Calmor Steel is in insolvency with admitted claims of Rs 10,000 crore, Rs 8,500 crore financial and Rs 1,500 crore operational. A resolution plan offers Rs 4,000 crore against a liquidation value of Rs 3,000 crore. How might the proceeds be split, and what would a distressed buyer pay for the financial claims?

Financial creditors recover about 44.9% nominal and 40.3% in present value under the plan, against 33.5% in liquidation. Process costs come first, and operational creditors get Rs 60 crore, more than the nothing they would get in liquidation. A buyer wanting 18%, with a 75% chance of approval, would pay about 32 paise per rupee of claim. The Rs 1,000 crore between the plan and liquidation value is the room creditors negotiate over.

In India the process runs under the Insolvency and Bankruptcy Code. In liquidation, section 53 sets a waterfall: process and liquidation costs first, then secured creditors alongside workmen's dues, then others, with operational creditors far down the list. A resolution plan is voted on by the committee of creditorsThe body of financial creditors that votes on resolution plans in an Indian insolvency, with votes weighted by the size of each claim., which needs a large majority by value, and the Code sets floors: operational creditors must get at least what they would receive in liquidation, or under the waterfall applied to the plan amount, whichever is higher; dissenting financial creditors must get at least their liquidation value. These rules have been amended more than once; confirm the current provisions and regulations before relying on any of them.

Pay the costs, then the operational creditors, then the lenders. Rs 2,800 crore upfront less Rs 120 crore of costs and Rs 60 crore to operational creditors leaves Rs 2,620 crore for financial creditors now, plus Rs 1,200 crore over four years: 44.9% of their claims on paper. In liquidation, Rs 3,000 crore less Rs 150 crore of costs leaves Rs 2,850 crore, 33.5%, and secured lenders take all of it; the operational creditors' floor is therefore zero, so the plan's Rs 60 crore, 4 paise per rupee, is a negotiated payment above the minimum, usually offered to keep suppliers trading and avoid challenges.

Because money later is worth less than money now, and distressed money is expensive. At 18% a year, Rs 300 crore a year for four years is worth about Rs 807 crore on approval day, not Rs 1,200 crore, which takes the lenders from 44.9% to 40.3%. A household selling a flat for Rs 1 crore paid in four yearly instalments by a buyer who might default has not really been paid Rs 1 crore. The deferred instruments also carry credit risk on the resolved company, which a buyer prices in the 18%.

Weight the two paths and discount each to today. If the plan is approved in a year, 100 of claim receives 30.8 then and 3.53 a year for four years, worth 34.2 today at 18%; if it fails, liquidation pays 33.5 in two years, worth 24.1. At 75% and 25%, the claim is worth about 31.6 per 100, so the fund bids around 32 paise per rupee to banks that want to exit now. The seller gives up the difference between that and the headline in exchange for certainty and speed.

Close with where the money is made. The Rs 1,000 crore between the plan and liquidation value is what the committee negotiates over: pushing for more cash upfront, a higher total or security over the deferred instruments. A fund that buys claims at around 32 and then helps win better terms, or raises the approval odds, earns far more than 18%; a fund that buys and then watches the plan collapse into a slow liquidation earns much less.