The RBI’s recent directive on the resolution of stressed assets will help banks to resolve their bad loans in a time-bound manner, Nitin Jain, CEO, global wealth and asset management, Edelweiss, said. Edelweiss, which has a fund of $1.5 billion for investment in distressed assets, says it sees sizeable investment opportunities in the RBI’s second list of distressed assets. Edited excerpts:
What would be the impact of RBI’s decision to do away with debt resolution tools?
We are all trying to gauge the exact implication of the change. But it is also true that in the last 4-5 years there have been so many schemes that resolution of distressed assets have become somewhat complex. The erstwhile schemes like SDR, CDR, S4A and others were good tools, but they were not completely adequate to solve large problems. And hence, you saw that actual resolutions were not happening using those tools. On the other hand, there is a certain optimism about the Insolvency and Bankruptcy Code (IBC) and the National Company Law Tribunal (NCLT) process. I think people have understood that resolution is reasonably fast under this process.
Will the new system help hasten resolution of bad debts?
Through its recent mandate, RBI has tried to simplify the resolution process and make it time bound. The resolution process mandated by RBI is very similar to the IBC process in terms of the approach. It is time bound, but it is very strict as well. However, one will have to see how the different stakeholders adapt to the new process. For one, we will now need 100% acceptance from all the creditors for a resolution plan. That might be difficult because every bank has different objectives, different collateral and different loan structures. So it is not that all of them are completely aligned all the time. Secondly, from the process point of view, it might be difficult for the banks to report even a day’s delay in repayment on a continuous basis. We will have to see how that will be executed by the lenders. It will be an onerous task and will increase operational costs for them. Except for a couple of points like these, which are rigid, I think the spirit of the circular is to take the problem by the horn and solve it in a time-bound manner.
What is your strategy for investing in stressed assets?
We are very focused in our approach to stressed assets. We have a large team and a large capital commitment. And hence, you would see us participating in many deals. Our strategy is simple, if we find a good operating asset, where the business model is not broken but the balance sheet is broken, we would like to invest in it. In fact, given that we have flexible capital, these are the kinds of assets that we would like to participate in across the capital structure. Sometimes, it can be priority debt, or it can be mezzanine debt, or it can even be a complete buyout. But if the underlying business is struggling, then we generally don’t like to participate. Once in a while, we might buy it if it is cheaper than the liquidation value, but it is not our preferred strategy.
Does the new system open up opportunities for asset reconstruction companies and stressed asset funds?
It does open up a sizable opportunity. The circular has come recently, and as the situation evolves, we will know what the exact scope is. But I do think that the role of distressed funds, asset reconstruction companies (ARCs) and non-banking financial companies (NBFCs) will go up. The NCLT is likely to be the last resort. So in a lot of situations where a business has run into genuine problems, and need to invest fresh capital, funds like us will play a more important role. We have a fund of $1.5 billion to invest in distressed assets, and we hope to take it to $2 billion in the near-term.
You have not been aggressive in the bidding for the top 11 assets at the NCLT?
It is because investing in some of these large assets is not necessarily the mandate of our fund. The corporates will have cheaper cost of capital than us, and they might be able to bring more synergy. These are primarily the reasons why we did not participate much. But we see a lot of opportunity in the second list.
Initially there was a lot of interest from the foreign funds, but that fizzled out. Why?
These are large, complex assets and need a lot more operating capability than what a financial investor can bring. Hence, a lot of funds are looking to partner with corporates and then bid. It might be a challenge for them to manage buyouts of large Indian companies on their own. But the second or third tier assets, which are not complex, or are easier to manage, might attract lot more interest from overseas financial investors.