Govt may tweak CoC rules after drawing flak over excessive haircuts
2 min read . Updated: 24 Aug 2021, 05:21 AM IST
PremiumAs per IBBI data, in more than 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80%
The government may bring out objective and transparent guidelines for committee of creditors (CoC) to sign off on bankruptcy resolution plans, two people familiar with the matter said, after excessive haircuts approved by some CoCs faced criticism.
According to the two people, who asked not to be named, there are legitimate concerns that need to be addressed, especially in the light of the recent National Company Law Tribunal (NCLT) verdict in the matter of Siva Industries and Holdings Ltd.
CoC, made up of financial creditors, is the supreme decision-making body in the corporate insolvency resolution process (CIRP).
The Chennai bench of NCLT on 12 August rejected a one-time settlement agreed between the erstwhile promoters of Siva Industries and its lenders and ordered liquidation of the company.
In April, IDBI Bank-led lenders who made up the CoC discussed and approved a proposal of Siva Industries where creditors agreed to take a 93.25% haircut to settle dues of ₹4,863.87 crore. That means the banks would have recovered only ₹328.21 crore.
According to a Mint report on 18 June, India’s bankruptcy resolution system remains marred by meagre recoveries and protracted delays, despite attempts to fine-tune the regime that debuted in 2017.
On 15 June, NCLT also questioned the extensive haircut (95.85%) that lenders agreed to take in the insolvency resolution of Videocon group companies.
Anil Agarwal-promoted Twin Star Technologies proposed to pay ₹2,962 crore against admitted claims of ₹64,838 crore, implying a 95.85% loss to all Videocon creditors, the report said.
As per Insolvency and Bankruptcy Board of India (IBBI) data, in over 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80%. Some of the large haircuts include Deccan Chronicle (95%), Lanco Infra (88%), Ushdev International (94%) and Zion Steel (99%), the report said.
The people mentioned above said that since CoC comprises financial creditors who are often banks and financial institutions that are regulated by the department of financial services (DFS) and the Reserve Bank of India (RBI), one of these could frame guidelines for them. DFS is an arm of the finance ministry.
The ministries of finance and corporate affairs, RBI and DFS did not respond to an email query on this matter.
A parliamentary panel has also made some suggestions to further strengthen the Insolvency and Bankruptcy Code (IBC), including having a framework to ensure that commercial decisions of the CoC should be more transparent and objective.
