ICRA: Haircuts For Operational Creditors Have Been In Line With That For The Financial Creditors
Based on the data for 92 corporate insolvency resolution plans (CIRPs) that have yielded a resolution plan upto March 31, 2019 under the Insolvency and Bankruptcy Code (IBC), ICRA estimates that the haircuts the operational creditors have been required to take are not materially different than the haircuts taken by the financial creditors. Of these 92 CIRPs, the operational creditors would realise about 42% of the total claims of Rs. 81.4 billion (i.e. haircut of 58%). For the same CIRPs, the financial creditors would realise 44% of the total claims of Rs. 1,606 billion. In absolute terms though, the loss to the financial creditors has been significantly higher compared to the operational creditors.
Says Mr. Abhishek Dafria, Vice President & Co-Head, Corporate Ratings, ICRA, “We believe that the reason the operational creditors have not suffered significantly higher haircuts is on account of the criticality of certain creditors to the core operations of the corporate debtors. As a result, the resolution applicants have ensured that relationships with such creditors are maintained. Among certain large size corporates, realisation by the operational creditors has been much higher than the average realisations such as that seen in the resolutions of Bhushan Steel Limited (81% of claims received by operational creditors) and Binani Cement Limited (86%). At present, the extent of funds to be paid out to the operational creditors as part of the resolution plan of Essar Steel Limited is under dispute, highlighting the difficulty in satisfying all the parties especially when the operational creditors do not have a say in the selection of the resolution plan.”
As per ICRA, one of the biggest successes of the introduction of the IBC has been the power given to the operational creditors to take a defaulting corporate debtor to the National Company Law Tribunal (NCLT). The operational creditors have been using this power proactively and effectively. Of the 1,858 corporate debtors referred to the NCLT upto March 31, 2019, 920 cases (i.e. 49%) have been referred by the operational creditors. Despite the delays being witnessed in the application being accepted by the NCLT and then the delays in the CIRP itself, the operational creditors have continued to show confidence in the process and remained at the forefront of pushing corporate debtors to the NCLT.
Adds Mr. Dafria, “As the operational creditors do not form part of the Committee of Creditors (CoC) that evaluate the resolution plans, it is the responsibility of the financial creditors who are part of the CoC to ensure that the operational creditors receive a fair share of their claims so as to maintain their financial health. A short-sighted vision of the financial creditors to enhance their own realisation from the resolution applicant could impact the sustainability of the businesses of the operational creditors which would thus have a bearing on the going-concern status of the corporate debtor itself in the long run.”