Stressed assets funds may return to India after relaxed ECB norms

Companies seek returns of over 20 per cent but RBI has put restrictions on yields and tenure

The Reserve Bank of India’s move to allow companies to raise loans under external commercial borrowing (ECB) route — to repay banks their dues categorised as non-performing assets (NPAs) — will likely pique interest of foreign stressed asset funds once again. So far, such investors have remained non-committal in picking up Indian assets after seeing legal obstacles in the resolution process under the Insolvency and Bankruptcy Code (IBC), say experts.

The RBI on Tuesday said NPAs, or loans heading towards the NPA stage, could also be sold off by banks to recover their domestic rupee loans. Such transactions will have to be carried out with entities permitted to give loans under ECB, the RBI said. These are typically regulated entities, banks, and registered foreign investors.

Transactions cannot be carried out with overseas branches of banks present in India. Most of the stressed assets funds are private and not regulated. However, they can tie up with banks not present in India to enter indirect deals. 

However, there is a restriction on the rate at which these firms can provide loans, which is LIBOR (London Inter-bank Offered Rate) plus 400-450 basis points, or roughly 6.0-6.5 per cent. However, the stressed assets funds prefer to take assets that provide yields of 20 per cent and above, say experts. 

Interestingly, the RBI said the assets could be sold by banks on an “assignment basis”. That means that if a company has a debt of Rs 1,000 crore, and it agrees to pay Rs 400 crore, the bank will transfer the entire rights for Rs 1,000 crore to the buyer. This pushes up yields significantly for the buyer, unless the RBI clarifies that the deal and rights of the assets are limited to only Rs 400 crore.

“This is a replacement avenue given to open up Indian assets to foreign debt. This will encourage those stressed assets funds that were interested in Indian assets at the initial stages of the IBC, but had stayed away due to litigations and uncertainties, to have a fresh look at the assets,” said Harry Parikh, Associate Partner at tax and accounting firm BDO India.

Initially enthusiastic about India’s Rs 10-trillion stressed assets market, many of the foreign stressed assets firms are looking to put their money into assets at various levels of stress, including declared NPAs.

Distressed assets specialists such as Cerberus Capital, Silverpoint, Varde, Centre Bridge, and Davidson Kempner Capital Management had shown interest in India, but did not fully commit to their plans of investment as the IBC processes hit roadblocks by frivolous bidding, or other legal challenges, say people in the know.

If investors can pick up assets directly overseas through their arrangement with permitted ECB lenders, they won’t have to face lengthy legal battles while recovering dues. This will likely put pressure on domestic asset reconstruction companies (ARCs) unless more clarity on the assignment rule is provided. 

“The market is huge and there is scope for both funds and ARCs,” said R K Bansal, managing director and CEO of Edelweiss ARC. 

“ARCs typically don’t do big deals, even as some of the big deals are routed through ARCs. Considering there are tenure and yield restrictions on ECB loans, domestic ARCs should not face much of a problem.” 

Experts expect some deals to happen with a mixture of equity and debt, where the debt component could be converted to equity and taken up by foreign investors. However, if the foreign funds do get a hold on Indian assets, it will also have interesting ramifications for the companies in question, given that these firms will also take a proactive role in the management of those companies. 

“The permissibility to use ECB under the one-time settlement scheme would mean that risks will get transferred from financial creditors to new creditors/strategic creditors who may have a say in the management, and will have better skills in recovering their loans,” Parikh said.