Now with the new bankruptcy laws, how has life changed for you?
These are all resolution tools. The last tool was the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) for almost 10 to 12 years. In the 80s, we had the Board for Industrial & Financial Reconstruction (BIFR). In the 90s, we had Debt Recovery Tribunals (DRTs), then in 2000 it became SARFAESI and now it is the Insolvency and Bankruptcy Code (IBC). I think IBC will be a game changer because, as of now, banks could only repossess the assets, but could not change the management. Before this, you could never change the promoter. SARFAESI allowed banks to change the promoter till the debt was recovered.
Once recovered, giving it back to the promoter did not work. It still is very early days to give any judgement. Theoretically, it is one of the very good legislations. If at all anything has changed, it has changed for the asset reconstruction companies (ARCs) which have aggregated the debt. In the banking system, consortium has not worked well. Banks need to decide what they want to do because they have a minimum window of six months or nine months for resolving.
What is it that an ARC can do and banks cannot?
An ARC can bring focus. Nonperforming assets are a by-product of their main activity. Main activity are deposits and advances. In the process, 1-2% can go delinquent. Even if you have very good appraisal standards, 1% may go bad because of so many factors. We have all the powers that banks have. We have only one business — acquire bad assets and revive them. We bring expertise in resolution and restructuring.
If external factors do not support revival…
The year 2001 was the worst, maybe worse than this. Maybe size was smaller, otherwise there was 14-15% NPA in every sector in every bank. But if you look at 2003, 2004 and 2005, there was a dramatic turnaround. In 2002-03, we restructured Essar SteelBSE 0.41 % and in 2005-06 they came out of corporate debt restructuring (CDR) after giving recompense. So, you are right, the economy should support. From 2009, CDR got slightly weakened by some of the regulatory issues. Unfortunately, it was misused for kicking the can down the road. Otherwise CDR failure, in the 2002-09 period, was not more than 10%.
There is not a single success story of ARCs. Why are ARCs not able to instil confidence?
Two things: One, new NPAs or NPAs with low vintage, viability still remains. It started only in September 2013. Two, the economy still has not picked up. We have done many cases. For example, ArshiyaBSE -0.66 % was a difficult case for a bank. It was a good asset but, maybe ahead of time. It has one of the excellent warehouses in Panvel. If GST had come three years earlier, perhaps it would have been a good case. What happened? Banks sold it at 50%. Nearly Rs 3,000-crore debt was sold at about Rs 1,500 crore. We have acquired. It was a unique revival. One foreign fund bought over six warehouses at Rs 600 crore. We have restructured the debt. We have taken 25% equity in the company. The company is running well now. It was the conversion of debt into equity. When we acquired the asset, the share price was in the range of Rs 20-40. Today it is Rs 70-80.
There are issues about promoters coming back to buy a distressed asset with siphoned off funds, at times with foreign funds?
If foreign money is coming, perhaps it is a good sign because corporate governance will work like anything. If you look at corporate governance, it is a casualty in all these cases. Foreign funds will not put money just like that. It comes with a lot of governance and restrictions. These are all genuine good big funds. And they are serious investors. One important immediate impact of IBC is some discipline in credit market. That will definitely come. Now, nobody will borrow just like that. Earlier, borrowing was so easy in our country. That is why there were overleveraging so much. That will change.
Will there be more equity upfront?
Exactly! It will be more of equity. Even equity was brought through debt.
How many companies are you handling in the new IBC…How has been the progress?
There may be about 11-12 cases. Progress is good. Murli IndustriesBSE -4.51 % is one where the resolution is in advanced stage. We have already got the expression of interest, which we are now evaluating and we will sell it. Trying to get people on board for buying assets is where we find it difficult. There are no buyers.
So, is pricing an issue or are they not confident about the Indian economy?
Depends on the size. Funds are coming for the larger assets like Electrosteel, Essar and Bhushan, but maybe with a strategic investor. Smaller assets is more difficult. Like today, we advertised for a 2.2 million tonne unit which is small but the advantage is it has huge 700 acres of land 20 km from Krishnapatnam port. Today we got at least 10 calls, which is a good thing.
What about the human resources to handle large cases? Are these the same auditors who sign off on the cooked up accounts?
This is one challenge in the initial years of IBC. Today you write a one and-a-half hour online exam and you get an IRP certificate. Today so many pass but how confidently one can handle the cases? If you look at the large 12 cases, they are given to people backed by big audit and consultancy firms, so bankers have confidence. It is early days and it is a big challenge. Even if there is a small company to hand over, they should be clear what he can do. We have seen in some cases, where we have a stake, even mails are not going from the IRP account because his computer is choked. We hope things will improve.
What are the challenges here?
Both capital and resources are scarce. People are scarce. You don’t get many people with expertise. You can get them only from banks. In many banks, the bright ones will be in glamorous departments like sanctions. So, there is no good expertise in the banking system. Expertise is scarce. That is perhaps one reason why ARCs are not active.
We have two dozen ARCs, yet only handful are active. What can be done to revive this market?
Capital is what is holding everyone back. If you exclude Edelweiss, the total capital available with all other 25 ARCs will be not more than Rs 2,500 crore to Rs 3,000 crore. Nobody has tied up with any of the funds, so that is what is holding them back. I think many have not understood the business. In ARC association meetings, I tell them you should all be active because the cake is so big that everyone has a share. People are talking about a bad bank now because we are not active.