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Huge ‘Haircut’ During Insolvency!

Insolvency and Bankruptcy code is being said to be very effective in terms of resolving Insolvency as compared to the previous mechanisms prevailing. According to Union Minister of State for Corporate Affairs, Shri Rao Inderjit Singh, he in a written reply to a question in Lok Sabha on Aug 02, 2021 stated, the total of 8 cases have been resolved, 65 have been settled/ withdrawn and 23 cases have been ordered for liquidation in the real state sector out of 212 Applicants.[1]

The Standing Committee on Finance (2020-21) shows the effectiveness of the Insolvency and Bankruptcy Code, 2016. It reflects that out of 4283 cases dealt, 3283 cases have been disposed of and 1000 cases is pending.[2]

According to the RBI report, 1,953 cases were referred to bankruptcy courts involving ₹2.32 trillion, of which ₹1.05 trillion was recovered during fiscal year 2020.[3]

As per the World bank’s Ease of Doing business Index, 2015[4], ranked India at number 135 out of 190 countries on the ease of resolving insolvency based on various indicia. Now India has jumped to 63rd position in the World bank’s Ease of Doing Business 2020 Report.[5]

On the other hand, Mr Sahoo stated that 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. 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 haircut is the reduction which a bank makes in the original loan amount during a settlement, it ranges up to 90-95 percent in some cases, leaving only a pittance for the banks at the end of a long and tiring process. As per publicly available data, 240 corporate debtors that have been liquidated till December 2020, had outstanding claims of Rs 33,086 crore, with assets valued at Rs 1,099 crore.

A debate has been arisen, whether resolutions through the National Company Law Tribunal (NCLT) are turning into a loss-making exercise for banks. In Under IBC, the Banks have been seen to have taken a deep haircut, where the company is either acquired by a fresh promotor or the original promotor offers a settlement through one time deal after withdrawing the CIRP under section 12A.

As happened in the case of IDBI Bank- Sivasankaran deal on the settlement of Siva industries and Holdings Ltd (SIHL) loan is a prominent example. After resolution attempts failed, C Sivasankaran offered a one-time settlement (OTS) to banks under which he agreed to pay Rs. 500 crore to banks against a loan of Rs 5,000 crore.

Videocon Industries and its group companies had admitted claims of Rs 64,838.63 crore but banks agreed to hand over the company to new acquirer for a 95 percent haircut.

In the same manner, the Jalan -Kalrock consortium got the troubled Jet Airways for a haircut of 95 percent. In other words, banks don’t have much to show for at the end of long process.

[1] PIB Delhi (August 02,2021), https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1741629 (last visited Aug 08, 2021)

[2] Ministry of Corporate Affairs, Standing Committee on Finance Report (2020-2021)

[3] Reserve Bank of India, Report on Trend and Progress of banking in India (issued on 29th December, 2020)

[4] The World bank, Report on Ease of Doing Business, 2015

[5] The World bank, Report on Ease of Doing Business, 2020

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