This Diwali, Here's a Big Reason to be Positive About the Market

Nov 7, 2018

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

It has been two and a half years since the Insolvency and Bankruptcy Code (IBC) came into existence.

It is a one-stop solution which addresses all insolvencies in a time-bound manner.

And boy, it's been a big game-changer for the banking industry... and a big positive for the economy and the market.

Before the IBC, it took around five years to dissolve a bankrupt company's operations. The number has dropped drastically to a year.

Earlier, banks had to run after promoters to recover their money. They were at the mercy of big borrowers.

But the tide has turned.

Now promoters are running after banks looking for solutions.

Take the recent case of Essar Steel.

In June 2017, the RBI identified 12 defaulters including Essar Steel. In June 2017, insolvency proceedings were initiated against Essar Steel.

Now, it's in the final stages of resolution.

Last week, the committee of creditors picked ArcelorMittal as the preferred bidder to buy out the company.

Interestingly, in order to qualify as a bidder, ArcelorMittal also had to clear pending dues to the creditors of Uttam Galva Steels Ltd and KSS Petron Pvt Ltd. This was close to Rs 70 billion.

ArcelorMittal was set to pay close to 86% of the outstanding loan. That meant a haircut of just 14% for the lenders.

But surprise, surprise!

The promoters of Essar Steel, the Ruia family, have offered to repay the entire loan in an attempt to get out of the insolvency resolution process.

This is what the promoters of Essar Steel had to say:

  • We believe our proposal will provide 100% recovery to secured creditors and lenders, and maximum recovery for unsecured creditors. This is well in excess of that offered in the proposal under consideration, and is in line with value maximisation, which is the underlying principle of the IBC process.

Whether this is allowed or not and whether it is legally valid or not is an altogether different point of discussion.

But the bottom line is very clear. Pay up or lose your Crown Jewel.

And this is not limited to Essar Steel.

Take another example of Binani Cements.

Creditors made a claim of Rs 63.5 billion. But we've learnt they would receive around Rs 72.6 billion. That means the highest bid exceeded Binani Cement's total outstanding debt.

Not to mention, the upcoming resolution of Bhushan Power and Steel is getting a lot of attention too.

In the initial round, this account received bids of Rs 110 billion from JSW steel, Rs 170 billion from Tata Steel, and Rs 185 billion from Liberty House.

Then, JSW revised its bid to Rs 197 billion, 80% higher than its earlier bid.

This is all good news for subscribers of Smart Money Secrets. Our recommendation of April 2018, will benefit from this resolution.

Clearly, the IBC is the biggest reform in the banking sector in a long time.

It's important to keep in mind the code remains a work in progress. Nevertheless, I'm excited because it could play a key role in solving the NPA mess in India's banking system.

The IBC will not only help banks recover bad loans to an extent but also help bring back credit growth.

Chart of the Day

Talking of the IBC, it is important to consider the recent successful recoveries.

If we consider two successful closures, i.e. Bhushan Steel and Electrosteel, the lenders have already recovered close to Rs 421 billion.

If we consider the other two cases of Essar Steel and Binani Cements, then the lenders would receive around Rs 492 billion.

Faster Recoveries Under the IBC

The government expects close to Rs 1.8 trillion through the IBC. Similarly, banks expect to write back more than Rs 1 trillion from the resolution of the 'Dirty Dozen' constituting 12 big NPA accounts referred to IBC by the RBI.

This is what the RBI said in its report on trend and progress in the banking industry:

  • Banks can take advantage of the IBC to clean up their balance sheets and improve performance on a sustained basis to remain competitive. Instead of waiting for regulatory directions, banks can file for insolvency proceedings on their own to realise promptly the best value for their assets.

The IBC is positive for the long-term health of the banking system and it is evolving with time.

More importantly, lending in the next credit cycle will be more disciplined as a result.


Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

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1 Responses to "This Diwali, Here's a Big Reason to be Positive About the Market"

margaret thomas

Nov 7, 2018

this is very good stock market

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