A holding company owes Rs 1,000 crore of notes and owns cement, power and logistics subsidiaries, each with its own debt. What do the noteholders recover in liquidation?

The holding company noteholders recover 50%. Cement repays its Rs 500 crore and passes Rs 300 crore up; logistics repays Rs 100 crore and passes Rs 200 crore up; power's lenders take its Rs 400 crore, a 66.7% recovery, and nothing reaches the holding company. Netting the group would wrongly give 30%. A holding company guarantee of power's debt would cut the notes to about 41.7%.

The holding company owns shares in its subsidiaries, not their plants. Shareholders are paid only after a company's own creditors, so the notes can reach only the equity left in each subsidiary after its lenders are paid in full. This is structural subordinationCreditors of a parent rank behind creditors of its subsidiaries, because the parent holds only their equity.. A father who lent money to three of his children's shops can claim only what each shop has left after its own suppliers are settled.

Work one company at a time. Cement: Rs 800 crore of value, Rs 500 crore of debt, Rs 300 crore of equity for the holding company. Logistics: Rs 300 crore less Rs 100 crore, Rs 200 crore. Power is worth Rs 400 crore against Rs 600 crore owed, so its lenders recover 66.7% and its shares are worth nothing; the Rs 200 crore shortfall is their loss, not the holding company's. The notes receive Rs 500 crore against Rs 1,000 crore: 50%.

Netting adds Rs 1,500 crore of value, subtracts Rs 1,200 crore of subsidiary debt and leaves Rs 300 crore for the notes, 30%. That treats power's Rs 200 crore shortfall as if it reduced the surplus at cement and logistics, which limited liability does not allow. Power's lenders lent to power, not to its sisters, so their loss stays inside power.

If Saptarishi had guaranteed power's debt, power's lenders could claim their Rs 200 crore shortfall at the holding company, alongside the notes. Rs 500 crore would then be shared over Rs 1,200 crore of claims, 41.7% each, so the notes fall from 50% to 41.7% and power's lenders rise to 80.6% overall. Before computing anything in a group restructuring, ask who guarantees whom; the answer moves recoveries more than any valuation debate.