Mumbai: Buyout firm KKR & Co.’s Indian arm is considering setting up its own asset reconstruction company (ARC) as its two-year-long effort to buy a majority stake in International Asset Reconstruction Co. Pvt. Ltd (IARC) hasn’t materialized, two people aware of the matter said.

“Though KKR is still actively looking for a stake in IARC, they plan to set up their own ARC in the backdrop of recent regulation on ARCs," one of the two people said, requesting anonymity as the discussions are private. “It’s too early to speak about the details as it’s dependent on the market as well as the growth potential in India."

The option of an independent ARC is being considered since it is far cheaper than buying into an already established ARC, the second person said, also declining to be named. 

“The market is ripe for ARCs anyway since banks will want to offload their bad loans. With KKR’s history in dealing with stressed assets, an independent ARC makes sense," the person said. 

In May, India allowed foreign institutions to fully own an ARC, as the government sought to resolve the problem of mounting bad loans. While local banks have Rs6.3 trillion worth of bad loans lying on their books, existing ARCs in India have capital that is enough to buy only a fraction of the stressed assets available.

In January, The Economic Times reported that KKR had decided to partner with Bharti Group veteran Akhil Gupta to buy a controlling stake in IARC. Gupta did not respond to an email seeking comments while a KKR India spokesperson declined to comment. Birendra Kumar, chief executive officer of IARC, also declined to comment. 

Some of IARC’s existing shareholders include HDFC Bank Ltd, Tata Capital, ICICI Bank Ltd and City Union Bank. 

“Essentially, a global fund would be paying for the asset book of an ARC and its capability of acquiring stressed assets and reviving them. Factors like the quality of the portfolio, the debt aggregated and the turnaround potential in each account would determine the valuation of the ARC," said Nikhil Shah, managing director, Alvarez & Marsal India Pvt. Ltd, a stressed asset turnaround and interim management firm.

International stressed asset funds such as JC Flowers and Apollo India Credit Opportunity Management Llc have already started the process of setting up their own ARCs.

Other global private equity funds such as Hong Kong-based SSG Capital Management and International Finance Corporation, the investment arm of the World Bank, have already acquired stakes in existing ARCs to buy bad loans. 

SSG Capital was an early entrant in this space. In September 2014, it acquired 49% of Asset Care and Reconstruction Enterprise. In January 2015, IFC invested in Encore Asset Reconstruction Co. Pvt. Ltd.

On 1 September, RBI announced strict guidelines around sale of stressed assets by banks to various entities including ARCs. The central bank restricted banks from investing in security receipts of their own assets, and asked them to reduce the amount of security receipts on their own books. This means that ARCs will have to come up with all-cash deals if they want to buy an asset from banks. 

Presently, ARCs are allowed to pay 15% of the net asset value up front in cash, issuing security receipts for the remaining amount. These receipts can then be redeemed on a later date by banks who hold them on their investment books.  KKR India is closing its second alternative investment fund of at least Rs1,500 crore, which will be used to offer credit solutions to Indian companies.

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