With over 400 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, all eyes are on the first set of 12 big defaulters that the banks sought to resolve under the RBI’s directive in June.

Constituting a fourth of the system’s bad loans, these large companies presumably have a better chance to find buyers. But as it stands, in these cases too, buyers demanding a huge haircut is proving to be a stumbling block in arriving at a resolution plan.

The resolution plan under IBC essentially includes a turnaround fund investing in the company, or a strategic buyout, wherein a competitor steps in to buy the assets of the company. But given that most of the 12 big accounts identified by the RBI are highly over-leveraged and some of these companies have debt-to-market-cap levels of over 60 times, finding buyers has not been an easy task.

For instance, Alok Industries has total debt of around ₹23,000 crore as of March 2017. Even if one assumes a 50 per cent haircut, it would be way above the existing market capitalisation of the company. The company, though, has some fixed assets to show for.

But many companies such as Era Infra Engineering have huge debt that is not backed by sufficient fixed assets. Most of these indebted companies also have negative net worth (book value). Hence interested bidders or potential buyers are seeking huge haircuts from banks before going ahead with the deal. Under the first case resolved under IBC (Synergies Dooray Automotive), a resolution plan made by a company related to the corporate debtor was approved by the NCLT at a steep haircut of over 90 per cent.

More pain for banks Banks, as it were, are caught in a Catch 22 situation. If they do get a buyer, the haircut could be enormous. If they don’t, then the company goes into liquidation, which leaves them with virtually nothing on the table.

With recovery rate of just 10-20 paise to a rupee, in case of liquidation, lenders or investors may not get paid anything if the company goes into liquidation. With the focus turning on the RBI’s second list of companies, banks are concerned over the incrementally higher provisioning to be made.

Over a fifth of the 400-odd cases admitted by NCLT under the IBC have been initiated by the defaulters themselves. Interestingly, the list includes many listed players.

The market appears to have already factored in the concerns plaguing these defaulters. Their stocks are trading at a very low price. If the resolution fails, and the company goes into liquidation, in most likelihood, shareholders will not get anything, say experts.

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