📚 PASS Research Analyst Certification Examination Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 14.2 — Important regulations in Indian Securities Market

Imagine you are tracking a mid-cap textile firm that has been under the Corporate Insolvency Resolution Process (CIRP) for months. You have been maintaining a ‘Hold’ rating, banking on the possibility that a white knight investor might submit a viable resolution plan to revive the company. However, the Committee of Creditors (CoC) fails to find a buyer, and the adjudicating authority orders the liquidation of the company.

As an analyst, your valuation model must undergo an immediate, drastic shift because the focus has now moved from ‘going concern’ valuation to ’liquidation value.’

When a company reaches the liquidation phase under the Insolvency and Bankruptcy Code (IBC), the mandate of the management and the resolution professional changes entirely. The objective is no longer to keep the firm alive as a business entity, but to sell off its assets to repay creditors in a strictly defined order of priority.

This shift renders traditional DCF models based on projected cash flows obsolete, as the company will cease to function as a business once the assets are auctioned. Your task is to shift your focus toward the ’liquidation value’ determined by registered valuers, which often reflects a significant haircut compared to the book value.

Understanding the waterfall mechanism for distribution is critical for any analyst assessing the recovery prospects of a company undergoing liquidation. The IBC stipulates that insolvency resolution costs take precedence, followed by secured financial creditors and workmen’s dues. Subsequent layers include other employees, unsecured financial creditors, and government dues, with equity shareholders standing last in the queue. For instance, if you are analyzing a debt-laden company, you must reconcile the asset liquidation proceeds against the outstanding debt stack.

If the estimated liquidation value is insufficient to cover even the secured creditors, your recommendation for the stock price should account for a near-total loss of equity value.

Effective analysis in this phase requires you to stop viewing the company as a provider of goods or services and start viewing it as a pool of assets. You must evaluate the realizable value of land, machinery, and inventory, while also adjusting for the costs of the liquidation process itself. Monitoring the filings of the liquidator is now your primary source of intelligence.

This is not just about reading balance sheets; it is about understanding how the legal process of stripping and selling assets will ultimately impact the residual value left for the stakeholders you advise.

Nuance

⚠️ Nuance
Candidates often confuse the ‘Going Concern’ sale with traditional liquidation. Under the IBC, a liquidator may attempt to sell the company as a ‘going concern’ even during liquidation to maximize value, which is different from a piecemeal asset sale. A common misconception is that liquidation automatically means the business closes immediately; however, the liquidator retains discretion to keep the business operational briefly to attract a better buyer, and analysts must be careful not to value the equity as if it still has future growth prospects.

Check Your Understanding

Practice Question 1

If a company enters the liquidation process under the IBC, which of the following best describes the priority of equity shareholders regarding the distribution of proceeds?

Practice Question 2

During the liquidation phase of a corporate debtor, what is the primary role of the Liquidator regarding the firm’s assets?

This is a companion read for Section 14.2 — Important regulations in Indian Securities Market from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

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