IBC sharply reduced haircuts for lenders, says IBBI chief Sahoo

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August 04, 2021 5:30 AM

“It is axiomatic that a company coming to the IBC does not have adequate assets to repay all its creditors. On an average, the companies, which have been rescued through the IBC till March 2021, had assets valued at 22% of the amount due to creditors when they entered the IBC,” Sahoo said.

Some analysts have also pointed out that the mere threat of IBC by creditors has facilitated recovery 90-100% dues in most cases, leading to the withdrawal of insolvency applications before the actual proceedings start at the NCLT.Some analysts have also pointed out that the mere threat of IBC by creditors has facilitated recovery 90-100% dues in most cases, leading to the withdrawal of insolvency applications before the actual proceedings start at the NCLT.

The average dues of troubled firms were nearly five times of their asset value when the Insolvency and Bankruptcy Code (IBC) was invoked to resolve their stress, MS Sahoo, chief of the insolvency regulator, told FE, staunchly defending the five-year-old law that has come under criticism for turning out to be a “tool for haircut” for lenders.

“It is axiomatic that a company coming to the IBC does not have adequate assets to repay all its creditors. On an average, the companies, which have been rescued through the IBC till March 2021, had assets valued at 22% of the amount due to creditors when they entered the IBC,” Sahoo said.

“This means the creditors were staring at a haircut of 78% to start with. The IBC not only rescued these companies but also reduced the haircut to 61% for financial creditors.” Among other factors, he said, the recovery also critically hinges on at what stage of stress a company enters insolvency proceedings, “as much as at what stage a patient arrives in the hospital”.

The chairman of the Insolvency and Bankruptcy Board of India (IBBI) also contested the criticism that the IBC has resulted in more liquidation than resolution (1,277 cases ended up in liquidation while only 348 cases witnessed resolution until March 2021).

“You are watching only the end game, where you see about 1,600 cases reaching the finishing line. However, 19,000 cases were closed, either before or after admission (by the NCLT), but before reaching the finishing line,” he said. So, if the entire universe of companies touching the IBC is considered, the percentage of companies proceeding for liquidation is still negligible, he explained.

Some analysts have also pointed out that the mere threat of IBC by creditors has facilitated recovery 90-100% dues in most cases, leading to the withdrawal of insolvency applications before the actual proceedings start at the NCLT.

Even in the 1,600-odd cases where insolvency proceedings did take place, the companies accounting for 70% of the total stressed asset value were rescued, while those making up for only 30% proceeded for liquidation, Sahoo stressed.

Moreover, of the companies that ended up in liquidation, three-fourth were already defunct, and of those rescued, one-third were defunct. “This means that of the companies touching the finishing line, two-thirds were defunct to start with,” Sahoo explained. The companies ending up with liquidation had assets valued, on an average, at about 6% of the claims against them, when they entered the IBC. “If a company has been sick for years, and the assets have depleted significantly, market is likely to liquidate it,” the IBBI chief said.

It is the market which makes the choice, and the law is only an enabler, Sahoo pointed out. “The market releases resources through liquidation for alternate uses. Liquidation is not the end, rather a means for efficient cycling of resources,” he said.

In any case, haircut should be assessed in relation to the assets (of a debtor) that are available on the ground and not the claims of the creditors. This is because the market offers a value in relation to what a company brings on the table, and not what it owes to creditors, Sahoo said. The IBC maximises the value of the existing assets at the commencement of the process, not of the assets that probably existed earlier.

Where resolution has taken place, the average recovery is 190% of the liquidation value of the existing assets, “generating 90% bonus, instead of haircut,” he added. The recovery (39%) through the IBC is also much better than that via any other existing mechanism, including the Lok Adalats, DRTs and SARFAESI Act.

Sahoo also said only about 250 insolvency cases have been filed since the expiry of suspension on filing on March 25, contrary to fears of a surge in such applications due to the havoc wrought by the pandemic. “This is on expected lines and has been the experience internationally. The higher threshold of default of `1 crore, coupled with support and forbearances, has limited the flow of applications. More importantly, the stakeholders like to use the Code when the likelihood of resolution is high. They may be waiting for the appropriate time to invoke the Code,” Sahoo said.

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