ARCIL cuts NPA buyouts target

Lack of route for FII investment in distressed assets seen as trigger

The Asset Reconstruction Company of India Ltd (ARCIL) has scaled down its earlier target of buying sticky assets worth Rs 20,000 crore this fiscal to Rs 15000 crore owing to regulatory bottlenecks.

The absence of any clear cut route for foreign institutional investors to invest in the distressed assets is the key hindrance faced by ARCIL.

ARCIL has bought sticky assets worth Rs 6,000 crore (accounts that have a principal outstanding plus overdue interest of Rs 6,000 crore) this financial year.

"We initially had a target of Rs 20,000 crore but had to scale it down to Rs 15,000 crore," said S Khasnobis, president and chief operating officer, ARCIL.

"The government and the Reserve Bank of India are yet to decide under what route FII investment can be permitted into sticky assets. Although distressed assets appear to be debt instruments, they are very high risk and there is no assured return which are characteristic of an equity instrument," said Khasnobis.

ARCIL had earlier made representations to capital market watchdog Securities and Exchange Board of India (Sebi), RBI and the finance ministry to permit FII investment through a new window for subscribing to ARCIL's instruments, security receipts with underlying distressed assets.

Several qualified institutional buyers such as GE, Citicorp, Clear Water, Merrill Lynch and Morgan Stanley are waiting at the doorsteps to enter this yet-to-be-developed market for distressed assets in India. The market will only grow when there are buyers for security receipts.

It is said that government may permit FIIs to invest only up to 49 per cent of the value of each distressed asset in order to maintain domestic ownership.

With no investor now in the picture, the banks and financial institutions that palm off non-performing assets themselves are subscribing to the security receipts floated against them.

Therefore, for the time being, from the banks' point of view, the bad assets have merely moved from the advances book to the investment book in 'standard non-SLR' category but with added burden of provisioning and the cost of the receipts.

Other irritants for ARCIL include the RBI diktat that all security receipts should be rated on day one. According to ARCIL officials, rating is only an added expenditure. When done on the very first day, the rating will obviously be that of a 'junk bond'.

"Rating is not the criterion for investment in distressed debt worldwide," they pointed out.

RBI has also indicated that the life of a security receipt should not be more than five years in order to ensure fast resolution of cases.