Data from the Insolvency and Bankruptcy Board of India (IBBI) shows that as of 30 June 2022, banks and other creditors have been able to recover only Rs 31 (~$0.4) of every Rs 100 (~$1) lent to bankrupt companies since the inception of the Insolvency and Bankruptcy Code (IBC) in 2016.
And while everyone seems to focus on the money that banks haven’t been able to recover, one rarely hears about ordinary investors, who are also victims in this process. If banks and institutional creditors are losing 69% of their loans, ordinary shareholders are losing as much as 100% of their investments.
According to IBBI, there were over 3,800 bankrupt companies in the IBC resolution pipeline as of September 2022. And it is estimated that every company in the insolvency process has a median of 16,163 investors 16,163 investors Business Standard Retail investors put over Rs 2,000 cr in bankrupt firms, hoping for revival Read more , who would have invested money in the hopes of turning a profit or at least recouping their investments.
But many of these shareholders in companies such as Indian airline Jet Airways, housing finance company Dewan Housing Finance Ltd (DHFL), and multinational conglomerate Videocon Industries Ltd have seen the value of their investments destroy completely.
This is because when big companies take over a bankrupt firm after the insolvency resolution process, they also attract retail investors—broadly known as the ‘pied piper effect’. Brimming with optimism about the bankrupt company being in better hands, they start buying shares expecting good returns in the future or just to make a quick buck in the present.
However, when the final resolution plan is eventually approved by the National Company Law Tribunal (NCLT), many of these investors are left with nothing as the new owner’s plan always involves reducing the public shareholding to a bare minimum at no cost.
While some investors succeed in exiting with a notional loss or a neat profit, most others suffer a fate similar to that of rodents in the tale of the Pied Piper of Hamelin.
And the reasons for individual shareholders losing out are myriad.
First, they are the last ones entitled to receive anything from the sale of assets of a bankrupt company. So when banks are only able to recover ~31% of their dues, there is nothing left for existing individual investors.
Then, there is the thorny issue of information asymmetry, where the promoters of bankrupt companies and those closely involved in the insolvency process get a sense of which way the wind is blowing long before ordinary shareholders do. This allows them to offload their stakes and make a killing even as others end up getting nothing.
While creditors and companies dominate the media headlines, the fate of investors often goes unnoticed.