Distressed assets: Winds of change – The Financial Express

Clipped from: https://www.financialexpress.com/opinion/distressed-assets-winds-of-change/2350091/

The government, RBI and SEBI are on the right track in reforming the Indian stressed assets market

Policymakers should consider the following legal changes to complement these structural reforms.Policymakers should consider the following legal changes to complement these structural reforms.

By Veena Sivaramakrishnan & Pratik Datta

The market for stressed loans in India is undergoing a major shift. The government, RBI and SEBI have unleashed reforms to address the NPA crisis—state intervention in the form of a new bad bank is being complemented through structural reforms to help develop a vibrant market in stressed assets.

The North Block deliberated on the management of stressed assets at the Financial Stability and Development Council (FSDC) in early September. By mid-September, the Cabinet approved setting up of the National Asset Reconstruction Company Ltd (NARCL) to take over nearly Rs 2 lakh crore worth of NPAs from the banking sector. A week later, RBI liberalised its norms on transfer of stressed loans. Banks, NBFCs and All India Financial Institutions (AIFIs) have been allowed to sell their NPAs on cash basis directly to a new set of players including corporates as well as financial sector entities permitted to take on such loan exposures by their respective regulators.

In parallel, SEBI chairman Ajay Tyagi said the regulator is considering a new sub-category of alternative investment funds (AIFs) for investing in distressed loans from banks and NBFCs. This reform was originally suggested in 2019 by the RBI Task Force on Development of Secondary Market for Corporate Loans. This new category of AIFs would possibly be allowed to purchase NPAs directly from banks, NBFCs and AIFIs on cash basis under RBI’s new norms.

These reforms should help unlock the capital of banks and financial institutions, enabling them to extend fresh loans to boost post-pandemic economic recovery. Policymakers should consider the following legal changes to complement these structural reforms.

First, any financial entity that is allowed to purchase NPAs from banks and financial institutions should be given enforcement rights under SARFAESI, which was traditionally enjoyed only by identified banks and financial institutions. Foreign portfolio investors who play a major role in financing to unbanked sectors in India by investing in unlisted securities should be permitted similar access (at present it is only for listed securities).

This legal privilege can be restricted to financial investors and need not be extended to strategic investors who are otherwise eligible to purchase distressed debt under the recent changes introduced by RBI.

Second, SEBI should permit Category II AIFs to invest in distressed loans from banks and financial institutions. Category II AIFs already enjoy pass-through status under the Income-tax Act, 1961. They are being used as debt funds and have the potential capabilities required for stressed assets funds. Given the nature of their set-up, they can provide healthy competition to existing participants in the stressed assets market.

Finally, acquisition of control of a listed company through debt to equity conversion by permitted financial sector entities under the new RBI directions should be exempted from the open offer requirement under the Takeover Code, 2011. Currently, acquisitions under SARFAESI as well as under the Debt Restructuring Schemes of RBI are exempt from such requirements.

The same treatment should be extended to acquisitions by permitted financial sector entities under new RBI norms. This would make it relatively easier for permitted financial sector entities to take control of a distressed listed company, turn it around and make a profitable exit by selling the business.

The government, RBI and SEBI are on the right track in reforming the Indian stressed assets market. The recent structural reforms coupled with the anticipated reforms for ARCs as a sector, if complemented with the legal measures suggested above, could make the market for stressed assets more attractive to potential investors, including offshore investors, giving the best possible exit for banks and financial institutions.

Sivaramakrishnan is partner and Datta is senior research fellow, Shardul Amarchand Mangaldas & Comail logo

Subscribe to FE Daily Newsletter for latest updates on markets, business, money, infra & more, right in your mailbox

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s