IBC ordinance may disqualify global private equity funds

Several global private equity funds have already tied up at least $10 billion to invest in Indian NPAs

Jayshree p. Upadhyay, Deborshi Chaki
Updated30 Nov 2017
The amended section 29(A) of the Insolvency and  Bankruptcy Code applies to bidders ‘under any law in a jurisdiction outside India’. Photo: Ramesh Pathania/Mint
The amended section 29(A) of the Insolvency and Bankruptcy Code applies to bidders ‘under any law in a jurisdiction outside India’. Photo: Ramesh Pathania/Mint

Mumbai: The broad sweep of India’s amended Insolvency and Bankruptcy Code (IBC) may shut out several global private equity (PE) funds who have tied up at least $10 billion to invest in Indian non-performing assets, legal experts said.

The changes to the Insolvency and Bankruptcy Code (IBC), aimed at preventing errant promoters from regaining control of their assets, could disqualify many global funds, particularly over a dozen active investors exclusively buying troubled assets.

The amended section 29(A) of IBC applies to bidders “under any law in a jurisdiction outside India”.

Any person or entity who has guaranteed the debt of any firm under insolvency or liquidation under any jurisdiction, is barred from bidding for assets under insolvency.

Any undischarged insolvent (entity unable to pay off its debt) under any jurisdiction is also barred from bidding for insolvent assets.

“This ordinance, if read literally, would in all likelihood disqualify most global private equity funds, especially those specializing in acquiring and financing troubled assets, from submitting a resolution plan under the Code,” said Sanjeet Mallik, partner at Samvad Partners, a law firm. 

“The definition of affiliated persons is breathtakingly broad and includes related parties and associate companies. These are very broadly defined,” he added. 

According to publicly available data, global PE funds have secured commitments to invest at least $10 billion in distressed assets in India.

These include an $825 million fund by US-based Apollo Global Management Llc set up in partnership with ICICI Venture Funds Management Co. Ltd, and a $750 million investment plan by Canada’s CDPQ along with Edelweiss Financial Services Ltd.

The connected entity definition includes a “related party”, too.

Under IBC, a related party includes a relative of directors and key managerial personnel of corporate debtors and any person who controls more than 20% of voting rights in the debtor. 

Take for example, a private equity fund that has acquired a stressed company in another jurisdiction through a leveraged buyout and is unable to service debt.

If it holds a majority stake in an Indian firm that has defaulted, it will not be able to place its bids.

“The current situation definitely has serious implications for PE investors who will now be barred from bidding for distressed assets if they are an investor in a defaulting company,” said Anand Bhageria, partner at Singhi Advisors. 

“However, in many cases, the PE funds are passive investors and had no role into the management of the company, and it remains to be seen whether they are given a waiver in such cases. Also, whether a PE fund can be held liable for guarantees given by a portfolio company to another borrowing entity, needs to be evaluated properly,” he added. 

“With this, several large global PE funds that have been actively exploring opportunities in distressed assets may find themselves in a tight spot,” he said. 

The fund manager of a PE fund, which is an active investor in distressed assets, said he is seeking legal opinion. 

“It looks like we are conflicted after the ordinance. But for now, we are evaluating the situation and seeking a legal opinion. This would specifically impact Small and Medium Enterprises or SMEs as they anyways do not have buyers,” he said on the condition of anonymity. 

Larger non-performing assets (NPAs) in which private equity funds have invested include Monnet Ispat Ltd, in which Blackstone had bought a stake in 2011.

But not all agree. Anurag Das, managing partner of Rain Tree Capital, a Singapore-based investment manager specializing in Asia-Pacific credit, and distressed and special situations said the threat of lower loan recovery is being exaggerated.

“So far under IBC, very inadequate information is being released to outside parties, and very limited effort committed to inviting resolution bids. Participation only makes sense to promoters, and a few sector players in larger situations. With this ordinance it is possible that more and better information will be made available to attract more bidders. There are a couple of minor issues in the language of the ordinance, but I expect these to be resolved equally responsively,” said Das.

“Eventually, one would like to have a regime where there is adequate information, true competition in bidding with quality resolution plans and players, and then scrupulous promoters should be free to compete independently or with other investors,” he added.

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