RBI moots leveraged buyouts for acquisition of ‘stressed companies’

The Reserve Bank of India has proposed major changes aimed at restructuring of stressed assets in the system which may lead to norms that allow leveraged buyouts of such non-performing assets besides giving greater play and investment opportunity to private equity firms in such firms.

In a discussion paper rolled out on Tuesday, the financial regulator said it would allow banks to extend finance to ‘specialised’ entities put together for acquisition of troubled companies. The lenders should, however, ensure that these entities are adequately capitalised.

At present, banks are not allowed to finance acquisition of promoters’ stake in Indian companies. The underlying reason being promoters should acquire equity stake from their own sources and not through borrowings.

This has also stopped global buyout firms from participating in one big chunk of the market, a segment they are associated with in the developed economies. As a result, even big buyout majors such as KKR, Carlyle and Blackstone tend to largely focus on growth capital investments in India.

This could change if the proposed rules are implemented. RBI has called for observations and views on its proposals by January 1, 2014.

Among some key highlights, it has said PE firms and large NBFCs with proven expertise in resolution/recovery may be allowed to participate in auctions through explicit regulatory affirmation. Such entities will have to be provided authority under SARFAESI Act on selective basis to deal with specific assets.

RBI said appropriate incentive structures may be built so as to provide a greater role to PE firms and other institutions in restructuring of troubled company accounts. These institutions can be expected not only to bring additional funds for restructuring but also bring in expertise for management of the business unit in question.

It said alternatively or additionally, a specialised institution may be created with equity/quasi-equity participation of entities such as PE firms or international institutions with the Indian government holding a part of the stake. This institution may participate in restructuring of borrowal accounts along with banks and other lenders. It has put the ball in the government’s court for this proposal.

The trigger for the new norms is the rise in number of stressed firms given the slowdown of the Indian economy. As a result, the Indian banking system has seen an increase in NPAs and restructured accounts in the recent years.

The RBI discussion paper seeks to outline a corrective action plan that will incentivise early identification of problems, timely restructuring of non-performing accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts.

Click here for full discussion paper.

Here are some key points:

  • Sale of assets between asset reconstruction companies (ARCs) is not permitted under the SARFAESI Act provisions. In order to encourage liquidity and price discovery of stressed assets, sale of assets between ARCs may be permitted. RBI will take up the issue with the government.
  • The ability of ARCs to raise limited debt funds to rehabilitate units will be considered. This will be accompanied by increasing their minimum level of capitalisation in view of recent liberalisation of FDI ceilings and enhancement of working funds. The ARCs will be encouraged to reach certain minimum level of AUM targets.
  • Large designated NBFCs could be allowed to assign stressed assets to ARCs. If any of these designated NBFCs are not notified under the SARFAESI Act, the issue of their notification will be taken up with the government. However, a bank /NBFC cannot sell assets to its own promoted ARC or an ARC where it owns at least 10 per cent equity.
  • Early formation of a lenders’ committee with timelines to agree to a plan for resolution.
  • Incentives for lenders to agree collectively and quickly to a plan; better regulatory treatment of stressed assets if a resolution plan is underway; accelerated provisioning if no agreement can be reached.
  • Improvement in current restructuring process: independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.
  • More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.

More liberal regulatory treatment of asset sales where a lender can spread loss on sale over two years provided loss is fully disclosed and takeout financing/refinancing could be possible over a longer period and will not be construed as restructuring.

(Edited by Joby Puthuparampil Johnson)

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