The huge pile-up of bad debts on bank books and a time-bound resolution process underway have offered a big opportunity for asset reconstruction companies (ARCs), which, after many years of slow business, are getting ready to strike gold.
Some ARCs have enough capital to explore the field on their own; others are willing to share the space with partners, who would contribute capital to buy stressed assets.
And then there are some that are getting into the space as Indian banks battle with bad loans of about Rs 10 lakh crore, and the regulator’s pressure on cleaning up their books mounts by the day.
The ARCs are also building up their teams and are hiring in all areas. Retired bankers are in demand.
Two of the largest ARCs — Edelweiss Asset Reconstruction Co and Asset Reconstruction Co India (ARCIL) — seem to be adopting two divergent paths aiming at the same objective.
For example, ARCIL, India’s oldest ARC, which in the past has suffered from want of adequate capital, is tying up with firms with deep pockets, domestic and overseas, to buy stressed assets.
ARCIL is also keen to be part of the insolvency resolution process and not depend on banks to get stressed assets, according to Vinayak Bahuguna, managing director and chief executive officer, ARCIL.
Bahuguna says taking advantage of the situation, ARCIL should grow its books multiple times and not just in percentage terms. ARCIL’s aim is to command a 20-25 per cent market share even as the pie grows. Currently, ARCIL’s market share is below 20 per cent.
“There are three-four legs to our strategy. We would like to take part in the resolution process itself, and present our own plan, and wherever it is not possible, we will offer to buy out the creditors on Day One of the recovery process,” said Bahuguna.
If laying its hands on stressed assets is not possible, ARCIL will continue to engage with the creditors and look for opportunities where certain sets of those would want to get out of the assets. Besides, Bahuguna said ARCIL would offer its services to banks for recovering debts if the latter chose to do so as part of the resolution.
But the bigger part is that ARCIL is in talks to tie up with large funds that can infuse equity and debt in stressed asset accounts. Bahuguna declined to give more details.
“As an ARC we cannot put equity directly in companies. In that case, we would like to partner some funds that can do so. We are in talks with some of them,” Bahuguna said.
On the contrary, Edelweiss ARC Managing Director and Chief Executive Officer (CEO) Siby Antony said his firm didn’t have a problem with capital.
Edelweiss is also involved in some bankruptcy proceedings and the first case of resolution was in the case of Synergies Dooray, where Edelweiss was the deemed creditor. The case is controversial because the insolvency professional has awarded a 95 per cent haircut of the loan, which Edelweiss is now challenging.
Edelweiss is also involved in the resolution process in some large accounts forced to insolvency by the Reserve Bank of India itself, and also have independently taken some accounts to insolvency proceedings, making it a particularly aggressive and most active ARC in the space.
It has led a clutch of creditors in insolvency proceedings against Binani Cements, Murli Industries, and Falcon Tyres, to name a few.
“There is a good opportunity as big banks have to now clean up their accounts. The process has started and in the first half about Rs 6,000 crore of bad debts have been sold to ARCs. We expect the business to pick up in the second half, for which we are ready with funds,” said Antony.
Canadian Pension Fund CDPQ picked up 20 per cent in Edelweiss ARC for $300 million and both have plans to invest up to $2 billion in stressed assets. Sensing the opportunity, newer ARCs are also coming up.
Rahul Gupta, co-group CEO of Ambit, said the firm had a partnership with JC Flowers. With an equity commitment of Rs 100 crore in place, it is now in fundraising mode.
At the beginning the fund is targeting a fund size of $150-200 million. The fund should be able to raise about $100 million in the first closure.
The focus will be on the mid-market for the turnaround of stressed units that need assistance like working capital and management. The initial investment size would be up to $30 million, said Gupta.