The Insolvency and Bankruptcy Code (IBC) has come under a fair amount of scrutiny of late. Several recent settlements have raised eyebrows. The Videocon bankruptcy where 13 separate companies of the group were lumped together and sold off to Twin Star Technologies Ltd, a part of Anil Agarwal’s Vedanta group, is one. The bankers took a 95.8% haircut and the National Company Law Tribunal (NCLT)’s Mumbai Bench has expressed surprise at how close the final bid value was to the liquidation value, which was supposed to be confidential. The one-time settlement that IDBI Bank agreed to take from the promoters of Siva Industries and Holdings Ltd despite protests from other banks has also attracted the gaze of the NCLT Chennai Bench. The Bench asked why IDBI showed such alacrity for a one-time settlement that was a pittance—barely 6.5% of what was owned in total.
And these are only two examples. There are probably several dozen other cases that need close examination to see why 85% or more haircuts are accepted. After all, when the bankruptcy law was passed, this was not what the policymakers wanted.
The defenders of IBC will point out that it still gives better results than anything that was tried out earlier and that is true. The overall recovery so far (till March 2021) has been around 39% of total claims—way better than what borrowers recovered from corporate defaulters before the law was passed. At the same time, it is also true that the law has failed to live up to its initial promise and the recoveries have come down. Take away some high-profile resolutions where buyers paid big value and the recovery rate drops to 24%.
So what is going wrong and what can be done to ensure better recoveries? There are three broad reasons why many recoveries are so low.
The state of the economy and the sector:
The IBC process works by seeking a buyer for the non-performing asset. The overall economy and the demand for assets in a particular sector play a big role in what the bankers finally recover. The initial high-profile cases included big high-quality steel assets at a time when the steel demand was going up. There were multiple bidders—Tata Steel, Sajjan Jindal’s JSW group and the Laxmi Mittal group, among others. Bidding wars led to good recoveries. In the case of Essar Steel, the creditors managed to recover 92%. In Bhushan Steel, they got 64%. Similarly in the cement sector, with robust prospects, lenders recovered the full amount in the Binani Cements insolvency case. But there were few bidders for assets in other sectors where the demand was low or there was overcapacity, which was why lenders realised little from many cases.
Since then, the economy has further deteriorated and capacities in a host of sectors are at 60% or lower utilisation. Many potential acquirers with enough cash are sitting on the sidelines until the economy recovers.
The integrity of the players:
The IBC process can work well only if the Resolution Professional (RP), the lenders who form the Committee of Creditors (CoC) and the NCLT Bench all have the same goal in mind—maximising the value at which the asset is sold. This would seem obvious but in practice this is not so.
Several RPs have horror stories about pressure brought in by erstwhile promoters, sometimes acting with the help of one or two members of the CoC. The problems start with the appointment of valuers because the liquidation value sets the floor. While the debtor has to be valued by two agencies and the RP can ask questions if the values are widely different, it can still be rigged. A RP gives the example of one case where the valuation firm used historical prices to value land and buildings instead of the current market prices.
Worse, inventory and accounts receivable were not valued while coming up with the liquidation value. Potential bidders were scared off and a proxy of the erstwhile promoter was the only bidder. These cases are quite common in cases of smaller enterprises and they often get away because of the shortage of NCLT judges and the sheer volume of cases. Too much dependence on the commercial wisdom of CoCs also creates its own set of issues.
Assets deteriorate:
The value that can be realised from an asset depends on its condition. Many lenders wait too long and by the time the bankruptcy proceedings are initiated, there is little value left to be realised. Former Reserve Bank of India governor Urjit Patel tried to fix this but some of his initiatives were later diluted.
Finally, bankruptcies will happen for multiple reasons. Apart from corrupt promoters or bad management, policy changes as well as shifting demand or too much competition or even spike in input prices play a role. It is up to bankers to keep a close eye on their loans and also ensure they have robust processes in place. The IBC is not a substitute for due diligence at the time of lending—something many PSBs forget.
Prosenjit Datta
Senior business journalist
(prosaicview@gmail.com)