Poor timing, sentiment lead to haircuts in IBC: Experts
Haircuts in debt recovery, say experts, are due to three reasons: Delay in admitting insolvency applications, poor market sentiment, and the inappropriate timing of cases landing for resolution in bankruptcy court.
Several cases such as those of Videocon and Amtek Auto have seen erosion in value during the long-drawn process of resolving non-performing assets (NPAS). A senior official said while faster resolution mechanisms needed to be in place, the creditors are in the driver’s seat.
“The decisions the committee of creditors takes in their commercial wisdom have to be in keeping with the spirit of the Insolvency and Bankruptcy Code (IBC),” the official said.
The lenders to Amtek Auto received a bid valued at ~4,000 crore. The process dragged on, leading the banks to resume the process. The bids in this round came at one-fourth of the value quoted on the first occasion. The resolution is yet to see the light of the day.
Financial creditors have been able to recover just about 40 per cent of their claims against the companies rescued in the past five years of the IBC, according to the data by Insolvency and Bankruptcy Board of India (IBBI).
In many cases under the IBC, the haircut taken by the lenders reached 80-90 per cent. However, amid assertions that the IBC is not a recovery tool but a mechanism for reorganising companies, experts say the new law has exposed the financial indiscipline and the need for action.
“The haircuts seen in the media are not necessarily reflective of what is happening across cases under the IBC ... Haircut as a principle is inherent,” said Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas & Co.
The timing of when stressed companies reach the IBC is also relevant to ensure value maximisation. Videocon, for instance, came to the IBC four years after it was declared an NPA. “There was no hair left in the company even for a haircut,” a senior official said. Till December 2020, 240 corporate debtors that have been liquidated had outstanding claims of ~33,086 crore, with the assets valued at ~1,099 crore. Of the 1,277 companies that ended in liquidation, the claims exceeded ~6.47 trillion with assets valued only at ~46,000 crore.
IBC experts say haircuts are an outcome of the economic climate and the reluctance of prospective resolution applicants to invest large amounts to buy companies with immense debts.
“In the current market conditions, the liquidation and sale of assets have also not shown great chances of recovery. While the haircuts have been significant, lenders today seem to have little choice,” said Charanya Lakshmikumaran, partner, Lakshmikumaran & Sridharan Attorneys.
Market conditions have come to the rescue of the lenders in the case of SBQ Steels. From a proposal offering below the liquidation value, the final resolution ended up giving ~100 crore more than that after metal prices moved up in 2020.
So far, almost half the corporate insolvency resolution processes that achieved closure have ended in liquidation. IBC experts say lenders could consider restructuring the debts by looking at the business viability of the companies more seriously rather than taking haircuts for faster recovery.
A working paper by Pratik Datta (of the National Institute of Public Finance and Policy) says if the decision on the company is left to its fully secured creditors, they have no incentive to recover any amount in excess of the face value of their debt. “This is because, even if they recover an amount higher than the face value of their debt, the maximum amount they are entitled to is still the face value of their debt only,” Datta said.