insolvency and Bankruptcy Board of India chief MS Sahoo said the criticism on IBC does not take into account the objective with which the code was introduced.

“The insolvency law is not a recovery tool. When it comes to the IBC, the sole target is reorganisation of a company while discharging the claims of the creditors to the extent realistically possible. If creditors want to focus on recovery there are other avenues available to them,” he added.

Disagreeing with the suggestion for a cap on lenders’ haircut, Aashit Shah, Partner, J Sagar Associates, said that while lenders may have taken significant haircuts in some cases, these are primarily in legacy matters where borrowers were already in severe distress.

Ultimately, the recoveries lenders make in an IBC process is a matter of commercial bargain. If the haircut is significant, it is not due to the law, but invariably because of the asset quality. Introducing any conditions on maximum haircuts will only hinder the process, he said.

Even as recovery remains a major concern, the IBC has substantially changed the behaviour of several promoters when it comes to their commitment to repaying the borrowed money, besides improving evaluation methods and diligence processes among lenders.

Despite inadequate judicial and physical infrastructure, NCLTs have been disposing off mounting cases amid rising financial stress in economy.

Massive haircuts taken by financial creditors in the insolvency resolution cases of Videocon Industries and Jet Airways, among others, have led to questions being raised on the efficacy of the IBC. After resolution attempts failed, C Sivasankaran-owned Siva Industries and Holdings, offered a one-time settlement of bank loans of ₹5,000 crore by paying just ₹500 crore.

Videocon Industries and its 12 group companies had admitted claims of ₹64,839 crore, but banks agreed to hand over the company to Anil Agarwal-owned Vedanta for a 95 per cent haircut.

Similarly, the Jalan-Kalrock consortium got the troubled Jet Airways after banks wrote off 95 per cent of its loan.

Sundaresh Bhat, Partner & Leader (Business Restructuring Services), BDO India, said the haircut taken by the banks depends on the underlying assets of the corporate debtor and valuations, which is determined by market forces.

“The CIRP process under the IBC is a well-settled process now to arrive at a proper market or realisable value for any resolution of the corporate debtor under stress. The genuine resolution applicant will not pay for the lending done without doing a proper due diligence,” he added.

A raw deal

The recovery for operational creditors is even worse. For instance, in cases where the admitted claims were over ₹5,000 crore, operational creditors recovered only 12.5 per cent of their total admitted claims.

The recovery for financial creditors has been better at 42 per cent in insolvency cases where the total admitted claims were over ₹5,000 crore, while in cases where the total admitted claims were less than ₹5,000 crore, they recovered only 29.7 per cent.

Another worrying factor is the delay in the completion of resolution process, impacting operational creditors much more than financial creditors.

As of March-end, 79 per cent of the total 4,376 cases under the IBC are pending for over 270 days, and the average time taken for the completion of insolvency resolution was 492 days. This delay, experts said, was another reason for low interest among bidders in the stressed assets market.

Slowing economic growth and inordinate delays in the completion of CIRP proceedings are among the biggest reasons for lenders to accept the haircuts, according to experts.

IBC prioritises recoveries for both public and private sector banks, NBFCs, and other financial creditors over operational creditors. Only financial creditors have representation on most Committee of Creditors formed for selecting and approving the bids of the companies, and have priority over operational creditors in the distribution of assets if the company is sent to liquidation.

“Developed jurisdictions put operational creditors on a par with unsecured financial creditors. Ideally, payments to unsecured financial creditors and operational creditors, should be on a pro-rata basis,” said the expert.

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