Insolvency and Bankruptcy Code (IBC) came into effect in 2016 with the following objectives:
Maximize the value of the assets of the debtor, promote entrepreneurship and encourage entrepreneurship, ensure a timely and effective resolution of insolvency and bankruptcy cases, balance the interests of all stakeholders, including creditors, debtors, and employees, 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 19th December 2023 has approved a resolution plan in respect of Reliance Communications Infrastructure Limited (RCIL) wholly owned subsidiary of RCom owned by Anil Ambani. Against the claims made from the debtors totalling Rs.49668 Cr, the NCLT admitted only Rs.47251 Cr and the settlement is Rs. 455.92 Cr which is 0.92% of the debt. Interestingly, the settlement will be done by Reliance Projects & Property Management Services Limited owned by Mukesh Ambani which takes over the assets. It has taken 4 years to complete the Resolution Plan (RP) as against the stipulated maximum of 330 days.
In another case, on 23rd December 2023, the Committee of Creditors (CoC) led by SBI approved RP of Coastal Energen for its Thermal Power Plant at Tuticorin, with an amount of Rs.3500 Cr offered by Adani Power though the claim was in excess of Rs.12200 Cr. The RP is 28% of the claim.
The Financial Creditors (FCs) should get the Principal and Interest. In the case of Essar Power MP Limited taken over by Adani Power amount realized is 12.37%.
A new name came into the Banker’s dictionary. Haircuts! Which is writing off the loans and accrued interest on the loan. The list below gives a glimpse of the so-called haircut, which is part of the loss to the FCs.
|Loan Outstanding (Cr)
|Took over by
|SREI Multiple Inv. Trust
|Twinstar Technologies (Anil Agarwal, Vedanta)
|Millennium Finance Ms. Binani
|Reliance & JM
|Liberty House UK
|Reliance Home Fin
|Vallal (Father & Partner)
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 has been recovered by the banks. Reliance infratel had huge assets, which were taken over by the elder Ambani for a pittance. Alok Industries is a running unit of Mukesh Ambani now. In the case of Reliance Home Finance, houses are available as security. In spite of it, 40% haircut was given. DHFL depositors have approached the court against this settlement. In the Siva Industries case, C. Sivasankaran has 9 fraud cases against him including IDBI fraud, but his father is allowed to take over the company paying just 7% of the loan.
Do these not amount to loot? It is the depositor’s money which is given as a loan, and the deposit interest rates have gone down to help the defaulters.
The Financial Stability Report released by RBI on 28th December 2023 summarizes the Corporate Insolvency Process (CIRP) as given below: “Since the inception of the IBC, a total of 2808 Corporate Debtors (CDs) have been rescued (808 through RPs, 1053 through appeal and review or settlement, 947 through withdrawals) and 2249 CDs have been referred for liquidation till September 2023. The total admitted claims till September 23 are 7058. 2001 are pending of which 36 (out of 37) for seven years, 502 for six years. During the resolution plan approval, only around 15% is paid by the purchaser and the repayment takes years without any further interest collected by the banks.”
The RBI report says the primary objective of the Code is rescuing lives of CDs in distress, which was not the objective of the act. Can RBI change the objectives of the law?
The report also mentions realizable value to the creditors as 16.9% in 2020-21, 22.4% in 2021-22 and 37.1% in 2022-23. One should know that the admitted claims are less than the dues. In the case of loans to farmers, students, MSMEs and housing loan borrowers the banks collect up-to-date interest from the borrowers and even penal interest for delay. But for corporates, it is different. The resolution plan does not end with NCLT. In many cases, the borrowers approach the High Court and even the Supreme Court, and it takes a few more years to settle the dispute.
But RBI says the creditors realize 168.5% of the liquidation value and 86.3% of the fair value. This is creating a mirage. The reality is that the banks or FCs are recovering an average of 10-15% only in the NCLT-settled cases of large corporates.
As per the FSR of RBI out of 597 liquidations, against the claim of Rs.132888 Crores, the amount realized is Rs.5251 crore which is only 3% of the claims admitted.
The FSR, April,23 says, there were 25107 applications for CIRPs of corporate debts of Rs.8.81 lakh crore, disposed of before their admission to CIRP, till March 2023. Why? How were they disposed of? Was there any recovery? If so, how much? RBI report does not give any details. This is astonishing.
The 32nd report of the Parliamentary Standing Committee on Finance was submitted to both houses of the Parliament on 3rd August 2021. It recalls the objective of the Insolvency and Bankruptcy Code as time-bound insolvency resolution and value maximization of assets.
Unfortunately, as seen from the FSR, December, 2023 report, the Code has failed on both counts if we analyse carefully.
The standing committee report says, “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 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 regarding 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.
Only the time limit has been increased to 330 days. Even now, the average days for resolution in different ways is more than 540 days and as mentioned earlier many cases go on for years. In the initial provisions of the act, the creditors (CoC) had to vote with a 75% majority to agree to the settlements. This rule was amended to suit Mukesh Ambani to buy Alok Industries worth Rs.29253 crores with an 83% haircut.
Harsh Goenka, Chairman, RPG Enterprise has 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 Prime Minister of India.
After the resolutions, the borrowers continue to live in style, RPs live in style, and the lenders are absolved from any liability but the banks suffer. Only companies are declared insolvent, not the owners. So in the end, the depositors are the losers.
As the original objectives have not been fulfilled, a review of IBC and NCLTs is urgently needed.
The RBI should also implement its own decision made earlier to have a maximum credit ceiling of Rs. 10000 crore for one corporate, which will reduce the burden of the banks in case of write-offs.
The NCLT has become the gateway for looting the banks and handing over companies to favourite corporates for a pittance without any accountability for the borrower or the bankers. Should we just close the NCLTs?
Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and Deputy Chairman at the Global Labour University.
A version of this article was published in The Hindu, which can be read here.
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