State Bank of India (SBI), the country's largest bank, has recovered a paltry 2 per cent of total debt outstanding in defaulting companies that eventually landed in liquidation under the Insolvency and Bankruptcy Code (IBC).
There are as many as 150 defaulting companies under liquidation where SBI had loan exposure of close to Rs 30,000 crore. These are the cases where no resolution was reached because of the differences over the resolution or restructuring or lack of buying interest from outside companies. There were other financial creditors too in these 150 companies, but the SBI managed to get only Rs 350 crore out of these cases. It is not known whether the Rs 350-crore recovery under the liquidation was higher or lower than the liquidation value of the company.
As per the IBC, the insolvency professionals have to work out a liquidation value well in advance by appointing two valuers before the process of restructuring, resolution or liquidation starts. The upfront declaration of a liquidation value helps all stakeholders come together and find a resolution. The liquidation value is generally low as the assets are sold as junk except the real estate.
The liquidation value is arrived at by valuing the land, building and plant and machineries.
An SBI research paper titled 'Towards a successful insolvency and bankruptcy code' has observed that more than one fifth of the cases admitted to IBC have ended in liquidation. "One way of looking at it is at the time of lower demand and economic downturn, there are not many takers of the stressed assets and hence entities ended with liquidation," states the report. Partly, the reasons are also because of the absence of global distressed funds because of frequent amendments in the new IBC Act. In addition, many strategic players stayed away as they themselves were facing challenges on account of over capacity, lower demand and high leverage.
The SBI research also makes a point that the quality of companies going to liquidation was also a contributory factor as over 70 per cent of the cases that ended in liquidation were earlier with BIFR (Board of Financial and Restructuring) for sick companies. There were also some defunct companies. "The economic value in most of these defaulting companies had already eroded before they were admitted into IBC."