Haircut on cases resolved through IBC not very encouraging, says Kotak report

• Financial creditors have taken an average haircut of 73% on the ₹8.3 lakh crore worth of debt in cases resolved through IBC.
• Haircut in financial parlance refers to the reduction that is applied to the value of an asset.
• Liquidation remains the dominant mode of closure of IBC cases, according to data from the Insolvency and Bankruptcy Board of India (IBBI).

Haircuts on cases resolved through the Insolvency and Bankruptcy Code (IBC) are still very high, nearly seven years after coming into force. While ₹8.3 lakh crore of debt has been resolved through the IBC till date, financial creditors have had to face a haircut of 73% on average in cases which have gone into resolution, according to data from the Insolvency and Bankruptcy Board of India (IBBI).

Haircut in financial parlance refers to the reduction that is applied to the value of an asset. In the case of financial creditors, the haircut refers to the reduction in the value of loan given out by them.

For instance, if a borrower proposes to pay only ₹40 on a ₹100 loan taken by him and the lender accepts it, it means the lender has taken a 60% haircut.

Cases going into resolution still however are a small part of the total cases submitted under IBC. According to IBBI data, cases under a resolution plan stood at 15% in the December 2022 quarter, edging up from 14% in the previous six quarters.

Elevated levels of haircut that financial creditors have had to take is not encouraging, says a Kotak Institutional Equities report.

“The overall haircut scenario is not very encouraging. As we work through some of the weaker assets where there are incomplete projects or sectors with very poor demand from buyers, the realization values have declined,” the report said.

IBC a resolution and not recovery mechanism

While the high levels of haircut might be discouraging, Reserve Bank of India governor Shaktikanta Das had said at an event in Mumbai in December last year that the IBC should be looked at as a resolution mechanism and not recovery.

“The IBC should not be seen as a recovery mechanism. What is important now is to identify early stress and address it in a timely manner,” Das had said.

Overall, IBBI data shows that nearly half of the cases submitted under IBC have gone into liquidation. As of the December 2022 quarter, liquidation accounted for 45% of the cases, while only 21% cases were either appealed, reviewed or settled.

In April last year, the Supreme Court reiterated that the IBC is not for money recovery proceedings. “Time and again, it has been expressed and explained by this Court that the provisions of the Code are essentially intended to bring the corporate debtor to its feet and are not of money recovery proceedings,” the Supreme Court had said in a case between Invest Asset Securitisation and Reconstruction vs Girnar Fibres.

Till date, financial creditors have realised ₹2.25 lakh crore through IBC. The most high-profile case is that of Essar Steel, which had a debt of ₹49,000 crore. The Lakshmi Mittal-owned ArcelorMittal emerged as the successful bidder with an offer of ₹42,000 crore. Essar Steel’s creditors had to take a relatively minor haircut of 15%.

The worst case is that of Videocon Industries wherein creditors had to take a loss of ₹61,877 crore or about 96% of their receivables.

Resolution duration 80% higher than mandated

On a relatively positive note, insolvency cases are well below the levels of FY20 when the Covid-19 pandemic had struck. At 267 new cases submitted in the December 2022 quarter, the annualised run-rate of 1,068 is nearly half of FY20’s levels of 2,000.

“We infer from IBC admissions data that corporate India is comfortably placed,” said the Kotak report.

While timely resolution of cases is one of the cornerstones of IBC, the resolution duration still remains significantly high – at 590 days. It is 80% higher than the newly-framed limit of 330 days.

Initially, IBC cases were to be completed within 180 days, with a provision to extend the time limit by 90 days. However, according to an analysis by Kotak, 64% of ongoing cases have exceeded the original 270 days time limit. Due to this, the brokerage expects liquidation to remain the dominant mode of closure of IBC cases going forward.

SEE ALSO:

Layoffs coming to the Indian IT sector? Analysts say Accenture’s jobs cuts offers a ‘blueprint’

Shinier Zomato Gold, better commissions makes analysts bullish in the long term

Indian banks better placed than their US peers due to attractive valuations and stickier deposits