The word “haircut” has suddenly become central to the debate around Essel Group chairman Subhash Chandra’s personal insolvency case.
The National Company Law Tribunal (NCLT) has approved a repayment plan under which Chandra is to pay around Rs 6.25 crore against admitted claims of about Rs 22,006.57 crore. On a simple comparison of the two figures, creditors would recover only around 0.03% of the admitted claims, implying a haircut of roughly 99.97%.
That number has drawn criticism from lenders and sparked questions over how such a large gap between claims and recovery can arise.
But Chandra has disputed the way the Rs 22,000-crore figure is being presented. In his latest clarification, he said he had . He said the figure relates to personal guarantees he had provided for loans raised by companies associated with the Essel Group.
So, what exactly is a haircut in an insolvency case, why do creditors agree to one, and how unusual is the Chandra case?
In insolvency, a haircut is essentially the portion of an admitted claim that a creditor does not recover through the resolution process.
If a bank has an admitted claim of Rs 100 crore and receives Rs 60 crore under a resolution plan, its recovery is 60% and its haircut is 40%.
The calculation is:
Admitted claim: Rs 100 crore, Recovery: Rs 60 crore, Haircut: Rs 40 crore, or 40%
A 100% recovery means there is no haircut. If a creditor recovers nothing, the haircut is 100%.
The term is generally used from the creditor’s perspective. It describes the reduction in what the creditor is able to recover, rather than a discount that a borrower simply receives on its loan.
The basic reason is that the alternative could be worse.
When a company enters insolvency, creditors have to assess how much they can realistically recover. A resolution plan may offer them less than the original claim but more than they could receive if the company were liquidated.
A distressed company’s assets may not fetch their book value in a forced sale. The business may also lose value if it stops operating, while legal and administrative costs can further reduce recoveries.
This is why the IBC framework focusses on resolution and value maximisation rather than simply recovering the maximum amount of the original loan.
A haircut, therefore, does not automatically mean that creditors have made a bad deal. The relevant question is whether the recovery offered is better than the alternatives available to them.
Large haircuts are not new to India’s insolvency system.
Some of the country’s biggest insolvency cases have involved substantial reductions between admitted claims and eventual recoveries.
Videocon Industries is one of the most prominent examples. When the NCLT approved the resolution plan for 13 Videocon Group companies in 2021, the tribunal recorded admitted claims of Rs 64,838.63 crore against a resolution plan of Rs 2,962.02 crore. That worked out to a 95.85% haircut for creditors.
The tribunal also noted that operational creditors faced a 99.28% haircut and described the situation using the phrase “Hair cut or Tonsure, Total Shave”.
The Videocon plan was subsequently challenged, with the NCLAT dealing with objections including the size of the haircut and the treatment of dissenting financial creditors. The IBBI records the appellate proceedings relating to the Videocon resolution.
Jet Airways is another well-known example. The airline’s resolution plan involved admitted claims of around Rs 5,432 crore and a realisable amount of around Rs 1,183 crore, translating into a haircut of about 92.33%, according to a compilation of IBC resolution data.
Other large insolvency cases have also produced significant haircuts. Aircel, for instance, has been reported with an approximately 82% haircut, while Amtek Auto’s was around 80% in the same dataset.
These examples show why a large haircut by itself does not necessarily make a resolution plan unprecedented. What matters is the circumstances of each case, the available assets, liquidation value, competing resolution options and what creditors actually voted to accept.
The because the mathematical difference between the admitted claims and proposed payment is far larger than the headline numbers seen in many major corporate insolvency cases.
Rs 22,006.57 crore, Rs 6.25 crore repayment
That translates to a recovery of roughly 0.03% and a nominal haircut of about 99.97%.
But there is an important qualification.
This is a personal insolvency proceeding involving Chandra as a personal guarantor. The underlying loans were taken by companies associated with the Essel Group.
That is different from a conventional corporate insolvency where the company that borrowed the money itself is the corporate debtor being resolved.
Chandra has specifically objected to the way the Rs 22,000-crore figure has been discussed.
In his August 30 statement, he said:
His own borrowing was Rs 0.He had signed personal guarantees totalling around Rs 22,000 crore.Of those guarantees, he says around Rs 4,800 crore were signed when the underlying borrowing took place, while the remainder were signed after defaults occurred.He said the borrowing entities, rather than he personally, had raised the loans.
His statement also provides a separate account of several lenders and says the borrowers had already repaid or settled substantial amounts.
For example, the statement lists Rs 4,808 crore as the amount disbursed across the listed borrowing accounts, against Rs 3,803 crore paid by borrowers, leaving a balance of around Rs 998 crore. It says claims filed against the personal guarantor were initially Rs 5,311 crore and, after settlements, stood at Rs 4,262 crore.
Chandra says the borrowing entities have assured him that they will settle the remaining Rs 4,262 crore after reconciling their accounts with lenders.
Those are Chandra’s figures and claims, and they should be distinguished from the Rs 22,006.57 crore of admitted claims in the NCLT personal insolvency proceedings.
This is perhaps the most important point in understanding the controversy.
A “haircut” is fundamentally about
If a creditor is recognised as being owed Rs 100 crore but receives Rs 20 crore under a resolution plan, that creditor has effectively recovered 20% and taken an 80% haircut.
It is therefore more precise to say that creditors are facing the haircut under the Chandra repayment plan, rather than saying that Chandra has simply “received a 99.97% discount” on Rs 22,000 crore of personal debt.
The distinction becomes particularly important because Chandra says the Rs 22,000 crore represents guarantees for corporate borrowings, not money he personally borrowed.