House panel questions high IBC haircuts
The panel quizzed the Centre on haircuts as high as 95%. The government told the committee that lenders may take large haircuts in such cases where liquidation values are very low.
A Parliamentary panel has cautioned the government over “disproportionately large” haircuts taken by lenders under the Insolvency and Bankruptcy Code (IBC) and noted that frequent changes to the newly enacted law could alter its original aim, even as the Rajya Sabha on Tuesday passed the IBC (Amendment) Bill, 2021, amidst a din in the House.
“As the insolvency process has fairly matured now, there may be an imperative to have a benchmark for the quantum of ‘haircut’, comparable to global standards,” the panel said, reviewing the implementation of the IBC, which was enacted on May 28, 2016, for effective time-bound recovery of debts to encourage entrepreneurship.
The panel quizzed the Centre on haircuts as high as 95%. The government told the committee that lenders may take large haircuts in such cases where liquidation values are very low.
“It needs to be kept in mind that the fundamental aim of this statute [IBC] is to secure creditor rights which would lower borrowing costs as the risks decline. Therefore, greater clarity in purpose is needed with regard to strengthening creditor right through the mechanism devised in the Code, particularly considering the disproportionately large and unsustainable ‘haircuts’ taken by the financial creditors over the years,” the panel said in a report.
Hindustan Times on June 25 reported that the government could review the legal provision that allows for the withdrawal of an insolvency case in favour of an often-negligible one-time settlement (OTS). This was in the context of Siva Industries Holdings Ltd. In April, IDBI Bank-led lenders discussed and approved an OTS proposal of Siva Industries where creditors agreed to take a 93.4% haircut to settle dues of ₹4,863 crore.
On June 15, the National Company Law Tribunal (NCLT) questioned the extensive haircut (95.85%) that lenders agreed to take in the insolvency resolution of Videocon group companies. According to data from the Insolvency and Bankruptcy Board of India (IBBI), in at least 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80%.
“I have a different perspective. Prior to the IBC, winding up proceedings or rehabilitation under SICA took several years. The IBC has drastically reduced the time-frame on debt resolution (even though it exceeds the original ambitious 180-day timeline). While lenders may have taken significant haircuts in some cases, this is primarily in legacy matters where borrowers were already severely distressed. Ultimately, the recoveries lenders make in an IBC process is a matter of commercial bargain. If the haircut is significant, it is not due to the law, but because of the asset quality. Introducing any conditions on maximum haircuts will only hinder the process,” said Aashit Shah, partner at law firm J Sagar Associates said.
The committee cautioned the government against frequent amendments and asked it to revisit the Code, particularly in the light of its original aims and objectives.
“We therefore need a thorough evaluation of the extent of fulfilment of these aims and objects in the course of implementation of the Code over the years,” it said.
The latest amendment to the IBC that was passed by the Rajya Sabha on Tuesday aims to provide a pre-packaged insolvency resolution mechanism for micro, small and medium enterprises (MSMEs).