RBI order may bump up ARCs' valuations

Asset reconstruction companies to get freedom to own stressed firms

The Reserve Bank of India’s (RBI’s) dispensation to allow asset reconstruction companies (ARCs) to hold more than 26 per cent stake in distressed assets might bump up the valuations of the ARCs for foreign investors.

The rule puts ARCs in a commanding position in deciding how an asset resolution should happen, something they could not do so far because of their limited shareholding. Technically, the latest rules give ARCs freedom to become owners of the stressed firm and drive the resolution process.

“We will now have better level of control and more say in how the company concerned should be operated,” said Vinayak Bahuguna, managing director and chief executive officer of Asset Reconstruction Co of India (ARCIL). “Moreover, it gives ARCs the ability to maximise returns by increasing shareholding and selling the stake off in case a company turns around.”

The central bank, in a notification on its website on Thursday, did not specify an upper limit that an ARC can hold for debt converted into equity. “ARCs with net owned fund of Rs 100 crore on an ongoing basis are exempted from the shareholding cap at 26 per cent of post-converted equity of the borrower company,” it said.

The Reserve Bank of India (RBI) directive would also make domestically incorporated ARCs attractive to foreign funds looking to acquire a share of the pie in India’s Rs 10-lakh crore stressed assets markets.

The scope of business would accelerate in the coming days, especially with the bankruptcy code in place. Now that clauses have been amended to keep defaulting promoters largely away from the resolution plan, the haircut taken by banks in each case would also be deep, according to analysts, and that should be advantageous to ARCs.

The ARC business, in which 100 per cent foreign direct investment is allowed, operates in a joint venture model. Foreign funds with deep pockets pick up stakes in domestic ARCs to buy local stressed assets. 

With the RBI’s directive, ARCs become an acquisition target, said a senior executive with an asset reconstruction company. 

Bahuguna, however, said earlier too there was no problem in getting foreign capital in the distressed asset business space. 

On the RBI’s other stipulation that at least half of the board members should be independent, Bahuguna said that was already the case in all ARCs.

The central bank said the shares acquired after conversion of debt should be marked to market at least once a month. In addition, “The ARC shall explore the possibility of preparing a panel of sector-specific management firms/individuals having expertise in running firms/companies which could be considered for managing the companies.”

These conditions, along with a minimum of Rs 100 crore of net owned funds, are already adhered to by all ARCs.

EFFECT OF IBC AMENDMENTS

• The rule puts ARCs in a commanding position in deciding how an asset resolution should happen

• Latest rules give ARCs freedom to become owner of the stressed firm and drive the resolution process

• The RBI directive would also make domestically incorporated ARCs attractive to foreign funds looking to acquire a share of the pie in India’s Rs 10-lakh crore stressed assets markets

• Due to the bankruptcy code, haircut taken by banks in each case would also be deep, according to analysts, and that should be advantageous to ARCs