(From left) Sumit Khanna, partner and national head, corporate finance and restructuring, Deloitte India; Avnish Mehra, managing director, Everstone Capital; Karan Singh (moderator), partner, Trilegal; Sunil Srivastava, deputy managing director, SBI; Rudrapriyo Ray, president, structured finance group, Axis Bank; and Shantanu Nalavadi, managing director, India Resurgence Asset Management Business, during a panel discussion. Photo: Mint
(From left) Sumit Khanna, partner and national head, corporate finance and restructuring, Deloitte India; Avnish Mehra, managing director, Everstone Capital; Karan Singh (moderator), partner, Trilegal; Sunil Srivastava, deputy managing director, SBI; Rudrapriyo Ray, president, structured finance group, Axis Bank; and Shantanu Nalavadi, managing director, India Resurgence Asset Management Business, during a panel discussion. Photo: Mint

The role of interim resolution professionals in resolving stressed assets

Panellists at the Mint Stressed Assets Investment Summit discuss the risks that investors should be cognizant of

At the Mint Stressed Assets Investment Summit, panellists discussed the role that interim resolution professionals (IRPs) are playing in the process of resolving stressed assets and the risks that investors should be cognizant of, among other things. Panellists included Avnish Mehra, managing director, Everstone Capital; Sumit Khanna, partner and national head, corporate finance and restructuring, Deloitte India; Shantanu Nalavadi, managing director, India Resurgence Asset Management Business; Sunil Srivastava, deputy managing director, State Bank of India; and Rudrapriyo Ray, president, structured finance group, Axis Bank Ltd. The discussion was moderated by Karan Singh, partner, Trilegal. Edited excerpts:

There is lot of interest in how the RPs (resolution professionals) are doing. Clearly, at the inception of the code, a majority were not keen to be an RP as they were waiting and watching how the liability issues would be addressed before putting themselves out there. What are the big challenges the RPs are facing around issues of preserving the assets and keeping the value of the company until the plan is actually implemented? How do you also address the problem of conflicts of interest?

Khanna: We started our first case in March of this year and on 30 December, the 270 days period will be completed. We were one of the first RPs and this happened well before the first 12 cases came for the proceedings. We were always focused on this business and were very clear that this is the business whose time has come. This is why we very quickly built up a very strong and large practise.

But that aside, coming back to how do we preserve value for these assets, the fundamental belief we have is that these are good assets with very bad balance sheets and that somehow impairs the normal day-to-day working. Once the balance sheet goes bad then it becomes a kind of vicious cycle, leaving aside any kind of aspersions on intentions and motivations of the promoters.

So it becomes very essential for someone to come externally and it is surprising that you can set right things which seemed unsurmountable. For instance, in one of the largest cases in steel, we have improved production by 30% in the first month of operations. Clearly we are not steel people but, with simple workable processes, we have achieved this.

I am a great believer in the code, I think it is a very powerful and well-written document...we are testing it and we will go through the tribulations of trying out something new. If you go in diligently, try and learn how the businesses run, then you take charge of the business better. Of course we were very new but we were fortunate that our global teams guided us well before we started our first process.

There is value that you not only can preserve but also create. While it is not our job to make these businesses turn around, if you are there and something can be done better, then why not.

Our core sectors—healthcare, consumer and some areas in industrials like auto—are some of the areas we are spending a lot of time in specific stress situations. We are looking to invest anywhere from $50 million to 200 million in terms of equity.- Avnish Mehra, managing director, Everstone Capital

India is unique in many different ways, not because of legal frameworks but because we are largely a promoter-driven country with a unique set of challenges. What are the international practices you can draw on that are comparable with the set of circumstances and challenges prevalent in India and ones that can lend some credibility to the process as IRPs are few in India?

Khanna: Two simple words—transparency and documentation. These are the guiding principle for us as we are now a team of 150 members for restructuring in Deloitte. As long as everything is done transparently and we document as best as we can, there is very little that has to go down. Because tomorrow we don’t have to be steel producers just because we are running a steel plant. Essentially what happens is that the Board is suspended and you have to take oversight of the company as the Board and ensure that the company is being run by the employees of the corporate debtor as it should have been done in the first place.

The ordinance passed recently doesn’t allow promoters to now bid for the assets under most circumstances. As a bank in the process of value discovery, are you in favour of this ordinance?

Ray: I think the problem of moral hazard should definitely be addressed and in fact has been addressed. The only issue is that in certain cases there have been cyclical issue, or it can be an issue of policy changes, which may affect a particular business and if the account for these is an NPA (non-performing asset) with any bank for more than a year, then it becomes a problem for those promoters (to bid).

Shantanu, you are operating in a fund that has dominant Indian business houses, that understands Indian risk and promoter mentality. On the other hand you have a big global credit fund that sees opportunity in India but hasn’t had the experiences of understanding and appreciation for valuing risk. Tell us the value of forming the joint venture and the challenges in dealing with two sets of people who have different approaches to risk, especially emerging market risk.

Nalavadi: We were the one to reach out to global funds. We felt that there is actually value which a global fund like Bain bring in. They have dealt with stressed assets in various geographies like the US, Europe and Asia. So the insights and discipline they bring in are of immense value.

The second thing is they come with global industry knowledge, which is extremely important because a lot of industries we operate in India have global linkages. We are just not buying assets, but we are turning them around.

The kind of things you have done in the past are likely to inform what opportunities you might pick in the future. Does that then naturally mean that you are not a picker in the top 12?

Mehra: There are few assets in the top 12 which we are involved in but we will be very selective. We know exactly the sectors and industries where we don’t have in-house operating expertise or cannot get on board an operating partner, there we won’t. But there are a couple of situations in the top 12 where we are engaged in deeply because of our experiences in those areas. It purely depends on the sector and obviously scale also has a few things to it. We try to pick up battles which we can win and which don’t require a $5 billion equity cheque for example.

Which sectors are you looking at and how would your exit look like after you have made the investments?

Mehra: Our core sectors—healthcare, consumer and some areas in industrials like auto—are some of the areas we are spending a lot of time in specific stress situations. We are looking to invest anywhere from $50 million to 200 million in terms of equity.

From the exit perspective, there is no difference between these cases and other normal controlled situations. You are focusing your first 12-24 months in stabilizing the business and making operational improvements, next 36-48 months in growing the assets and then preparing for the exit. This is the normal course of almost any investments and there should be no difference in the way you deal with these kinds of situations compared to stress situations.

Part of hostile takeover environment will require lenders to convert debt into equity. Is that something lenders will be willing to do?

Srivastava: After the ordinance was promulgated, debarring existing promoters from bidding, have sort of created an expectation of depressing the value of assets as we go forward. In one of the major cases, for a portion of debt, there were 17 bidders and the highest bid was for 67 paise to a rupee.

For the first 12 cases, 43% of the cases are in the iron and steel industries and they constitute one-fifth of the total iron and steel capacity in the country. Unlike the US and China, India does not have surplus capacity. India has large infrastructure requirements. In the first half of this current year, six major players have shown incremental year-on-year growth of 10%.

In India, to build another steel plant will not only require huge amount of land and capital but also a long time of around 10 years. During that period, there is immense value in these assets. In spite of factoring in contingent liabilities, I would like to take a contrarian view that the absence of these existing promoters may not depress value to the extent that we are imagining.

If the corporate debtor does not rectify or restructure during the appropriate time assigned to them, and it goes into NCLT, then we will definitely convert debt into equity. We have done it in the past in the 1999-2003 period and after the economy revived, most of the banks were able to write back. As a banker, I have to clean my balance sheet and so I would be interested in the maximum amount paid to me in the shortest possible time with the least amount of hair-cut. For the bidders, it is for them to figure out how to meet their criterion and not the bankers.

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