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Indian Distressed Opportunities

MUMBAI: India is becoming a hot destination for ‘scavenging’. Cash-rich private equity distress funds are hovering atop the $35-billion distressed asset market in the country sighting enormous wealth-creation opportunities.

According to experts, 2006 has been an eventful year for distress funds as estimated investments in non-performing assets have grown from around $1 billion in 2005 to over $1.7 billion. It has been a safer bet for private equity (PE) players investing in distressed assets as many have fair potentials of recovery and are largely secured against tangible assets including high value real estate.

“The trend kicked-off with Asian Development Bank (through its Asian Development Management Fund) investing close to $100 million in India Cements in mid-2005. We have seen a handful of sizeable deals in sectors like cement, pharma and textiles in 2006,” said Arun Natarajan of Venture Intelligence.

Year 2006 witnessed the UK-based international fund Spinnaker Capital investing Rs 125 crore in IG Petrochemicals (IGPL). According to sources, the debt of the company was around Rs 640 crore at the time of buyout. The Hyderabad-based Pennar Industries also received an aid of Rs 120 crore from Spinnaker Capital and Eight Capital in July 2006.

As per the agreement, the funds will together pick up a 27% stake in the company after 18 months, something that Spinnaker is also doing in IG Petrochemicals, where it will pick up a 14.83% stake within a year. Sanghi Cement (GE-led foreign consortium investment of $160 million), Binani Cement (JP Morgan’s investment of $57 million), Kopran (Clearwater Capital Partners Investment of $20 million) and Shetron (Citigroup investment of $10 million) were the other major PE investments in stressed assets in 2006.

Despite the restrictions, funds continue to be active, especially, on the single-credit front, where some 15 to 20 of them are said to be operational at the moment in the country. “PE players have evinced tremendous interest on distressed assets over the past two years. There is still enough space for quite a lot number of players in the sector. The sector will be more interesting to watch once private asset reconstruction companies give more opportunities to existing lenders to recoup some part of their losses,” said Siby Antony, executive trustee, Stressed Asset Stabilisation Fund, a subsidiary of IDBI Bank.

According to experts, high debt burden of takeover assets (as a result of the recession in 1990s), rise in valuation of distress assets, multiplicity of lenders while taking over and unknown and unclear liabilities of takeover assets are the challenges faced by the investors.

Gautam V Patel, vice-president, Deutsche Bank AG, said, “The initiatives taken by regulators to empower lenders with SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) and CDR (corporate debt restructuring) system have been successful by far. But a lot more has to be done. The regulators should also allow change of management under the SARFAESI Act. We should initiate changes in the judicial process to weed out hassles of unclear liabilities and other legal wrangles.”

India – Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 – SARFAESI Act

ARCIL

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April 7, 2008 - Posted by | Uncategorized | ,

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