Corporate Bailouts and Public Burden: The Hidden Truth of Loan Haircuts

Rajya Sabha MP A. A. Rahim recently raised four questions to the Ministry of Corporate Affairs regarding the number of loans written off (haircuts) under the Insolvency and Bankruptcy Code (IBC) Act, 2016. This Act, passed by the Indian Parliament, was intended to recover large loans that were turning into bad debts. He also inquired about the amounts written off under the so-called ‘haircut’ provisions. Finance Minister Nirmala Sitharaman replied that 1,119 loans were settled under the IBC Act and that financial institutions recovered Rs 3.58 lakh crore. She also clarified that the exemptions for haircuts under the IBC Act do not fall under the waiver scheme. However, when asked about the total amount waived under haircuts, she avoided a direct response, resorting to vague explanations.

What is a Haircut, and How Does it Work?

The IBC Act, passed in 2016, was designed to recover loans taken by corporate entities, partnership firms, and individuals from financial institutions when the defaulted amount exceeds Rs 1 crore. The loans seized under this law are auctioned by the National Company Law Tribunal (NCLT). As per the Act, only the highest bid, calculated based on the firm's asset value at the time of auction, is considered. The asset value, however, remains confidential and is often significantly lower than the outstanding loan amount. The difference between the loan amount and the recovered amount is termed a ‘haircut.’

For instance, consider the haircut granted to Anil Ambani’s Reliance Infrastructure (RI). When RI was put up for auction under the IBC Act, its bad debt stood at Rs 47,251 crore. The company owned 43,500 towers and 1,70,000 kilometres of underground fibre optic cables across the country. According to BSNL estimates, the cost of installing a tower is at least Rs 25 lakh, and laying one kilometre of optic fibre cable costs between Rs 6,000 and Rs 1 crore, depending on the terrain. However, during the auction, only the depreciated value of the infrastructure was considered, which remained undisclosed. Consequently, RI, despite its massive assets, was auctioned for a mere Rs 469 crore. This resulted in a staggering Rs 46,782 crore (99.11%) haircut, benefiting Mukesh Ambani’s Jio. In essence, the younger brother’s company was acquired by the elder brother for a fraction of its worth, while banks suffered enormous losses.

Billions for Adani, Barely Anything for ASHA Workers

Upon hearing the Finance Minister's claim that Rs 3.58 lakh crore was recovered after haircuts across 1,119 accounts, one might assume a significant amount was retrieved. However, this figure is misleading—akin to the Rs 469 crore recovered from the Ambani case. Gautam Adani’s companies, including Adani Power, Adani Properties, Adani Ports, and Adani Good Homes, acquired bad debts worth Rs 61,832 crore for just Rs 15,977 crore. With government backing, Adani received a 74% haircut, effectively allowing him to amass immense wealth at the expense of public funds. The Minister also stated in her reply to the Rajya Sabha that these haircuts do not qualify as write-offs. However, considering the average haircut of 70%, as indicated in her response, the total relief given to 1,119 companies exceeds Rs 8 lakh crore.

According to Reserve Bank data, bank loans written off between 2014—when Narendra Modi took office—and 31 March 2024 amount to Rs 16.3 lakh crore. If we factor in the Rs 8 lakh crore lost to haircuts, the total loss suffered by banks exceeds Rs 24 lakh crore. This means that large future bad loans will be routed through the IBC, allowing corporations to plunder public deposits without public scrutiny. Before 2016, tax evasion was accounted for in the budget under the ‘revenue forgone’ category. Subsequently, new terminologies such as ‘conditional’ and ‘unconditional’ were introduced, and over time, such figures disappeared from public records. Loan write-offs seem to be following the same trajectory.

Meanwhile, ASHA workers—who play a crucial role in public health—are denied even their basic dues. The Central Government does not recognise ASHA workers as labourers, and as the Kerala Health Minister stated in the Kerala Assembly, Rs 100 crore in benefits due to them has been withheld. While the government denies minimal benefits to ASHA workers, it covertly channels billions to major corporations like Ambani and Adani through dubious financial mechanisms, exploiting the taxes and savings of ordinary citizens, including ASHA workers themselves.

This systemic exploitation must not continue unchecked. It threatens the very foundation of our democracy. It is imperative that we unite and demand accountability to ensure a fair and equitable distribution of resources.

[Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial stance of this publication.]