ARCs may tap capital market to raise funds
Last year was foreseen as the year for insurance companies, which was true in many ways. Many insurance companies like ICICI Lombard, SBI Life, New India and HDFC Life tapped the primary market to raise funds. But in the coming years, Asset Reconstruction Companies (ARCs) are likely to steal the limelight.
“This year will be a year for ARCs,” said a senior executive of a leading book running lead manager. With rising bad loans of banks and growing stress in balance sheets of companies, the role of ARCs will increasingly become vital.
The growing stressed assets in the banks have prompted the Reserve Bank of India (RBI) to encourage ARCs to come forward to not just sell stressed companies but also encourage them to look at turning it over.
In 2017, the RBI has allowed ARCs to hold more than 26 per cent post converted equity stake in the stressed company under reconstruction. Additionally, the RBI asked ARCs to have a minimum net-owned corpus of Rs 100 crore by March 2019. All these RBI moves are in the right direction. Easing of some regulatory norms will be useful but one of the biggest challenges for ARCs will be funds.
Out of the 21 public sector banks (PSBs), 11 PSBs have been placed under Prompt Corrective Action (PCA) by the RBI. With many banks themselves struggling with bad loans, a source familiar with the working of ARCs, said, the ARCs could go for the IPO (initial public offering) route. Some companies will largely opt for external borrowings from overseas.
“The growing interest of foreign investors into the debt market can work in ARCs’ favour.” This interest has a lot to do with the Insolvency and Bankruptcy Code (IBC), but the positives of the code is still awaited.
At present, some existing players in the ARC space are Edelweiss ARC, Assets Care & Reconstruction Enterprise, Asset Reconstruction Company (India) and JM Financial ARC. Some new entrants are also expected to foray into the space. For instance, Aditya Birla ARC and Indiabulls ARC have received approval from the RBI in 2017. Adding to it, US-based global investment firm Kohlberg Kravis Roberts (KKR) & Co has become the first foreign investor to fully own an ARC in India.
Commenting on the current state of the banking system with Nirav Modi scam and its impact on equity market, a top executive said, “The market has to have ups and downs. Corrections are good for the market. It will delay some IPOs but some good ones will come earlier. Good and bad will get separated in the process.”