Five Minutes with Vishakha Mulye

As ICICI Venture's distressed investment vehicle with Apollo Global Management continues to raise capital, the firm's chief executive and managing director Vishakha Mulye explains the motivation behind raising a special situations vehicle for India.

How has India’s macro-economic situation paved the way for distressed funds?

Because the Indian economy was growing at 8 percent-plus and there was a lot of feel-good happening worldwide, many companies of size and scale went into the market and borrowed heavily to finance ambitious plans. However, the growth for those Indian companies has had a natural correlation with the growth of the Indian economy. So, with the current deceleration in India’s growth trajectory to 6 percent-plus levels, the earnings growth of these companies has been a little more muted than expected. Therefore, because it hasn’t kept pace with their ambition and the debt they’ve borrowed, clearly we find the gap between earnings and debt repayments. 

Secondly many of these companies in the last decade borrowed foreign currency convertible bonds in the international market – the total value of FCCBs expected to fall due in the next 3 years is around $42 billion. Many of these were borrowed at the rate of INR 45, but today the rupee is at INR 55 to the US dollar. Further, none of them expected the bonds not to get converted and so never treated it as debt, but as equity. Today, it is a problem for some of them because the bonds have not got converted and they have to meet these debt payments that they had not envisaged having to do when they borrowed it in terms of their cash flows. 

So, I wouldn’t say such companies are distressed today – I call it more special situations, where if they do not take corrective actions today, they could go into distress as intrinsically these companies are operationally viable.

Given ICICI’s position as the private equity arm of a bank – is there any regulatory pressure in India for firms to spin out of banks like your Western counterparts have started to do?

The structure of private equity in India is different to how it is in the West. In the West, private equity was part of the banks. In our case it is through a separate company, even though it is 100 percent-owned by ICICI Bank. In the western structure, there was a worry about co-mingling risks that third party money can have with the proprietary money of the bank, which is not the case in India. In India, there is a separate governance structure for third party funds which is independent of the bank. At ICICI, we have had a similar structure for over a decade for all our third party funds. As an example, as chief executive and managing director of ICICI Venture I do not have any responsibilities at ICICI Bank. This is equally true for my colleagues who have moved from ICICI Bank to ICICI Venture.

This is a commonly used structure amongst Indian banks. Indian regulations continue to allowed sponsor banks to put money into the funds. The only restriction is the money they put in gets calculated under the limits that have been set up by the regulators and their own board called a “capital market limit”. So when a bank puts money into its own sponsored fund, it acts like any other LP in that fund. We have investments from ICICI Bank in our funds and continue to have their investment even today.

Currently some institutional investors are restricted from investing in India – do you believe this will change in 2013?

Unfortunately, pension funds, which are big investors in the international private equity market and the natural investors into the asset class, are not allowed to invest in private equity funds in the Indian context. That is something we will have to work on as an industry to get the government to acknowledge us. I have seen the first step from regulators through the publication of the AIF guidelines that they have acknowledged alternative assets as an asset class. But, to your question as to whether this can happen in 2013, my frank answer would be no, I don’t think so. Even if the regulator allows you to, you need to create those capabilities within and Indian pension fund organisations will take a longer time to create such new capabilities in this asset class. As we go forward, the Indian alternative asset management industry will have to perform and give confidence that we can consistently deliver.