IBC cases: For every ₹100 of claims admitted, banks took haircut of ₹69

K.R. Srivats | | Updated on: Aug 24, 2022
Concept of Insolvency and Bankruptcy Code or law on Indain currency Notes

Concept of Insolvency and Bankruptcy Code or law on Indain currency Notes | Photo Credit: lakshmiprasad S

Urgent need to introduce global standards which mandate that haircuts outside certain benchmarks should lead to failed resolution

Banks continue to reel under disproportionately large “haircuts” with an average of ₹69 going towards losses for every ₹100 of their claims admitted towards resolution of stressed assets under the IBC process, latest IBBI data for end June 30 showed.

Though the picture looks somewhat better at 17 per cent when the quantum is measured relative to fair value of assets, the real assessment should be measured against admitted claims, say experts.

Till June 30, 2022, creditors have realised ₹2.35-lakh crore through resolution plans in about 517 cases of the total claims of ₹7.67-lakh crore, IBBI data showed. With liquidation value at ₹1.31-lakh crore, the creditors’ total realisation in resolution plans stood at about 179 per cent of the liquidation value.

Haircuts are losses incurred by banks (creditors) on resolution of stressed assets.

Plummeted recovery

Some of the key factors that have contributed to a plummeted recovery under IBC is delay in the process of insolvency. The prime reasons for delay are non-filling of vacancies at the Tribunal, rise in the backlog of cases before the Tribunal, insufficient knowledge and training of the stakeholders. To compound matters, the Covid-19 pandemic further slowed down the insolvency and bankruptcy proceedings. The inordinate delays in resolution process are also leading to a waning of the appetite of potential investors to acquire stressed assets in India. 

Corporate insolvency provisions came into effect on December 1, 2016.  A total of 5,636 CIRPs have commenced by the end of June 2022 . Of these, 3,637 have been closed.

Experts’ views

Insolvency law experts say the current trend of disproportionately large haircuts calls for urgent regulatory changes to introduce the concept of benchmarks (for the quantum of haircuts ) in the resolution plan.

Siddharth Srivastava, Partner, Restructuring & Insolvency, Khaitan & Co, said, “Lenders ideally will always peg the returns from IBC resolution process to the outstanding amount (as opposed to fair value)... it is therefore advisable that this issue be addressed conclusively by amending the regulations to provide a benchmark for the quantum of haircuts in the resolution plan. Any plan which doesn’t comply with the benchmark should be considered ineligible”.

Mukesh Chand, Senior Counsel, Economic Laws Practice, said  haircuts need to be looked at in the context of time value of the amount realised. He said the IBC was never conceived or meant as a recovery mechanism, therefore, the basic approach of haircuts is flawed. 

Pritika Kumar, Founder, Cornellia Chambers, said over the recent years, there has been an increase in bankers accepting huge haircuts. “The NCLT Benches, too, have been raising questions in recent cases over lenders approving such big haircuts and are asking for an explanation behind the same. One reason for this could be the inordinate delays in the completion of CIRP proceedings owing to which lenders are accepting big haircuts,” she added.

Dinesh Pednekar, Partner, Economic Laws Practice, said, “While the statistics show that the lenders have taken huge haircuts relative to their admitted claims, such comparisons with respect to the outstanding and recovery amounts may not be logical. Emphasis must be given to ascertain the resolution value vis-à-vis the liquidation value.”

Published on August 24, 2022
COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you