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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 Tuesday, the National Company Law Tribunal (NCLT) questioned the extensive haircut that lenders have agreed to take in the insolvency resolution of Videocon group companies.

Billionaire Anil Agarwal’s Twin Star Technologies has proposed to pay 2,962 crore against admitted claims of 64,838 crore, implying a 95.85% loss to all Videocon creditors. The tribunal noted that this is close to the liquidation value of these companies.

However, steep haircuts are nothing new for lenders who have taken bankrupt companies to the courts.

According to data from Insolvency and Bankruptcy Board of India (IBBI), in over 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80% over the past four years. Some of the large haircuts include Deccan Chronicle (95%), Lanco Infra (88%), Ushdev International (94%) and Zion Steel (99%).

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Paras Jain/Mint


Among the 40 large cases referred by the Reserve Bank of India, the highest recovery was in the case of Essar Steel, where lenders managed to recover 92% of the outstanding dues of 49,000 crore. This case, which went all the way to the Supreme Court, saw the Ruias cede control of the firm to Arcelor Mittal.

In the case of Bhushan Power & Steel, banks recovered 41% of their dues. The resolution plan submitted by JSW Steel included payment of 19,350 crore to lenders against outstanding dues of 47,157 crore.

Since 2017, nearly 4,300 cases have been admitted for resolution under the Insolvency and Bankruptcy Code (IBC). Of these, 8% have seen resolution and 30% gone into liquidation, while 40% await resolution. (12% closed on appeal/review/settled, 10% closed by withdrawal).

According to Macquarie Research, bankruptcy resolution, which was initially prescribed within 180-270 days, now happens even beyond the extended timeline of 330 days.

However, experts say IBC is just another tool for loan recovery, and the main reason for the large haircuts is the delay in admitting cases.

“The reason for large haircuts is the delay in taking these cases for resolution. Do it when the default looks imminent. The enterprise value of the company needs to be retained if it has to get a good value. Early identification is therefore the only way for better recovery. The courts should also have to be more vigilant that resolution happens in time," said Abhizer Diwanji, partner, Ernst & Young.

That said, IBC remains a better option than other modes of recovery.

According to the RBI’s Trend and Progress Report, recovery through IBC stood at 45% during fiscal year 2020. Barring the top nine accounts, the recovery rate has been just 24%, according to Macquarie Research.

In contrast, other modes of recovery like debt recovery tribunals have seen just 4% recovery, Securitisation and Reconstruction of Financial Assets Enforcement of Securities (Sarfaesi) 26% and Lok Adalats 6%.

“Banks should consider resolution outside IBC also. Pre-packs (pre-packaged insolvency resolution) could be expanded to mid-sized cases. At some point, we need to relook at relaxing Section 29 A if promoters are not dishonest or diverted funds. Some sectors require the support of promoters for resolution. Banks should look at early warning signals and look at resolving the cases before Section 29 A bars the existing promoters to give a plan," said R.K. Bansal, managing director and chief executive officer, Edelweiss ARC.

The pandemic and the consequent suspension of IBC proceedings for the entire fiscal year led to a sharp slowdown in the resolution process.

According to ICRA, the realization for financial creditors from IBC declined to 26,000 crore in fiscal year 2021. The rating agency expects financial creditors could realize 55,000-60,000 crore in FY22, with 20% of the estimated realization coming from eight to nine big-ticket accounts.

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