The Insolvency and Bankruptcy Code was enacted in 2o16 but its yet to gain popularity.
The stressed asset market in India is estimated around $150+ billion, indicating significant potential for investments, either through Insolvency and Bankruptcy Code (IBC) or mechanisms outside IBC, according to a 2019 report by Alvarez and Marsal. While there exists tremendous investment opportunity under the IBC regime, participation of stressed asset investors has been tepid so far.
The enactment of IBC Code, 2016 has changed the credit culture and the way capital and businesses are managed. IBC has brought a collective resolution framework for insolvent companies through a creditor-in-control approach based on the internationally accepted principle of insolvency resolution. However, the results on the ground about the success of IBC are spotty at best. As per the Economic Survey 2020-21, almost 1500 companies have either been liquidated or taken over under the IBC, with almost 1800 companies undergoing the process. While judicial proceedings in India are notoriously prolonged, the IBC provides for time-bound closure of proceedings with a mandatory upper limit of 330 days subject to just exceptions. As per the Economic Survey 2020-21, the average time taken for resolution of companies is 441 days as opposed to 328 days for liquidation. Thus, thereby reducing the value of the asset. In addition, lack of consensus amongst lenders, delay in court processes and fear of commercial decision making in the largely Government owned bank system have been a bane.
Any new law will take some time to season out and lawmakers will make amendments to smoothen the path. India is no different. The Government has been proactive in updating regulations, and removing hurdles. While the opportunity size is not lost on investors, participation of stressed asset investors under IBC has been tepid so far. Though more than $7 billion of capital has been raised between seven major stressed asset investors, most resolutions have been driven by strategic investors.
The stressed asset market is likely to see an uptick in deal activity in the next financial year as financial creditors start recognising more non-performing loans. This would lead to more distressed debt opportunities for investors including buying these NPAs, buyouts of distressed companies and providing financing to stressed borrowers. Post Covid-19 relaxations in norms, India’s stress assets are expected to further rise. The gross non-performing assets (GNPA) ratio, according to the Reserve Bank of India (RBI) Financial Stability Report 2021, is likely to increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario; and to 11.22 per cent under a severe stress scenario.
As the global economy limps back to normalcy, emerging economies such as India are registering growth at a faster pace. India’ fundamentals are looking attractive, and the Government’s frontloading of investment and spending will likely bolster the turnaround in the economy. The Government’s recent formation of the National Asset Reconstruction Company eliminates one of the major headaches of aggregating loans from multiple lenders. More recently, The Reserve Bank of India has effectively opened up the trading of stressed loans to other regulated players in the market. This was earlier the domain of the ARC. This holds promise for stressed assets funds to operate more freely.
The Insolvency Board and other regulators are already working on “pre-pack” as a solution to the festering problem. All of this offers opportunities for all kinds of Credit investors. The challenges faced by the NBFC industry in the aftermath of the NBFC crisis and the withdrawal of easy credit from mutual funds has opened up the structured credit markets in India.
Given the vacuum in offering specialised credit solutions as well as the concentration of available capital only focussing on AA and above credit, the field is wide open for special situations and credit funds to continue to play a meaningful role in the stressed and (not so stressed) asset market in India. In that context India offers a unique opportunity for yield hungry investors at one end of the spectrum and the high growth capital risk investors at the end of the spectrum.
(The writer is the Managing Director at Kotak Investment Advisors Limited (KIAL) & Member of Group Management Council at Kotak Mahindra Bank. The views and opinions expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak Group.)