With stress in corporate India showing no signs of letting up, the Reserve Bank of India (RBI) has received a bunch of applications for licences to set up asset reconstruction companies (ARCs). Multiple sources confirmed to FE that Piramal Enterprises, Encore Capital JC Flowers in partnership with Ambit Holdings, Fairfax-backed IIFL Holdings and Fortune Financial Services promoted by former Sun Pharma CFO Sudhir Valia have all applied for ARC licences.
Significantly, San Diego-headquartered Encore Capital, which began its India operations last year, and is the world’s largest publicly traded retail distressed debt buyer, is looking to set up an ARC exclusively for retail non-performing assets (NPAs). Industry experts say this segment has not seen much participation yet with the focus primarily on corporate NPAs, partly because retail assets are not available in sizeable chunks.
IIFL, which already has a retail loan portfolio through its NBFC arm, is also understood to be keen to enter the retail NPA space. Meanwhile, Piramal Enterprises, which recently teamed up with corporate debt resolution advisory firm Brescon Advisors and has announced a $1-billion stressed assets fund, is keen to set up an ARC for a larger play in the distressed assets segment. As per reports, Piramal is also in talks with private equity giant TPG Capital to partner in the proposed ARC. An email sent to Piramal Enterprises seeking comments remained unanswered till the time of going to press.
Rising interest in ARCs notwithstanding, the sale of NPAs to ARCs has been somewhat sporadic, having picked up substantially only in the last two years, RBI data show. Of the 15 registered ARCs, assets of the top three players — Arcil, JM Financial and Edelweiss — account for more than two-thirds of total ARC assets. However, industry experts believe this could change soon.
Charanjit Attra, partner, EY Global, believes the new regulations that allow 100% foreign ownership in ARCs have generated a lot of interest. “There will be new players and more capital available soon,” Attra said, adding that the Sarfaesi Act coupled with the proposed bankruptcy law will smoothen the recovery process for existing and new ARCs in India.
According to a recent RBI study the acquisition cost of NPAs for ARCs as a percentage to book value of assets has increased sharply from 20.8% as of March 2013 to 44.5% as on March 2015. In other words, the discount rate at which ARCs are acquiring NPAs from the banks/financial institutions has decreased considerably. With newer ARCs in the fray competition may drive up the prices of assets further.
“We have seen the cost of acquisition go up in the past two years but it has been mainly because the assets in question were largely from the real estate, steel and power sector where scope for a discount is less,” said Siby Antony, CEO, Edelweiss ARC, the largest ARC in terms of assets under management. “However, if more players come in, competition will rise but with NPAs touching 15% of gross advances, I would say that the cake is large enough for everyone, whether old or new.”