Asset Reconstruction Companies are likely to see their capital base go up manifold with the easing of foreign ownership norms announced in the Union Budget as several global funds are expected to acquire majority stakes once the changes in the regulations become effective.
Industry sources say that large stressed asset funds like Oak Tree Capital, Blackstone, Lone Star Funds and Brookfield Asset Management are the likely contenders to buy majority stakes in Indian ARCs since they have explored similar options in the past but haven’t invested yet.
As per existing regulations, while foreign sponsors are allowed 100% ownership of an Indian ARC through the FIPB approval route, no single foreign shareholder can own more than 50%; which is something the foreign funds have not been comfortable with, given the risks involved. While globally investing in ARCs have not been very popular with funds because they tend to pose difficulty in returning capital to shareholders but things could be different in India. In January, this year global buyout fund KKR along with Bharti Group veteran Akhil Gupta picked up a majority in International Asset Reconstruction Co (IARC), which was set up by Tata Capital and HDFC Bank in 2002. Post the new regulations, KKR is expected to increase its stake significantly, sources said.
Meanwhile, of the 15 registered ARCs in India, several are believed to be looking to sell majority stake, as they simply don’t have the finances to buy bad loans from banks by making upfront payments. Also, the industry remains heavily lopsided with the top three companies holding more than 80% of market share.
Asset Reconstruction Companies (ARCs) were formed after the enactment of the SARFAESI Act in 2002 but business for most has dwindled after banks under RBI instructions have stopped subscribing to Security Receipts (SR), as a way to offload their NPAs. Market experts say foreign funds and expertise is the way forward.
“At 15% capital adequacy requirement I feel that the ARCs can attract up to Rs 50,000 crore from foreign investors in near future if one looks at the total NPAs,” says Sajid Mohamed, Partner Agrud Partners, a Mumbai-based law firm that specialises in stressed assets restructuring.
Currently the total volume of NPAs in the banking system exceeds Rs 4 lakh crore, while the combined capital base of ARCs is less than Rs 5,000 core.
Experts say changed regulations would bring in higher capital to assets reconstruction space also from domestic investors.