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Lenders to large stressed firms, with a default of at least Rs 1,000 crore each, have taken smaller haircuts under the Insolvency and Bankruptcy Code (IBC) than those with exposure to smaller firms, showed the data sourced from the bankruptcy regulator.

Creditors recovered 32.9% of their admitted claims from 138 large stressed firms until December 2023 since the IBC came into being in late 2016, as per the Insolvency and Bankruptcy Board of India data. However, the recovery from all the 891 bankrupt firms that saw resolution until December 2023 stood at 31.9%, indicating that lenders to smaller firms had to take larger haircuts.

Most of the larger firms are “asset-heavy”, which pushes up the recovery rate, according to experts. However, they said, what influences the recovery rate the most is when the IBC is invoked to rescue the bankrupt firm – the longer the delay, the lower the chances of a good recovery.

To be sure, the difference in the recovery rates between large and small companies isn’t substantial, they said, adding that robust realisation, or lack of it, in a few key cases can distort the broader picture given the large amount of default involved.

Based on the creditors’ claims that are endorsed by the National Company Law Tribunal, the aggregate default involving the 138 large debtors was Rs 8.83 lakh crore as of December 2023. However, the total liquidation value of these big companies when they entered the insolvency proceedings was only Rs 1.65 lakh crore, suggesting a very elevated leverage ratio. The eventual realisation, however, turned out to be almost 176% of the liquidation value.

The recovery, however, doesn’t include potential future realisations from the value of equity holdings after the rescue, resolution of personal guarantors to corporate debtors and the disposal of applications for avoidance transactions.

Manoj Kumar, head, M&A and insolvency resolution, at consultancy firm Corporate Professionals Capital, said, “Larger companies usually have a bigger asset base and better business operations network than the small companies. So, they attract greater investor interest.”

There is often limited investor interest in small companies, especially the unlisted ones, due to the lack of adequate quality data on their financials and operations, Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co, had said earlier. Besides, given their mainly regional presence, smaller companies don’t attract many strategic investors, unlike the larger ones, he had added.

Liquidation of large firms

Of the 2,376 corporate debtors that ended up in liquidation, 195 had admitted claims of more than Rs 1,000 crore each, the data showed. While these stressed firms had an aggregate claim of Rs 8.64 lakh crore, they had assets of only Rs 44,000 crore on the ground when the IBC was invoked.

  • Published On Feb 22, 2024 at 04:45 PM IST

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