The pace of corporate clean-up is expected to gather momentum over the next few years.
Already, highly leveraged companies are restructuring their portfolio to avoid being categorized as willful defaulters. Since Reserve Bank of India Governor Raghuram Rajan wants bankers to fully disclose and provide for all problem loans by next March, lenders may like to offload their bad loans and troubled assets to assets restructuring companies (ARCs) to free capital and clean up their balance sheet.
This has signaled to foreign bad loan and distressed asset buyers to pack up in other locations and land in lucrative India, following the changes to policy guidelines announced in the FY17 budget. What these foreign players may do is to buy up bad loans and distressed assets from Indian banks, take over the defaulting companies, hand them over to turnaround specialists, and recover their investments when the defaulting companies become healthy. It’s good for everyone.
Foreign sour loan buyers are expected to fill a vacuum that has prevented Indian banks from offloading their bad loans and distressed assets in the absence of specialist buyers. Since banks aren’t in a position to take over companies even after declaring them wilful defaulters because they have neither experience at nor willingness to manage companies, many defaulters were having a gala time. Some even took advantage of socialist-era rules and declared themselves sick, making it that much difficult for banks to take them over.
Till now, Indian banks could only sell their bad loans to ARCs, entities that were set up as early as a decade ago to help purge the banking sector of bad loans. However, a shortage of capital and opaque rules meant they couldn’t but play a minor role.
Indianmandarins has learnt that following the announcement of policy changes in the FY17 budget, global distressed asset buyers such as J.C. Flowers & Co and Apollo Global may move into the country as banks set out to clean up an estimated $120 billion of bad and troubled loans.
J.C. Flowers, which has invested over $14 billion across several countries and recently announced a joint venture with financial services group Ambit Holdings, plans to set up a so-called Asset Reconstruction Company (ARC) as well as a distress-debt fund in the country. It will focus on small-and-mid-cap companies, aiming to build $1 billion in assets under management in India, said Rahul Gupta, joint group CEO at Ambit.
Apollo Global Management, which has set up an $825 million fund in India in a partnership with top private sector lender ICICI Bank’s (ICBK.NS) private equity arm, is “refining the details” of its investment plans in Indian distressed assets. “We believe (the government and the central bank) are doing a good job of bringing greater attention and transparency to the issue,” said Mintoo Bhandari, a senior partner at Apollo, adding the focus on resolution of bad loans and the easing of some rules was “increasing interest” for global investors like Apollo.
Other foreign investors with footprints in India’s distressed asset sector include KKR & Co, which recently won approval to buy a stake in International Asset Reconstruction Co. KKR has also announced a distressed debt joint venture in China.
Billionaire Ajay Piramal’s Piramal Group has also said it wishes to set up a $1 billion fund to invest in distressed assets.
The rise in troubled assets also means more business for turnaround specialists like Alvarez & Marsal, which is said to have stepped up hiring for its Indian operations, and is looking to add new capabilities in insolvency.
By M K Shukla & Rakesh Ranjan