Mumbai: International Asset Reconstruction Co. Pvt. Ltd (IARC), promoted by former State Bank of India chairman M.S. Verma and former India head of Bank of America Arun Duggal, has concluded the first closing of its fund at around Rs200 crore.
IARC’s shareholders include HDFC Bank Ltd, Tata Capital Ltd and City Union Bank Ltd. The firm is mainly engaged in acquisition, resolution and reconstruction of non-performing loans (NPLs).
The fund, IARF 1, is a Rs400 crore corpus with an option of going up to Rs500 crore. The investors in the first close were domestic lenders and IARC itself.
“We have an indicative commitment of Rs100 crore from FIIs (foreign institutional investors), who will come in the second closing,” said Birendra Kumar, managing director and chief executive of IARC.
Some of the FIIs which have shown interest include Netherlands-based FMO and UK-based CDC Group.
As per the regulations of the Reserve Bank of India (RBI), foreign investment of up to 49% is permitted in asset reconstruction firms and no single investor can invest more than 10%.
The second close is expected to be in December 2010. The funds will be deployed in two years, with 50-60% being deployed in the current fiscal year.
IARC will focus on small and medium enterprises, Kumar said, adding, “While we continue to work on portfolios, we have started looking at restructuring units with turnaround potential, which are spread across sectors like food and agro, auto and textile.”
In addition to acquiring assets, IARC will also be providing finance in the range of Rs3-4 crore to the businesses they have invested in.
“Last year, in April, RBI has permitted us, in order to realise our dues, to grant some kind of restructuring support finance for short period,” Kumar said. “When you take over an operating unit with potential for restructuring, no bank will fund them immediately. So IARC can immediately finance them and help them to sustain themselves.”
“This will be from our net-owned funds, as the trust fund cannot be utilized here,” he added. “So we will use around 8-10% of our net-owned fund to lend to these companies.”
While other asset reconstruction companies (ARCs) have moved to acquisition of retail loan portfolios, for IARF 1, it will be a limited focus. For retail collections “you need your own bandwidth and need your own people to do it,” Kumar said. “We don’t have that bandwidth now.”
Kumar also said his firm is looking at proposals of Rs120-130 crore and expect to make their first acquisition this month.
There are 13 ARCs in India, with outstanding principal balance totalling Rs10,000-15,000 crore. Other such firms that are planning to raise funds include Phoenix ARC Pvt. Ltd, which is raising Rs500 crore fund, Asset Reconstruction Co. (India) Ltd, the oldest and largest firm in the sector which is raising a Rs2,000 crore fund, Edelweiss Alternate Asset Advisors, which plans to raise a Rs350 crore fund, and Invent ARC Pvt Ltd, which plans to raise a Rs200 crore fund.
According to Sharadkumar Bhatia, chief executive officer, Phoenix ARC, the reason for ARCs looking to raise funds is simple. “ARCs need cash for buying NPAs (non-performing assets), and at present, most of the banks are in the stage to offload their NPAs, so there is a need for capital.”
Kumar said NPAs of Indian banks this year is estimated to be around Rs10,000 crore.
Bhatia said fund-raising will be challenging. “Overseas investors have experience in distressed assets acquisition and resolution. However, in India, the industry is still young and evolving, so raising money from domestic investors could be challenging.”
The ARC industry has other set of challenges as well.
“When we buy loans from banks, the information we get is very critical, so there is information risk,” Kumar said. “The more information we get, the more calculated we can be in arriving at a negotiation price.”
Difference in valuation is another hurdle. “There is a mismatch in what the seller bank wants and what we want,” he said.