In a first by a global institutional investor, the Canada Pension Plan Investment Board (CPPIB) today committed USD 450 million to invest in stressed assets market, along with Kotak Mahindra Group's asset reconstruction company (ARC).
"The current environment has created a much larger opportunity that requires significant capital commitment," Kotak Special Situations Credit Fund's chief executive S Sriniwasan said.
He said the Kotak Group is committing its own USD 75 million and the total amount of USD 525 million will be invested by the fund in the asset reconstruction space, which has witnessed greater attention recently.
Sriniwasan explained that the money will be invested along with the group's existing existing ARC, Phoenix.
"Phoenix has the skillsets to run the business, which includes doing the due diligence and recovering the money," Sriniwasan told PTI.
Phoenix will invest 15 per cent cash component which an ARC has to invest upfront as per the existing laws on sale to ARCs through the security receipts, while the fund will invest the rest, he said, adding this has the potential to fasten the distressed assets resolution process.
"The ARC industry has limited capital and there is an urgent need for substantial capital to buy non-performing assets from banks, as and when these loans get sold at fair value," Phoenix's chief executive Eshwar Karra said.
He further said the fund, which will work along with Phoenix, comes with a flexible mandate and will help address capital needs of both borrowers and the selling lenders.
He said the committed fund will flow in over the next three years and overall window for the fund is 7-8 years.
The CPPIB holds a 3.91 per cent holding in Kotak Mahindra
Bank as of December 2015. It has been investing here since 2010 and while opening an office here last October, had said its commitment to the country stand at USD 2 billion.
This includes the 3.9 per cent ownership in Kotak Mahindra Bank, a USD 332-million commitment in L&T Infrastructure Development Projects, and a USD 250-million into structured debt financing to residential projects along with Piramal Enterprises, among others.
The announcement comes at a time when there is a huge jump in NPAs. According to reports, listed banks recognised Rs 1 trillion of fresh NPAs between September and December quarters taking gross NPAs to Rs 4.34 trillion, following an asset quality review by RBI to clean-up bank balance sheets.
Sale of the asset to ARCs is one of the routes of resolving stress, but there are problems like ARCs struggling with capital and also difficulties in arriving at the right valuation which makes deal fructification a worry.
