India regulation a catalyst for special sits investing

Investors deploying capital in special situations in the country are banking on government measures to professionalise and scale up distressed assets investing.

Global private equity firms are seizing stressed assets opportunities in India, driven in part by the government’s attempt to streamline regulation on troubled assets.

Bain Capital Credit last week held an initial close on more than half of its $1 billion target for its first Asia-focused special situations fund. The Bain Capital Special Situations Fund Asia has been backed by 38 investors according to a regulatory filing with the US Securities and Exchange Commission. Private Equity International understands that along with China, India is one of expected investment markets for the fund. According to the Ministry of Finance, India’s banking system has an estimate of between $150 billion to $200 billion of stressed or credit-impaired assets, as of December 2016.

“With a large number of businesses starved of capital and liquidity, there is a high level of demand for alternative private finance in India,” Sarit Chopra, managing director, Bain Capital Credit, told PEI.

Chopra highlighted that the Indian government and the Reserve Bank of India have introduced a number of measures in the last year that have been “a real catalyst for triggering investment opportunities for specialist investors.” The first of these is the new bankruptcy code, which forces troubled companies to complete bankruptcy proceedings within 180 days – a process which typically takes up to four years to resolve in India – or face liquidation.

Bain Capital Credit set up a joint venture in August 2016 with Piramal Enterprises to invest in restructuring situations in India. According to Chopra, the firm is seeing significant deal flow in India with a number of large businesses that are inherently viable or have good assets that can be monetised as well as in mid-cap companies.

“That said, investing in the distressed asset space in India is not without its challenges,” Chopra pointed out. “Local market dynamics and stakeholder management – not just with the company, but with creditors, banks, the local government and employee groups – are critical factors for success.”

Another important regulatory change has been the government’s approval of 100 percent foreign ownership of asset reconstruction companies or businesses that purchase stressed assets. Mintoo Bhandari, senior partner at Apollo Management, told PEI: “In the past, a firm like ourselves would have to depend on other parties to pull together to transact, which would cause challenges in alignment, cost and speed. So, we would need to have disparate groups with somewhat overlapping objectives, even if we were providing all the capital and direction, to align fully to able to transact.”

Bhandari also pointed out that the RBI has increased the capitalisation requirements of ARCs, from INR 2 million ($310,000; €260,000) to INR 100 million. “It’s a 50x increase in minimum capitalisation, which means they’re basically saying that they want larger, more serious, experienced players in the space. The RBI and the government are making a real move towards ensuring professionalism and scale,” he explained.

Apollo is one the earliest players in stressed assets investing in India. In 2014, the firm set up AION Capital Partners along with Indian private firm ICICI Venture Funds Management. AION has deployed close to 70 percent of its debut fund, which closed on $825 million in 2014. Its recent investments include digital media distribution company Planetcast Media Services, the commercial lending and leasing business of GE Capital and India’s largest retailer Future Group. According to Bhandari, the firm is looking to do a couple of landmark deals with a distressed component as well as one more buyout in the next 12 months.