Arcil Plans To Split Assets To Prevent Cross-subsidisation

Mumbai, Sept 18: | Updated: Sep 19 2003, 05:30am hrs
Asset Reconstruction Company (India) Ltd (Arcil), which is set to kick off its operations by September-end, is planning separate schemes for assets of each borrower to ensure that bad assets are not cross-subsidised by other assets.

To start with, it has been decided, large assets will be taken under separate/independent schemes. They can also be called borrower-specific schemes, Arcil president & chief operating officer, S Khasnobis, told FE.

One scheme for 15 companies assets would lead to a company with better value assets subsidising the inferior assets of the other company. That means cross-subsidisation of profit or loss of each other, though profits and losses on each asset differs. That may not be acceptable to many sellers and we cannot do that, Mr Khasnobis added.

Already some financial institutions and banks have expressed objection to the prospect of unified schemes for different kinds of assets, according to industry sources.

Arcil has chosen an operational model of an asset management company (like mutual funds) under which the company has the option of keeping different schemes for different assets or a unified and single scheme for all the assets taken over by the company.

Arcil has identified non-performing assets (NPAs) of 11 borrowers with at least Rs 20 crore of dues to various financial institutions and banks. Prioritisation of cases will be based on saleability and realisability value.

No other factor except the economic/realisable value is the principal criterion. Accounts with over Rs 20 crore of outstanding loans/dues will be taken up to start with. However, from individual banks point of view, they may be accounts with one or two crore of dues, Mr Khasnobis added.

In the second stage, a market will be created after the asset is restructured. By then, the risk of the asset would have come down and will be in a position to attract some investors. Thus, it is a process of creating value to the assets of the banking system. The process involves take over of assets, and improving the value of the asset through restructure or change the sponsor or sale, Mr Khasnobis said.

Mr Khasnobis said that the cost during the process period would be assigned to the lenders pro-rata. It is just like construction period for a manufacturing company before commencement of business, Mr Khasnobis added.

Once the investor is found the asset will be transferred to the buyer through pass-through certificates. The tainted paper (NPA) becomes a good paper once market making is done. Globally, it is happening, but it is yet to develop here. It may take two-three years, Mr Khasnobis added.

Two valuers Ernst & Young and Pricewaterhouse Coopers were appointed by the board, though at least other 15 valuers are in the companys list of other consultants. Selection of the two valuers was based on their knowledge of industries, not just sale of assets so that a running concern also can be taken over by Arcil.