{"id":116790,"date":"2021-07-06T17:41:10","date_gmt":"2021-07-06T12:11:10","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=116790"},"modified":"2021-07-06T17:41:10","modified_gmt":"2021-07-06T12:11:10","slug":"haircuts-and-settlements","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/haircuts-and-settlements\/","title":{"rendered":"Haircuts and Settlements"},"content":{"rendered":"\n<p><b>Source<\/b><span style=\"font-weight: 400;\">: <a href=\"https:\/\/www.business-standard.com\/article\/opinion\/haircuts-and-settlements-121070501434_1.html\" target=\"_blank\" rel=\"noopener\">Business Standard<\/a>\u00a0<\/span><\/p>\n<p><strong>Relevance<\/strong>: The insolvency<span style=\"font-weight: 400;\"> and Bankruptcy Code (IBC) is an important mechanism to protect the economy from NPA and failed businesses. Any issue in this mechanism will act as a big hurdle in the economic development of the country.<\/span><\/p>\n<p><b>Synopsis<\/b><span style=\"font-weight: 400;\">:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Insolvency and Bankruptcy Code (IBC) allows for a system of haircuts and settlements. However, experts have expressed concerns over their misuse which demands a robust reformation of the IBC process.\u00a0<\/span><\/p>\n<p><b>Background<\/b><span style=\"font-weight: 400;\">:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">India\u2019s bankruptcy process under the Insolvency and Bankruptcy Code (IBC) is relatively new and should be seen as a work in progress.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Experts have expressed concerns about the magnitude of haircuts that banks are taking under the IBC resolution process. Also, the system of one-time settlement (OTS) is harmful.\u00a0<\/span><\/li>\n<\/ul>\n<h5><b>Issue of Haircuts<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In finance, a haircut refers to the reduction applied to the original loan amount during the insolvency resolution settlement.\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Overall, <\/span><b>haircuts have been in the 80 percent range<\/b><span style=\"font-weight: 400;\">. Banks have lost four-fifths of the money they have lent to companies that have entered the IBC process.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Even the National Company Law Tribunal recently expressed surprise that Vedanta\u2019s Anil Agarwal was \u201c<\/span><b>paying almost nothing<\/b><span style=\"font-weight: 400;\">\u201d to take over Videocon Industries.\u00a0<\/span><\/li>\n<\/ul>\n<h5><b>Issue of One-time Settlement (OTS) Mechanism<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Under IBC, 90 percent of the committee of creditors (CoC) can decide to give the firm back to the promoter.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The recent OTS between the promoter of Siva Industries and Holdings Ltd and its creditors is one such example. The promoter paid Rs 500 crore against a Rs 5,000 crore loan and got back the firm.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The mechanism is beneficial as:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It <\/span><b>preserves capital <\/b><span style=\"font-weight: 400;\">and involves an agreement of the original lenders,\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It also takes the <\/span><b>pressure off the tribunal,<\/b><span style=\"font-weight: 400;\"> which is clogged up with cases.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">However, the OTS mechanism to settle cases can be open to subversion as the mechanism attracts minimum legal oversight.<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The promoters could borrow money from banks, take it out of the company, and then use the OTS mechanism to have the banks take a massive haircut on the loans.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h5><b>Way Ahead<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Any further reform of the IBC process must take into <\/span><b>account the basic motivation for its introduction:\u00a0<\/b>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Firstly, to preserve the companies as far as possible.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Secondly, to ensure that capital is not wasted or locked up in legal proceedings.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Third, to introduce some market discipline in bank\u2019s corporate lending.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The ideal solution is the development of <\/span><b>an incentive-compatible banking sector <\/b><span style=\"font-weight: 400;\">that lends more carefully. But until public sector banking in India occupies a far smaller share of corporate lending, such incentive compatibility is a distant dream.<\/span><\/p>\n<p><strong>Read more<\/strong> &#8211; <a href=\"https:\/\/forumias.com\/blog\/brazen-gaming-of-bankruptcy-process-on\/\" target=\"_blank\" rel=\"noopener\">Brazen gaming of bankruptcy process on<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Source: Business Standard\u00a0 Relevance: The insolvency and Bankruptcy Code (IBC) is an important mechanism to protect the economy from NPA and failed businesses. Any issue in this mechanism will act as a big hurdle in the economic development of the country. Synopsis: The Insolvency and Bankruptcy Code (IBC) allows for a system of haircuts and&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/haircuts-and-settlements\/\">Continue reading <span class=\"screen-reader-text\">Haircuts and Settlements<\/span><\/a><\/p>\n","protected":false},"author":10322,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[],"class_list":["post-116790","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/116790","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10322"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=116790"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/116790\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=116790"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=116790"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=116790"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}