Veteran investment banker Ashok Wadhwa is known for spotting opportunities much before others. However, for his asset reconstruction (ARC) business, he waited for years before finally applying for a licence in March in association with New York-based J C Flower, each having 47.5 per cent holding in the proposed company. Former Citibank veteran Jerry Rao holds the remaining five per cent.

He, however, did not miss much. The 15 ARCs active in the past 10 years have seen sluggish business. Now, 13 firms have applied to the Reserve Bank of India (RBI) for a licence to run an ARC, according to people familiar with the process. In January, the Piramal Group floated the largest $1-billion donor-advised fund, in association with the Nirmal Gangwal-founded turnaround company Brescon Corporate Advisors. This was followed by global giant CPPIB, tying up with the Kotak Mahindra Group to launch $525 million. New players rush as distressed assets mount on banks’ balance sheets.

RBI introduced a more comprehensive asset quality review later last year, forcing banks to bring a large amount of distressed assets to the fore. Gross non-performing assets (NPAs) for 40 banks jumped 93 per cent in a year to Rs 5.8 lakh crore at the end of March.

“There have been stressed assets and stressed banks in the past as well. But, the regulatory framework and political will to take corrective action by pursuing change in the management and by compelling entrepreneurs to sell their businesses has not happened previously,” says Ashok Wadhwa, group chief executive officer (CEO), Ambit Corporate Finance. Parliament passed the new Bankruptcy Bill last month that would ensure time-bound settlement of insolvency. This comes as the banking regulator introduced many majors, including strategic debt restructuring that facilitates banks to take control of the indebted companies by converting debt into equity. This is expected to create more conducive environment for banks to sell and promoters to accept change in management.

“Globally, most of the pension funds, endowments and insurance companies have longer dated liabilities due to improving human life expectancy. There are very few countries offering longer investment opportunities of 20 to 25 years to match their requirements. That is why many global players are rushing to grab the opportunity in India now,” he says.

It usually takes six to 12 months for RBI to grant such licences. But, given the impetus of the government, Ambit expects the process to be over in three to six months. This will help it get the licence soon as it applied for it in March.

The ARCs need to invest at least 15 per cent in equity on the purchase of distressed assets from banks, according to RBI norms. Ambit plans to launch a $100-million ARC fund after getting licence. With additional $15 million the three promoters will be putting in the firm, it will have a $115-million fund to be used for infusing equity in the distressed assets it plans to buy. This will help it create business with $765 million assets under management. “We would be more interested in companies that have a long-term ability to succeed in the market place, but perhaps are short on liquidity. They need temporary working capital or additional doses of equity. By providing that equity, we will hopefully make it profitable,” says Rahul Gupta, joint group CEO, Ambit Corporate Finance.

June 9, 2016, Business Standard