India: Distressed assets

India’s stressed assets situation moved into the spotlight in the wake of the Reserve Bank of India’s (RBI) latest budget announcement in March. RBI governor Raghuram Rajan warned Indian lenders to prepare for a year of “deep surgery” as it increases measures to tackle the country’s bad debts.

According to an India Ratings & Research report, as much as one-third of Indian companies have stressed or non-performing loans, accounting for 21 percent of total bank stressed credit, with the bulk of it on the books of state-owned banks. The report also expects bad loans to grow by 12.5 percent in 2017. As a whole, India’s stressed loan pile is estimated to have hit more than $110 billion.

“It’s the desire to use debt to fund growth that has made Indian corporations the most highly leveraged in the world and therefore the most susceptible to slowdowns or dislocations,” Mintoo Bhandari, managing director of Apollo Global Management India Advisors tells Private Equity International.

“If you are a promoter in India and you say, ‘Look, I got a trillion dollars of gross domestic product coming down the pipe over the next decade for India’, you ask yourself, ‘Do I want to dilute my equity or would I rather take on debt to grow and to keep my share of that pie?’

“This has been the modus operandi of companies in India – to use debt to the extent that they can and hope that it will all work out.”

The banks are now in a position to rid themselves of troubled assets and private equity firms have come in buying, with deals mostly in businesses that had suffered through the commodities crunch and the weakening of the Indian economy post-2007.

“It’s a good time for distressed assets players,” says Parveet Gandoak, an associate at law firm Debevoise and Plimpton. “A lot of the private equity firms have mandates from their global or pan-Asian funds to invest into these situations.”

About a dozen funds are focused on the distressed assets market in India, lured by the prospects of buying at significant discounts.

According to asset management consultancy Alvarez & Marsal’s (A&M) latest Outlook for Stressed Assets Market in India, the total funds available are estimated to be between $3 billion-$5 billion. These include global funds managed by KKR, TPG, Apollo Global Management and regional funds from Clearwater Capital and SSG Capital. TPG is among investors vying for a stake in Indian state-owned lender IDBI Bank, while KKR had recently won approval to own a majority stake in Mumbai-based International Asset Reconstruction Co.

Apollo has been present in India for more than five years and in 2014 entered a joint venture with ICICI Venture to establish AION Capital Partners. The fund had raised $825 million to invest in special situation opportunities in India.

Bhandari claims that when Apollo started thinking about this space, it was seen as an outlier, but this has now changed as the opportunity has been more widely recognised. Everstone Capital said it will start investing in stressed companies in India and has hired a former director at Advent International, Avnish Mehra, to head the new business unit. Indian billionaire Ajay Piramal, chairman of the $4 billion Indian conglomerate Piramal Group, has also said he wants to set up a $1 billion fund to invest in distressed assets.


The RBI deserves credit for generating investor interest in distressed assets. It has made clear that it is open to external capital and will support the restructuring of enterprises in India.

Fearing that the country’s system would be weighed down by bad loans, in February RBI launched an asset quality review and required commercial banks to clean up their balance sheets, declare non-performing assets and make provisions by March 2017. It has introduced a debt-for-equity swap tool to enable creditors to take control of the company and effect change in management when necessary.

Investors are also hopeful that the country will successfully pass a proposed bankruptcy reform bill by the end of May. The bill would be transformational, streamlining India’s scattered insolvency laws into a single piece of legislation.

This would make it easier for creditors to take a company to bankruptcy and take control within three to six months, instead of cases dragging on for several years, as has been the norm.

The government has also eased rules on foreign ownership of asset reconstruction companies (ARCs buy bad loans from lenders and work on revitalising the business). An earlier rule capped foreign ownership at 50 percent.

Puneet Bhatia, managing director and country head for India at TPG Capital says that India has “turned a corner” based on the government’s “constructive stance”, but that “it has seen a build-up of distressed assets over the cycles which will require concerted efforts to resolve”.

While the stage is set for a boom, players already in the market warn that investing in distressed assets in India is no picnic, even with the introduction of restructuring-friendly government reform.

“There’ll be a whole spectrum of players,” says Apollo’s Bhandari. “But this is really a specialist area. It’s not an arena where someone can just decide they are interested in it, walk in and do it well.”

Debevoise’s Gandoak says that even with the new “streamlined approach” – which will undoubtedly attract private equity investors to bid on assets – this is still a “watch and wait” space.

This is a sentiment echoed by Vikram Utamsingh, co-head of Alvarez & Marsal in India: “This [investing in stressed assets] is yet one more avenue of opportunity, but are there really businesses that people will want to buy? Which of the sectors are fully viable?”

As is often the case in India, and as Utamsingh puts it: “The devil will be in the detail.”