Are Deep Haircuts Undermining the Purpose of the Code
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A “Deep Haircuts” in insolvency resolution is the percentage of debt that creditors must write off or waive, representing the difference between the admitted claim and the actual amount recovered. Recent data show a steep average haircut of 67% for financial creditors under the Insolvency and Bankruptcy Code (IBC), with total recoveries hovering around 33% of admitted claims through September 2025. This trend has raised growing concerns among stakeholders, including the RBI and Parliament, who warn that long delays and asset erosion are forcing lenders to accept significant losses. The core debate now centers on balancing the IBC’s primary objective of value maximization against practical realities like procedural bottlenecks that have extended resolution timelines to an average of 603 days. Critics argue that while the framework aims to rescue distressed companies, the current high haircuts and liquidation rates often undermine the goal of preserving businesses as going concerns.
What Are “Haircuts” in Insolvency?
Haircuts in insolvency refer to a reduction in the amount creditors recover in comparison to their total claims, which is a common outcome of approved resolution plans. This mechanism reflects distressed asset value, as the market discount represents the cost of continuing to invest in a borrower whose value has significantly deteriorated. In practice, these reductions can be significant, with creditors accepting cuts of 95-96% or even 80-90% of their claims. While large haircuts frequently raise concerns about banking sector losses, they are primarily market-driven, determined by the quality of assets and the debtor’s liquidation value. Despite these reductions, data show that financial creditors in resolved cases have received 166% of the liquidation value, making them often better off than the alternative. However, the high percentage of haircuts raises ongoing concerns about the IBC’s effectiveness in maximizing recovery and meeting its original goals of fair treatment for all stakeholders.
Why Do Haircuts Occur in IBC Cases?
- Depreciation of asset value over time: Prolonged insolvency proceedings and the idle nature of assets during the Corporate Insolvency Resolution Process (CIRP) cause physical and economic depreciation, reducing the overall value available for recovery.
- Corporate debtors’ poor financial health: Insolvent companies frequently have severely overleveraged balance sheets and broken business models, which means their actual assets are significantly lower than the total debt owed, forcing creditors to accept a “cut”.
- Lack of competitive bidders: Distressed assets frequently attract few bidders, resulting in low market demand and lower purchase offers, forcing creditors to accept lower valuations to avoid liquidation.
- Delays in CIRP reduce enterprise value: Significant delays, which frequently exceed 330 days due to litigation, erode the company’s going-concern value and reduce investor interest, resulting in deeper haircuts.
What Are “Deep Haircuts”?
Deep haircuts refer to the significant loss of value that lenders and creditors face when they only recover a small fraction (often 10-30%) of their admitted claims, resulting in reductions of 70-90% or more. These steep losses have sparked serious concern among regulators and stakeholders, who fear that such outcomes will undermine the law’s goal of increasing asset value and encouraging healthy credit flow. While early high-profile cases such as Monnet Ispat and Alok Industries exemplified these drastic cuts, recent developments indicate a shift toward fuller recoveries in some cases.
Objectives of IBC: Value Maximization vs Recovery
The IBC’s central theme is resolution, which is intended to revive viable companies rather than simply serve as a tool for debt recovery or liquidation. The code focuses on maximizing asset value by making it easier to sell businesses as going concerns and ensuring timely, efficient resolution processes. Furthermore, it aims to balance the interests of all stakeholders, including financial creditors, operational creditors, employees, and the corporate debtor, using a creditor-controlled but equitable framework.
The Core Debate: Are Deep Haircuts Justified?
Proponents argue that deep haircuts are justified because they reflect real market conditions in which asset values have significantly declined, ensuring that creditors recover more than the distressed entity’s liquidation value. Accepting these reductions allows stakeholders to facilitate a faster resolution, avoiding the lengthy delays and asset dissipation that are common in protracted legal battles or liquidation proceedings. Critics argue that excessive haircuts indicate inefficiencies in the process, implying that the insolvency framework fails to preserve value effectively or that the debtor’s management caused unnecessary losses. These significant reductions can result in significant losses for creditors, particularly unsecured ones, undermining trust in the IBC framework if lenders perceive the system as overly punitive or unpredictable when compared to other resolution mechanisms.
Role of Committee of Creditors in Approving Haircuts
The Committee of Creditors (CoC) has the sole authority to approve resolution plans and determine the extent of haircuts based on commercial considerations. Courts rarely interfere with these commercial decisions because the Adjudicating Authority’s jurisdiction is limited to verifying legal compliance rather than questioning the plan’s merits. The focus of judicial review remains on ensuring the resolution plan’s feasibility and viability, rather than on the specific percentage recovery or haircut magnitude.
Judicial Perspective on Haircuts
Courts consistently uphold the Commercial Wisdom of the CoC on haircuts, treating the decision as non-justiciable as long as it does not violate statutory provisions. The Supreme Court clarified in K. Sashidhar v. Indian Overseas Bank that the National Company Law Tribunal (NCLT) cannot substitute its decision for the CoC’s commercial wisdom. This deference was reiterated in Essar Steel India Limited v. Satish Kumar Gupta, where the Court determined that economic creditors are the best judges to determine viability and recovery. The judiciary prioritizes process compliance over outcome, intervening only when the CoC’s decision violates the fundamental contours of the IBC. In State Bank of India v. Ushdev International Limited, the NCLT stated that it could only reject a plan if the CoC’s decision was illogical, unreasonable, or unsound. Despite significant haircuts, such as the 96% haircut in the Videocon Industries case and the 95% haircut in Siva Industries, courts generally accept these figures as valid commercial decisions. The Bhushan Steel and JSW Steel v. BPSL decisions demonstrate that judicial review shifts to corrective action only when there are clear violations of the law, not simply because recovery outcomes are low. Finally, the IBC does not mandate a minimum recovery threshold, so the focus remains on whether the resolution plan meets legal requirements rather than maximizing value.
Impact of Deep Haircuts on Stakeholders
- Banks and financial institutions: Significant, high-value haircuts on non-performing assets result in substantial losses and increased provisioning, reducing profitability and necessitating capital optimization.
- Operational creditors are frequently placed at the bottom of the recovery hierarchy, receiving little or no recovery and, in some cases, facing insolvency as a result of their losses.
- Economy: Deep haircuts raise concerns about credit culture because they may encourage borrower moral hazard and necessitate more cautious lending behavior.
- Investors: Significant and unpredictable haircuts send mixed signals by eroding value and raising concerns about the efficiency of insolvency proceedings, discouraging investment in distressed assets.
Key Reasons Behind High Haircuts in India
The IL&FS default in September 2018 triggered high haircuts in India by exposing opaque balance sheets and asset-liability mismatches in NBFCs, causing a “first-mover advantage” panic and a flight to safety in which investors demanded steep discounts on illiquid securities.
- Delays in admission and resolution are caused by judicial infrastructure deficiencies, with 23.2 million cases pending in courts, as well as a regulatory environment characterized by “marketism with limited exit,” which prevents distressed assets from being wound down quickly.
- Weak asset markets are the result of overleveraged corporate balance sheets and nonperforming assets (NPAs) in public sector banks, both of which grew during the 2003-2008 credit boom and were exacerbated by unrealistic infrastructure bidding and a lack of disciplined lending.
- Fears of hidden vulnerabilities in the shadow banking system, as well as inconsistent valuation practices across mutual funds, have led to limited investor participation in distressed assets, creating uncertainty and impeding orderly resolution.
- Sector-specific stress is concentrated in infrastructure and real estate, where governance lapses and aggressive bidding have resulted in stalled projects, while the power sector faces delays in privatization and distribution challenges that continue to put asset quality under pressure.
Are Deep Haircuts Undermining the Purpose of IBC?
High haircuts in India’s IBC are frequently the result of severe economic distress and lengthy delays, rather than inherent flaws in the law itself. While the IBC’s “commercial wisdom” principle allows lenders to accept settlements, haircuts of up to 95% have been reported, raising concerns about debt recovery and treatment of operational creditors. Persistent steep haircuts are directly related to systemic inefficiencies, particularly the average resolution time of 716 days in FY24, which exceeds the statutory 330-day limit and reduces asset value. Data show an inverse relationship between delay and recovery, with cases resolved within 330 days yielding a 49.2% recovery rate versus only 26.1% for those taking more than 600 days. The current system allows for significant value erosion before cases are even admitted, with many companies losing more than half of their value before entering insolvency proceedings, prompting calls for second-generation reforms to address admission delays and judicial bottlenecks. To better align with the IBC’s original goal of rescuing distressed businesses, the process requires immediate improvements in judicial staffing, faster adjudication, and clearer legal principles to reduce the need for such drastic financial concessions.
Possible Solutions to Reduce Haircuts
- Improved asset valuation practices: Using enterprise-value-based valuation and dual valuation checks with strict, transparent disclosures ensures that assets are sold at their true going-concern value rather than forced sale prices.
- Increased investor participation: Expanding competitive bidding through global outreach, mandatory Swiss Challenge methods, and relaxing foreign investment norms (ECBs) increases the pool of applicants, resulting in higher bid values and lower creditor losses.
- Strengthening pre-insolvency mechanisms: Promoting pre-packaged insolvency and initiating restructuring at the first signs of distress helps to avoid the rapid depletion of asset value that occurs during prolonged litigation.
Common Misconceptions
High haircuts often result from severely distressed assets or prolonged litigation rather than inherent flaws in the Insolvency and Bankruptcy Code (IBC), which prioritizes business rescue over liquidation.
- Haircuts do not mean failure of IBC: Haircuts are often an economic necessity in insolvency resolution and represent a market-demanded discount, rather than a failure of the code, which has successfully changed debtor behavior and enabled the reorganization of distressed firms.
- Lower recovery is not always avoidable: Lower recovery rates are frequently unavoidable due to significant asset deterioration prior to initiation, excessive delays in the resolution process, and low demand for specific assets.
- Comparison with global recovery rates is necessary: Comparing IBC outcomes against global standards is imperative to establish proper benchmarks and identify areas for improvement in the efficiency of the insolvency process, given that Indian recoveries have lagged behind developed economies
FAQs on Haircuts Under IBC
What is a haircut in insolvency?
A haircut is a percentage of debt that financial creditors waive off, representing the difference between the amount claimed and the actual amount recovered, and is frequently required when a company’s asset value is less than its total debt.
Are high haircuts common in India?
A haircut is a percentage of debt that financial creditors waive off, representing the difference between the amount claimed and the actual amount recovered, and is frequently required when a company’s asset value is less than its total debt.
Can courts reject plans due to high haircuts?
While the Supreme Court has upheld creditors’ “commercial wisdom,” courts may reject a plan if it violates statutory compliance, fails to pay the minimum required to operational creditors, or is deemed fraudulent.
Who decides the haircut?
The haircut is decided through a negotiated resolution plan approved by the Committee of Creditors, which is made up of financial creditors who evaluate the proposal’s commercial viability.
Can haircuts be reduced?
Yes, haircuts can be reduced if the resolution applicant raises their bid, creditors reach a better One-Time Settlement, or the final recovery exceeds the initial estimated valuation.
Conclusion
The debate over strict haircut policies focuses on whether requiring “deep” or “short” haircuts promotes discipline or simply limits student expression. While proponents argue that uniform grooming promotes a neat appearance and reduces distractions, many students believe these rules undermine their self-esteem and disregard cultural identities. Current implementations frequently fail due to a lack of consultation with students, the primary stakeholders, resulting in resistance, policy neglect, and conflict between staff and students. Systemic changes are required to replace rigid, one-sided mandates with guidelines that value individuality while maintaining order. Finally, schools must strike a balance between realism and policy goals, ensuring that grooming standards benefit, rather than hinder, the educational environment and student well-being.
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