PEs build $4-bn war chest for bad assets

Last week, different Benches of the National Company Law Tribunal (NCLT) admitted bankruptcy proceedings against Electrosteel Steels, Alok Industries, and Monnet Ispat & Energy. These were all under the Insolvency and Bankruptcy Code (IBC), which took effect last year.

With one more admitted earlier, of Jyoti Structures, four of the 12 stressed accounts the Reserve Bank of India (RBI) asked lenders to refer for bankruptcy have been admitted by the NCLT. The cases of five others of the original 12, which collectively owe ~1.78 lakh crore to banks, are being heard at the tribunal.

This has given new hope to private equity (PE) entities, which announced about $4 billion for distressed asset funds (DAFs) for India in the past 18 months. The business for DAFs has been almost a non-starter in India so far. This is despite banks having ~10 lakh crore in stressed assets — ~7.8 lakh crore of bad loans and ~2.2 lakh crore of restructured ones.

The IBC gave hope of a fair resolution in a time-bound manner, as the assets go for liquidation if resolution is not found in 270 days.

“The RBI’s efforts over the past three years have enabled recognition and appropriate disclosure of distressed assets, though resolution is still a challenge for multiple reasons,” says Dinkar Venkatasubramanian, partner, transaction advisory services, EY. These funds held back because of the lack of a regulatory frame work to protect their interests and to provide them with control over the assets. They first got enthused with the RBI introducing strategic debt restructuring two years earlier. This allowed conversion of debt into equity, to provide lenders control over these assets. It was followed with global funds — including Brookfield, Canada Pension Plan Investment Board and International Finance Corporation (IFC) — and domestic entities such as Piramal and Kotak Mahindra rolling out their DAFs last year.

However, it remained a non-starter. Banks were unwilling to take haircuts (the term for what they were willing to forego, to save the rest) for providing an appropriate capital structure to the new buyer. State-run banks have been worried at the legal consequences. The Central Bureau of Investigation, for instance, arrested a former chairman and three other ex-officials of IDBI Bank, along with four former executives of Kingfisher Airlines, in connection with the Vijay Mallya loan default case.

“The IBC was seen as a great framework but its implementation is being watched. The Ordinance empowering the RBI (in May) and subsequent filing of insolvency petitions on large corporate defaulters has certainly provided impetus,” says Venkatasubramanian.

Previously, the RBI had no role to play in resolving individual bad-loan cases. What it did was to form an internal advisory panel that analysed the top 500 defaulters and finally pared the list down to 12 large ones that should be first brought to the bankruptcy court. Banks have been given six months to resolve the loans owed by the remaining 488 defaulters, through other means. If they fail, these would also be dragged to the NCLT. Nikhil Srivastava, director of KKR, the US-based PE giant, says: “As the NCLT’s insolvency proceedings provide a legal seal, it would help bankers finalise the necessary haircuts without further concern.”