These vultures are investors looking for opportunities in distressed assets and bad debts. For years they had avoided investing in India, put off by a creakingly slow legal system and a labyrinthine bureaucracy.
But a new bankruptcy law and a move this month to give India’s central bank expansive powers to tackle bad debt have excited investors both here and abroad who think investing in India’s distressed market could produce double-digit returns.
“The new bankruptcy laws have been given teeth, which finally makes Indian credit markets attractive to foreign investors,” said Saleem Siddiqi, founder of Musst Investments, a family office in London. Mr. Siddiqi is creating an Indian merchant bank to invest in middle-market corporate loans.
A test of the new approach came this month, when a tribunal in New Delhi dismissed an appeal by a steel company, Innoventive Industries, which was arguing, among other claims, that a state law allowed it to suspend its liability temporarily. The tribunal ruled that the country’s new bankruptcy law prevailed.
“Now the first case is resolved, you will see an onslaught of deals from the big guys,” says Ravi Chachra, managing partner of the Mumbai-based asset manager Eight Capital.
Indian banks held about $105 billion in gross nonperforming loans as of Sept. 30, according to the Reserve Bank of India. One troubled asset has even received global recognition: the $1.3 billion in unpaid loans owed to banks by the beer-and-airline titan Vijay Mallya.
The new bankruptcy law is aimed at cleaning up the nation’s mountain of debt, making it easier to dissolve a company and recover money. In India, where parties can drag out bankruptcies for years, the law has an important feature requiring a bankruptcy to be completed within 180 days in the event of default.
The effective functioning of the bankruptcy law “is one of the steps in helping India modernize and function properly,” said J. Christopher Flowers, chief executive of J. C. Flowers & Company. His firm, in partnership with an Indian investment bank, Ambit, received approval from the Reserve Bank late last year for a required license to set up an asset reconstruction company as a way to work out problem loans.
Mr. Flowers, a former Goldman Sachs partner, made a fortune buying into Japanese banks nearly 20 years ago, but struggled with some of the investments he made during the financial crisis.
In India, Mr. Flowers noted, “you have a credit market which doesn’t function very well because creditors can’t collect on their debt and credit ends up in the wrong places.”
“Borrowing costs are high and banks don’t make money,” he said. “Bad debt clogs the system.”
One of the challenges investors like Mr. Flowers face is that so far, banks have been reluctant to swallow the big discounts that investors are demanding to acquire bad assets. Little more than $3 billion in nonperforming assets were sold to asset reconstruction companies in the 2016 fiscal year, according to a report from Credit Suisse.
Some widely reported deals haven’t materialized. The San Francisco-based asset manager Farallon Capital is no longer expected to acquire a 24 percent stake in the struggling Essar Steel.
India’s robust growth slowed recently as a result of the government’s unexpected move last year to ban 86 percent of the nation’s currency in an effort to root out “black money,” currency on which taxes haven’t been paid. The move has produced widespread shortages of cash. Economic growth is expected to face challenges as long as banks here are saddled with enormous bad debts.
“What is uncomfortable,” says Renny Thomas, senior partner and head of financial services for the consulting firm McKinsey & Company in India, “is that the unprovided-for part of Indian banks’ total nonperforming loans is a significant proportion of the net worth of the banking system.”
The $1.3 billion in unpaid loans owed to banks by the beer-and-airline titan Vijay Mallya has received global recognition. Credit Prakash Singh/Agence France-Presse — Getty ImagesPhoto by: Prakash Singh/Agence France-Presse — Getty Images
Long term, some foreign investors think the bankruptcy law change could have far-reaching ramifications for India’s capital markets, the jet fuel of a soaring economy. Indian companies have historically relied on selling stocks or lining up bank loans to finance their activities. Corporate bonds represent a tiny fraction of capital-raising.
“For the corporate bond market to develop in India, you need to have jurisprudence, you need to have recourse, you need to have laws, you need to have transparency,” said Mr. Siddiqi of Musst Investments. “The way India deals with nonperforming loans will be a litmus test of that.”
In addition to J. C. Flowers, other foreign players have set plans to participate in India’s distressed-debt market.
ICICI Bank of India and an affiliate of the private equity firm Apollo Global Management have agreed to work together in resolving debts in India “in an effort to revitalize and turn around overleveraged borrowers.” And Bain Capital and Piramal Enterprises, a diversified Indian company, have signed an accord to create a strategic partnership to invest in Indian restructurings.
Both of the American firms are following in the footsteps of the restructuring investor Wilbur L. Ross, now the United States commerce secretary. Nearly a decade ago, Mr. Ross invested in the struggling Indian airline SpiceJet, helping turn around the company by installing new leadership before selling at a profit. It was among a handful of investments in India for Mr. Ross.
In contrast with their solo forays into private equity, this time big foreign firms entering the distressed arena are largely choosing to team up with Indian firms.
The Edelweiss Group, a Mumbai brokerage firm, signed an agreement last fall with Canada’s second-biggest pension fund, Caisse de Dépôt et Placement du Québec, for the Canadian fund to invest up to $700 million in distressed assets and private debt in India over four years. As part of the deal, Caisse de Dépôt plans to take a 20 percent stake in Edelweiss Asset Reconstruction Company, which has about $5.4 billion in assets.
“Credit in emerging markets is ideally played by local players with local talent,” Venkat Ramaswamy, Edelweiss’s co-founder, said in an interview in his office, surrounded by different manifestations of the Indian elephant protector god, Ganesha. That’s because, as Mr. Ramaswamy explained, “Your permanency” or staying power and “knowledge of the local risks and operating conditions is important to recovery on an investment in debt.”
In March, a Carlyle Group fund, which owned an 8.2 percent stake in Mr. Ramaswamy’s brokerage firm, Edelweiss, sold its holding for about $130 million.
Many foreign firms have been waiting for the first big test of the bankruptcy legislation.
In 2016, ICICI began an insolvency proceeding against Innoventive, the first move by a bank to recover assets under the new law. Innoventive fought back, arguing that a special act by the state of Maharashtra, where the company is based, had resulted in suspension of the company’s liabilities for a year, thus nullifying ICICI Bank’s claim at the time.
After a hearing, the National Company Law Tribunal, the body adjudicating cases under the new bankruptcy law, moved to admit the case. Undeterred, Innoventive challenged the constitutional validity of the new law.
The recent ruling upholding the law does not guarantee clear sailing ahead, however.
“There will be some teething problems,” says Srini Sriniwasan, managing director at Kotak Investment Advisors Ltd., a unit of the Indian bank Kotak Mahindra.
Still, he is optimistic about the efficacy of the new bankruptcy law. “The speed at which the insolvency code was introduced and implemented is remarkable by Indian standards, ” he said.
Kotak has enjoyed a ringside seat while watching India’s distressed market swell.
The glass-walled building Mr. Sriniwasan sits in, in Mumbai’s Bandra Kurla complex, was built by a finance company. It had been allotted the land in an auction more than a decade ago.
When the firm failed, Kotak started buying some of the debt underlying the property from other public-sector banks.
An auction was set to sell off the property, but before it could proceed, Kotak had acquired all the nonperforming loans — and in doing so, secured ownership of the property.