ARCIL board asks management to firm up a business plan of five years

Will link decision on MD and CEO tenure to plan

The directors of Asset Reconstruction Company (India) (ARCIL) have asked the management to firm up a plan of three-five years to scale up in the competitive distressed asset management space. 

It will also be used as input on career decisions of key management personnel.

Banking sources said the board with strong representations from banks as sponsors had reviewed the performance of the entity in the past four years. The change in the regulatory framework, the Insolvency and Bankruptcy Code (IBC), and the push for resolving cases of stressed loans have opened up opportunities. 

In addition, international distressed asset management player Avenue Capital is on board with a substantial shareholding. This is the time to take partners’ expertise to make long-term plans, banking sources said.

ARCIL is sponsored by leading Indian banks, including State Bank of India, IDBI Bank, ICICI Bank, and Punjab National Bank. These banks together hold more than 50 per cent of the equity capital. 

Avenue Capital, a US-based $10-billion fund with expertise in distressed debt management, acquired over a 25 per cent stake through the secondary market.

The business plan will also help to link milestones and take decisions on granting a longish tenure to the chief executive, banking sources said. 
 

Vinayak Bahuguna, chief executive, came on board in the middle of 2015. 

He has over 25 years’ experience in the banking sector.

The other members of the management team are industry professionals with an average experience of more than 20 years.

ARCIL has a large equity base (FY18: Rs 1,690 crore) and low leverage with an equity-to-assets ratio of 86 per cent and an equity-to-assets under management (AUM) ratio of 14 per cent. These are ahead of those of peer asset reconstruction companies (ARCs) and provide a cushion against losses.

The liquidity challenge in the financial sector in the aftermath of IL&FS default last year has impacted fund raising. With a gradual improvement in markets, ARCIL should be in position to enhance business growth, bankers said.

According to the latest data from India Ratings after a low growth rate in preceding two years, AUM growth picked up to 7.5 per cent between 2016-17 and 2017-18, led by healthy acquisitions (Rs 1,220 crore). ARCIL generates steady cash flows from its retail assets. But, the benefits are modest, considering its higher share of investments in corporate non-performing assets.

According to CRISIL, AUMs of asset reconstruction companies (ARCs), measured by security receipts (SRs) outstanding, crossed Rs 1 trillion as of March 31, 2019, up 7 per cent over the previous year. While the value of debts acquired remained range-bound at around Rs 40,000 crore, AUM growth, which was 25 per cent in 2017-18, slowed on a higher discount rate and increase in SR redemptions.

The regulatory changes in recent years have been aimed at increasing ARCs’ skin in the game and diversifying the potential investor base for stressed assets. In August 2014, the minimum investment requirement by ARCs for assets acquired increased from 5 per cent to 15 per cent. Norms for investment in ARCs as well as SRs, including for foreign investors, were eased subsequently.