A telecom company moves its licences into an unrestricted subsidiary and offers noteholders new secured notes at 65 per 100. Work out the debt reduction, the holdouts' position, and why holders accept a haircut.

The exchange cuts Rs 280 crore of face value, and in a default exchanged holders get about 56 per 100 while holdouts get nothing. Rs 800 crore of notes become Rs 520 crore of secured notes that rank ahead of the Rs 200 crore that held out. Holders accept the haircut because it beats both today's price of 45 and the holdout's position, whatever the others do. Moving the licences out of reach is what makes the offer coercive.

It takes the most valuable asset out of the noteholders' reach without asking them. An unrestricted subsidiaryA subsidiary the bond terms treat as outside the group: it does not guarantee the notes and is not bound by their covenants. does not guarantee the notes, so the licences now sit where new lenders can be given first claim on them. The old noteholders still own a claim on the parent, which owns the subsidiary's shares, but those shares are worth only what is left after the subsidiary's own creditors are paid. It is like a family moving the house into a new company and borrowing against it there: the old lenders to the family can only claim the shares of a company whose house is already mortgaged.

At 80% participation, Rs 800 crore of old notes become Rs 520 crore of new secured notes: face value falls by Rs 280 crore, and total debt is Rs 920 crore, Rs 200 crore of new money, Rs 520 crore secured and Rs 200 crore of holdouts. Now run a default. Value is Rs 450 crore plus the Rs 200 crore the new money built, Rs 650 crore. The new money takes Rs 200 crore. The secured notes take the remaining Rs 450 crore, 86.5% of their Rs 520 crore, which is about 56.2 per 100 of old notes. The holdouts, unsecured and last, get nothing.

Because the choice is no longer between 65 and 100. For each holder, exchanging beats holding out whatever the others do: at 50% participation it is 65 against 25, at 80% it is about 56 against nothing. That is the logic of a prisoner's dilemma, and it is deliberate. If every holder exchanged, each would get 45 per 100 in a default, exactly today's price: the group gains nothing, but no individual can afford to be the one left behind.

Then give the holdout's argument, because the interviewer will ask. A holdout's claim is still Rs 100 at maturity; if Nirvaan survives and repays, the holdout is paid in full while the exchanged holders accepted 65. That bet needs the business to be worth far more than today, which is why most holders take the certainty. Lenders now fight these transactions in the bond terms themselves, by limiting what can be moved into unrestricted subsidiaries, and challenge them in court where the transfer looks like it stripped value from creditors.