STUDY OF FIRST 10 COMPANIES IDENTIFIED BY RBI FOR BANKRUPTCY PROCEEDINGS UNDER IBC, 2016

Abstract

The study examined financial data and credit ratings of first 10 companies (Bhushan Steel, Alok Industries, Amtek Auto, Lanco Infratech Ltd, Monnet Ispat And Energy Ltd, Electrosteel Steels, Era Infra Engineering, Jaypee Infratech, ABG Shipyard and Jyoti Structures) identified by Reserve bank of India for bankruptcy proceedings in July, 2017 under insolvency and bankruptcy code, 2016 over 6 years (2011 to 2016). Probability of default is calculated for these companies using Altman Z score model and Merton model and used to predict the time of default. External and internal factors behind failure of each firm were also studied. The external factors responsible for the companies’ failure were found out to be global economic slowdown, delayed approvals and land clearances in India, high raw material cost, changes in government policies and high borrowing costs. Internal factors included unrelated or no diversification, improper strategies, debt funded expansions and acquisitions leading to highly leveraged balance sheets. These factors made it difficult for firms to repay their debt and resulted in default. It was found that probability of default calculated using Altman Z score model gave better results for Indian companies as compared to Merton model. Prediction of default using Altman Z score proved to be true for 6 out of 10 companies. Few weaknesses in Merton model were also observed while predicting time of default. Changes in credit rating of companies given by credit rating agencies found out to be either delayed or frequent prior to default for 5 out of 10 companies. The study concluded that Altman Z score model can be used for predicting time of default of Indian companies.