The Insolvency and Bankruptcy Code (IBC) came into effect in 2016 with the following objectives:
Maximise the value of debtor’s assets; promote and encourage entrepreneurship; ensure timely and effective resolution of IBC cases; balance the interests of all stakeholders, including creditors, debtors, and staff; facilitate the promotion of a competitive market and economy; and provide for a framework to deal with cross-border insolvency cases.
A recent settlement by the National Company Law Tribunal (NCLT) , Mumbai Branch on December 19, 2023 had approved a resolution plan in respect of Reliance Communications Infrastructure Ltd. (RCIL), a wholly-owned subsidiary of Reliance Communications (RCom) owned by Anil Ambani. Against the claims made by the debtors totaling ₹49,668 crore, the NCLT admitted only ₹47,251 crore and the settlement was ₹455.92 crore, a mere 0.92% of the debt. Interestingly the settlement will be done by Reliance Projects & Property Management Services Ltd. owned by Anil’s older brother Mukesh Ambani, set to take over its assets. It has taken four years to complete the Resolution Plan (RP) as against the stipulated maximum of 330 days.
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The Financial Creditors (FCs) should ideally get principal and interest. In the case of Essar Power MP Ltd. that was taken over by Adani Power, the amount realised was 12.37%.
A new term has entered Indian bankers’ dictionary - haircuts - that is, writing off loans and accrued interest on the loan. The illustration below gives a glimpse of the so-called haircuts, which is actually a part of the loss to FCs.
Deep haircuts
These are only a few examples. In the case of Videocon, taken over by the Vedanta Group, only 5% of the loan outstanding on the date of declaration had been recovered by the banks. Reliance Infratel had huge assets, which were taken over by the elder Ambani for a pittance. In the Siva Industries case, C. Sivasankaran has 9 fraud cases against him, including the IDBI fraud, but his father was allowed to take over the company paying just 7% of the loan.
Do these not amount to loot? It is depositors’ money that is given as loan, while deposit interest rates have gone down to help defaulters.
The Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) on December 28, 2023 summarises the Corporate Insolvency Process (CIRP): “Since the inception of the IBC, a total of 2,808 Corporate Debtors (CDs) have been rescued (808 through RPs, 1,053 through appeal and review or settlement, 947 through withdrawals) and 2,249 CDs have been referred for liquidation till September 2023. The total admitted claims till September 23 are 7,058. As many as 2,001 are pending of which 36 (out of 37) for seven years, 502 for six years. During the resolution plan approval, only about 15% is paid by the purchaser and the repayment takes years without any further interest collected by the banks.”
Little realisable value
The report also mentions realisable value to the creditors as 16.9% in 2020-21, 22.4% in 2021-22 and 37.1% in 2022-23. One should know the admitted claims are less than the dues. While banks collect up to-date interest on loans to farmers, students, MSMEs and on housing, including penalty interest for delays, corporates are treated differently.
But the RBI says the creditors realise 168.5% of the liquidation value and 86.3% of the fair value. The reality is that banks or FCs are recovering an average of just 10-15% in NCLT-settled cases of large corporates.
As per the FSR, out of 597 liquidations, against the claim of ₹1,32,888 crore, the amount realised was ₹5,251 crore or 3% of the claims admitted.
The FSR of April 2023 says ‘as of March 2023, there were 25,107 applications for CIRPs of corporate debts worth ₹8.81 lakh crore, disposed of before admission to the insolvency process.’ Why? How were they disposed of? Was there any recovery? If so, how much? The RBI report does not give any details on this, which is astonishing.
According to the 32nd report of the Parliamentary Standing Committee on Finance, submitted to Parliament on August 3, 2021, “The Committee found that the low recovery rates with haircuts as much as 95% and the delay in resolution process with more than 71% cases pending (for) more than 180 days clearly points towards a deviation from the original objective of the code intended by the Parliament.”
“The Committee found that there are numerous issues with regard to Resolution Professionals (RPs) for which two regulators IPA and IBBI have taken disciplinary action on 123 Insolvency Professionals (IPs) out of 203 inspections conducted till date.”
So, 60% of the IPs inspected were found to be indulging in malpractices.
“The Committee’s view, keeping in mind the experience gathered so far, there is an urgent need to have a professional code of conduct for the Committee of Creditors (COCs).”
The Committee had also recommended fixing a ceiling on haircuts. These have not been implemented.
‘80-90% haricut’
Harsh Goenka, Chairman, RPG Enterprise, stated, “Promoters slash away on the side, take the company to cleaners, get an 80% to 90% haircut from bankers/NCLT. That’s the new game in town”. He had tweeted this to the PM.
After the resolutions, the borrowers continue to be wealthy and so are the IPs, the lenders are absolved from liability but the banks suffer.
Only companies are declared insolvent and not the owners. Eventually, the depositors are the losers. As the original objectives have not been fulfilled, a full review of IBC and NCLTs is urgently needed.
The RBI must also implement its own earlier decision to have a maximum ceiling of credit to a single corporate house at ₹10,000 crore, which will reduce the burden of banks during write-offs.
(Thomas Franco is former General Secretary, All India Bank Officers Confederation, and Deputy Chairman, Global Labour University.)
Published - January 09, 2024 07:00 am IST
