INSUBCONTINENT EXCLUSIVE:
MUMBAI: 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
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
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
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
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
