Thursday, February 01, 2007

Vultures can't give India a miss, cagey just yet.

Private Equity funds which feed on distressed debt - buying them at a steep discount, turn them around and sell off at a fabulous premium later are an asset class by themselves - known as “vulture funds” got a shot in the arm in Nov 2005, when Reserve Bank of India ( “RBI”) allowed Foreign Direct Investments up to 49% in the equity of Asset Reconstruction Companies (ARC). The RBI circular no.16 dated Nov.11, 2005 also allowed Foreign portfolio investments in security receipts issued by ARCs upto 49% of each tranche of such issue. There has been several legislations in this direction for quicker unlocking of value from stressed assets.

A cursory glance at the nature and size of distressed debt available is quite mind boggling. The total distressed asset market in India is estimated at about $ 35 billion at last count.

But dealers in distressed assets, like the Asset Reconstruction Company of India Limited ( ARCIL ) are far from happy.

WITH the upturn in the economy raising the prospect of windfall gains from bad loans, banks are demanding a share of the upside from potential buyers of bad debt. This has come in response to the normal stance of private equity (PE) investors asking exiting debt-holders to exit the distressed company by taking a haircut of nearly 20% of the debt. In the recent past, some PE players such as Spinnaker had invested in IG Petrochemicals, Clearwater in Gayatri Waters and WL Ross in OCM.

There is also a long pending need for rationalisation of stamp duties by different state governments. In the case of a financial weak company, the government should allow conversion of debt into equity without triggering the Takeover Code of Securities & Exchange Board of India ( SEBI). – which imposes the obligation on the acquirer to make an open offer to buyout public investors.

India is becoming a hot destination for ‘scavenging’ despite all these pain points. Cash-rich private equity distress funds are hovering atop the $35-billion distressed asset market in the country sighting enormous wealth-creation opportunities. According to experts, 2006 has been an eventful year for distress funds as estimated investments in non-performing assets have grown from around $1 billion in 2005 to over $1.7 billion. It has been a safer bet for private equity (PE) players investing in distressed assets as many have fair potentials of recovery and are largely secured against tangible assets including high value real estate.

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