Stressed asset specialists queue up for RBI licences to start ARCs

PE firm JC Flowers, IIFL Holdings among a dozen entities who have applied for an ARC licence

Vishwanath Nair, Pooja Sarkar
Updated31 May 2016
ARCs can play an important role in reconstruction of such stressed assets, RBI said in 2014 when it released a new framework to revitalize the distressed assets. Photo: Bloomberg<br />
ARCs can play an important role in reconstruction of such stressed assets, RBI said in 2014 when it released a new framework to revitalize the distressed assets. Photo: Bloomberg

At a time when banks are reeling under stressed assets, close to a dozen companies have applied to the Reserve Bank India (RBI) for licences to start asset reconstruction companies (ARCs), four people familiar with the development said. Applicants range from foreign distressed asset specialists to domestic investors with deep pockets.

India’s attempt to rid its banking sector of stressed loans is providing an opportunity for those with experience and the funds to turn around assets.

Stressed assets (which include gross bad loans, restructured assets and written-off accounts) for the banking system rose to 14.5%, as of 31 December 2015, compared to 9.8% in March 2012, according to data from RBI.

ARCs can play an important role in reconstruction of such stressed assets, RBI said in 2014 when it released a new framework to revitalize the distressed assets.

Investors are now stepping in to capture this opportunity.

Among those who have applied for a licence is global stressed asset specialist JC Flowers & Co., in partnership with Ambit Holdings Pvt. Ltd, domestic financial services firm IIFL Holdings Ltd, and former chief financial officer of Sun Pharmaceutical Industries Ltd Sudhir Valia, said people cited above.

Others like Eight Capital Management Llc, a special situations fund set up in 2005, is also in the process of finalizing its application for an ARC.

Mint could not independently ascertain the names of all those who have applied.

A spokesperson for central bank declined to comment. Emails sent to JC Flowers, Ambit Holdings and Sudhir Valia on Friday remained unanswered.

An email sent to IIFL Holdings Friday remained unanswered.

In March, financial data and information services firm VCCircle reported that Ambit and JC Flowers have agreed to a venture for an ARC. Indian businessman and entrepreneur Jerry Rao may pick up as much as 5% in the venture, the report said.

Apart from the ARC, JC Flowers and Ambit are also looking to raise a distressed debt fund with an initial corpus of $100 million, the VCCircle report added.

For IIFL Holdings, an ARC will help expand its non-banking financial services business. IIFL follows the likes of Edelweiss Capital Ltd and JM Financial Ltd, which already have ARCs.

“We have applied for the ARC licence but we have not received our approval yet. We believe there is a huge opportunity in the stressed assets segment, and we want to capitalize on it through the ARC route,” said an IIFL Holdings official, one of the four people cited above, on condition of anonymity. “To begin with we will do the transactions from our balance sheet and then look to raise capital, but we are not looking to partner with any distressed asset fund as of now.”

According to Ravi Chachra, the chief investment officer and managing partner at Eight Capital, which is in the process of applying for an ARC licence, lack of capital and expertise in Indian distressed assets sector makes it attractive.

“The total equity capital of the 16 ARCs is 4,000 crore even using the 15/85 model, the amount of loans that can be cleaned up is 28,000 crore, which is a small fraction of the stressed assets that are for sale. Our ARC will be better capitalized and will focus on turnarounds rather than asset stripping and liquidation of the distressed firms,” said Chachra.

RBI in August 2014 had asked ARCs to pay at least 15% of the net value of a stressed asset up front while purchasing it from banks—significantly higher than the 5% which was prevalent.

An ARC usually conducts due diligence on the loans, which lenders are looking to sell, and determines the net value of the asset depending on their ability to recover dues.

Apart from those seeking new licences, the central bank has recently approved applications for two new ARCs. Omkara ARC and Meliora ARC got a nod from the regulator in January. Both firms focus on bad loans in the small and medium enterprises (SMEs) segment.

The increased interest in the ARC segment will be supported by easier investment norms. On Friday, Department of Industrial Policy and Promotion (DIPP) said in a notification that 100% foreign direct investment (FDI) in reconstruction companies will be allowed under the automatic route. Earlier, only 49% of the investment was permitted under the automatic route, and anything higher would’ve required government permission.

The government and RBI have also allowed sponsors of an ARC to hold up to 100% of the reconstruction company.

Industry executives say that emerging opportunities and ease of bringing in capital will give a push to the industry.

“As the stressed-asset market heats up here (in India), international funds may look at various entry points to invest in such cases. This includes the ARC route which is one of the more important ways of stress resolution in India. With ARCs they may get a chance to invest in small and mid-sized cases— something which they would not have been able to do directly,” said the chief executive of an ARC, seeking anonymity.

V.P. Shetty, executive chairman, JM Financial Asset Reconstruction Co. Pvt. Ltd, said additional capital into the sector will be welcome. “If there are industries which deserve additional funds that can be provided by new investors, it is always welcome,” said Shetty. “What needs to be looked at though is how they are able to turn around the stressed companies.”

To be sure, the ARC industry has been active in India for some time, but there have been critics of the model. An August 2014 report by ratings company Crisil Ltd said that the recovery rate by ARCs, as represented by the redemption ratio of securities receipts issued to banks, has been just 53% over the last 10 years. More recent data is not available. Redemption ratio is the ratio between the security receipts redeemed and receipts issued by the asset reconstruction industry.

RBI, in its distressed asset framework, had also asked ARCs to focus more on asset revival rather than asset stripping and urged the banks to sell stressed assets when there is still scope of revival. Recent examples suggest that ARCs are now starting to move in that direction.

In July 2014, Edelweiss ARC Ltd began the process to purchase a majority of 8,000-crore worth bank loans to Bharati Shipyard Ltd, at a discounted rate. Edelweiss ARC, which now owns about 80% of the debt in the company, has appointed an interim CEO to run the daily affairs and come up with a long-term turnaround strategy. The company has been able to complete some of its ships and is focussing on bagging orders from the defence ministry and nurse itself back to health.

Similarly, in the case of Hotel Leelaventure Ltd, JM Financial ARC bought nearly 5,000 crore worth of loans at a consortium level to turn the firm around. By the time the ARC took control of the debt, the company sold its property in Goa to a Malaysian firm for 725 crore, and is now trying to turn around some of the other properties.

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