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Over 94% value erosion found in 165 IBC liquidation case

Mumbai, Feb 20, 2023

Big businesses that have gone into liquidation post-bankruptcy have seen a value erosion of over 94% of the admitted creditor claims, according to data collated by the Insolvency and Bankruptcy Board of India.

Since the inception of the bankruptcy framework in 2016, there have been 165 borrowers with admitted claims of over Rs 1,000 crore. Creditors had aggregate claims amounting to Rs 6,94,000 crore in these 165 claims, against which the assets on the ground were valued at only Rs 40,000 crore.

The value erosion is surprising because lenders always make sure there is a margin or promoter's contribution before granting a loan. If a bank extends a loan for a Rs 1,000 crore investment, it ensures a promoter contribution of Rs 200 crore. While loans may not be backed with security, lenders ensure the cash flow is available to service the loan. While bankers make sure that the value of the business does not fall below that of the loan amount, they get a realistic estimate of the assets when they get the liquidation value while initiating bankruptcy proceedings.

Bankers say there could be multiple reasons for the drop in the value of assets. One could be “gold plating” or inflation of costs by the borrower. The other reason is lenders start piling up penalties and charges when the borrower turns delinquent. As a result, the creditor claims rise even as the value of the underlying business shrinks. A third reason could be the charges imposed by the banks.

“Once an account becomes NPA, the valuation of its assets starts deteriorating while claims like interest continue to grow at a compounded rate. The asset coverage ratio nosedives for several reasons, including cases where the assets may have had inflated valuation at the time of sanction or the assets got siphoned off by unscrupulous borrowers when they foresaw losing control of unit,” said Hari Hara Mishra, director UV ARC. “It will be a good case study to examine the role of various factors in the decline of asset coverage at different intervals to help improve credit monitoring and recovery processes," he added.

The loss of value in liquidation cases is relevant because most companies referred for insolvency now end up in liquidation. Of the 6,195 corporate insolvency cases, 1,997 are still ongoing as of December 2022. Of the remaining 4,198 cases concluded, 1,901 ended up in liquidation. Among these, 1,229 liquidations were because lenders did not receive valid bids above the liquidation value, and in another 600 cases, there were no resolution plans at all.

The government is working on strengthening the insolvency framework in India by amending the law to cover group resolutions. “The proposed group insolvency framework is a step towards strengthening the functioning of the IBC and will further refine the current insolvency resolution landscape in India,” said Ravi Mittal, chairman IBBI.

[The Times of India]


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