Mumbai: When Rajiv Ranjan joined billionaire Anil Ambani’s Reliance Asset Reconstruction Company three years ago, he had ambitious plans of making a fortune out of reviving distressed assets across India.
Reliance ARC, part of Ambani’s Reliance Capital, was launched in 2008 with George Soros and BlueRidge as investors.
Three years on, and just one deal later, Ranjan has scaled back his ambitions. Years of fruitless efforts have left the 61-year-old frustrated, with little hope for the future of India’s distressed debt industry.
“This is the most difficult industry segment where I have worked, my most challenging assignment,” said Reliance’s Ranjan, who won his first big deal last December: a transaction worth $57 million.
Across Asia and the rest of the world, distressed debt investing is an active and critical part of the financial markets -- a high risk, high return business involving hundreds of billions of dollars in transactions.
In India, the industry is all but dormant. While the distressed debt business has a dark side -- vulture investors swooping in on a corporate carcass -- it can also provide a life-saving round of financing, keeping companies running, and workers employed.
Investors usually buy up the debt, often as low as 30 cents on the dollar, restructure the business, and sell for a premium later on.
India has assembled bad loans worth nearly $20 billion with the country’s top lender State Bank of India holding nearly a quarter of them.
And yet, rather than moving the bulk of those loans to distressed debt investors, they’re largely stuck. As a result, most of the foreign investors who had swarmed the Indian distressed market in 2004 are sitting quiet, or gone altogether.
In this case, India could take a lesson from the Philippines. Choked with bad loans from the 1998 Asia economic crisis, the Philippines government came out with a law years later that incentivised banks to clean up their books.
Acting on the law, government-owned Land Bank of Philippines kicked off the process and auctioned about half of its nonperforming loans in 2004. Soon, dozens of foreign investors were swarming the Philippine distressed market.
India by contrast has failed to effectively prompt banks to sell the non performing loans, forcing the banks to sit on them instead. So called asset reconstruction companies (ARCs) were set up to help offload the loans, but to no avail.
Officials at the Reserve Bank of India did not comment when asked if the regulator was looking to amend rules pertaining to the distressed debt industry.
Foreign distressed investors looking to invest directly with the company -- and not the lender -- aren’t tempted either.
“The ARC industry is crying for reforms,” Ranjan added. “The whole system is so ridiculously odd that it is virtually impossible to do anything worthwhile.” State-run Air India, private carrier Kingfisher Ltd, Koutons Retail and telecom services firm GTL Group are among the companies that have approached lenders to re-finance their debt.
The University of Pennsylvania’s Wharton School of Business pegged the Indian distressed asset market in 2007 at an estimated $45-$55 billion.
Foreign financial groups such as ADM Capital, Citigroup and Standard Chartered were present in the country at the time, seeking underperforming assets with potential to turn in big profits.
The flow of deals has not lived up to expectations. ARCs have issued promissory notes - which can be redeemed for cash after the ailing company is revived and its assets sold - worth nearly $3 billion as of June 2010, data from the Reserve Bank of India showed.
By comparison, a total of about $85 billion worth of distressed loans was traded in the US alone last year.
Ranjan, of Reliance ARC, talks about a southern India-based debt-laden textile company as an example of a distressed firm in need of capital. It has not been able to sell three of its nine factories to raise funds to pay-off debt as banks disagree on valuations, squashing a revival opportunity.
State-owned banks, unwilling to take a haircut and worried about criticism for selling an asset cheap, avoid direct bilateral deals and opt to sell debt only through auctions.
To help banks reduce their mounting bad loans, India, in 2002, had passed a bill which enabled them to recover money by selling distressed assets, paving the way for asset reconstruction companies to set up shops in the country.
But the regulations - which do not allow these companies to directly buy into physical assets, restricts fund raising avenues and foreign ownership - have only put off investors, and the rules have yet to be updated or enhanced.
“The Indian rupee credit markets are closely regulated. Loans typically don’t trade on a secondary basis like other Asian markets,” Karthik Athreya, director at US-based Clearwater Capital Partners, which has stake in 30 Indian companies, said.
Banks say they can manage the loans on their own. M.D. Mallya, chairman and managing director of state-run Bank of Baroda, says an ARC is a last resort.
“For me, if a loan has just become a non-performing asset I’d rather explore all possibilities available to me, and if none of those work only then I will think of selling it to an ARC,” said.
Old not gold
“One has to be very, very patient if you want to do business in this segment,” said Sharad Bhatia, chief executive of Phoenix ARC, a distressed debt buyer sponsored by private lender Kotak Mahindra Bank.
“Public sector banks are reluctant to sell. One question that I encounter from them is - What is it that you can do, which I cannot do?” he said.
Bhatia recalls a bad loan auction he attended recently where Phoenix was the highest bidder but could not buy the asset as it still did not meet the lender’s price expectations.
Unlike their state-run counterparts, private banks have been better able to manage their non-performing loan portfolio and are more eager to trade directly with ARCs.
Banks in Australia, on the contrary, are quick to act on defaults and deals happen within months whereas in India it could take as long as 6 years, industry experts said.
“If you really look at it every asset is a good business opportunity but pricing is the real issue. There is a wide gap between expectation of a bank and the price of an ARC,” said Siby Antony who heads Edelweiss Alternate Assets Advisors that manages Rs 140 crores worth of distressed assets.