Lenders to ABG Shipyard Ltd are in talks with an investor to sell a majority stake in India’s largest private shipbuilding company as part of the strategic debt restructuring (SDR) invoked by them in December, according to two bankers familiar with the development.

“There are not too many buyers that have come up for this stake buy as the shipping sector is presently going through a tough period. We are in talks with a financial investor from Vietnam for a majority stake sale," said one of the bankers cited above, requesting anonymity as the talks are confidential.

ABG Shipyard’s executive director and chief financial officer did not respond to calls and text messages seeking comments.

The SDR was invoked after the firm did not find a potential strategic investor on its own, said the second banker cited above.

Since March 2014, the firm is in the middle of a corporate debt restructuring (CDR), under which lenders led by State Bank of India agreed to recast 11,000 crore of loans, offered the firm a two-year hold on interest payment, reduced borrowing cost and extended the repayment period.

The firm was hurt by a slump in the industry as freight rates fell in step with a decline in global trade, combined with a domestic economic slump.

On 12 June 2015, ABG Shipyard informed the stock exchanges that it received a so-called expression of interest from Germany-based Privinvest Holding, which owned shipyards in Germany, Greece and the United Arab Emirates. However, the deal fell through, said the bankers cited above.

Syed Abdi, managing director and chief executive officer of ABG Shipyard, while speaking on the sidelines of the Make in India event on 17 February, had said the firm is looking for an investor for its existing projects as it had a $2 billion order book.

ABG Shipyard’s CDR was the second largest loan recast undertaken in recent years by India’s banks, next only to the 13,500 crore debt reorganization for engineering and construction firm Gammon India Ltd in July 2013. Lenders to Gammon India invoked the SDR provision in November.

“Shipping is without a doubt a very difficult business at this point in time and financial investors are anyway difficult to come by. When dealing with such cases, it may work well for banks to see if the new buyer in question is a high quality buyer and the debt has been right sized through this deal. Rather than taking huge haircuts in such sectors, banks may want to delay recovery till the time economic cycles change and chances of recovering loans is higher," said Dinkar V., partner (transaction advisory services) at consulting firm EY.

The Reserve Bank of India (RBI) has been trying to find ways to resolve the stressed asset problem faced by state-run banks for the last two years.

In January 2014, RBI announced a new framework to deal with stressed assets, as part of which banks were asked to form joint lenders’ forum to recognize and resolve stressed assets early.

Then, in June 2015, RBI introduced SDR rules, under which banks were allowed to convert a part of their debt to at least 51% equity and assume operational control. Lenders will then have 18 months to sell at least a 26% stake to a fit buyer.

Depending on the performance of the firm under the new buyer, banks can then sell their holdings over a period of time.

Since the SDR rules were introduced, lenders have converted debt to equity in a number of firms, including Electrosteel Steels Ltd, Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, VISA Steel Ltd, Lanco Teesta Hydro Power Pvt. Ltd, Jyoti Structures Ltd and Alok Industries Ltd.

So far, banks have found only one buyer—in the case of Electrosteel Steels, where London-based First International Group PLC has bid to take over a majority equity stake in the Kolkata-based steel maker.

Some analysts believe banks invoke SDR without even checking if there are buyers for these stressed assets.

The SDR route will defer the recognition of stressed loans as non-performing assets (NPAs) of banks, without solving the core bad asset problem, said a January report by Religare Institutional Research.

Credit Suisse, too, had expressed similar concerns in a December report in which it said “given the lack of disclosure requirement on SDR and built-in 18-month dispensations on asset classification, it appears to be getting used more for deferring provisioning".

RBI has said it is keeping a close watch on how the scheme is being implemented by the banks to ensure there is no misuse. The regulator is taking a zero-tolerance approach towards bad loans and has asked banks to clean up their books by March 2017.

As part of it, banks were told to classify visibly stressed assets as bad loans in the December 2015 and March 2016 quarters.

The clean-up has meant a surge in NPAs.

Gross NPAs of 39 listed banks surged to 4.38 trillion in the quarter ended December 2015 from 3.4 trillion at the end of the September quarter, according to data collated by corporate database provider Capitaline.

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