THE VULTURE FUNDS Globally, companies make billions by even buying distressed country debt, instead of mere corporate debt

Vulture funds are basically private equity or hedge funds with deep understanding of special situations. They buy assets cheap, strip them and even take management con­trol before selling them. They are known as vulture funds as they prey on companies which are in distress, but have the po­tential for revival and growth.

Globally, players such as Elliott hogged the limelight when, in the mid-90s, they pounced on sovereign debt of the Pana­manian government at a hefty 40 per cent discount at $17.5 mil­lion. Later, they even took the country to the court seeking full repayment of $27.8 million. The court in New York came down heavily on the government, directing it to make the payment, in­cluding an interest of $57 million, to Elliott. The other big players are Cerberus, JP Morgan, DE Shaw, Davidson Kempner I, KKR, Blackstone, Anchorage Capital and Goldman Sachs. The basic strategy of these funds is to buy cheap with the aim of making hefty gains. In India, too, many such funds are making a begin­ning, though the distressed asset market is yet to evolve due to the country’s legal system and also because most companies here are promoter-driven. A few years ago, US-based Apollo Global, amilture fund, had tied up with ICICI Ventures to set up AI0N Capital to invest in distressed assets. Blackstone, WL Ross, KKR, DE Shaw, Farallon Capital and Clearwater are also operating in India. Their experience has so far been mixed. UK-based pri­vate equity player, 3i, has shut its buyout division. Distressed funds that entered the Indian market after the Lehman crisis have even lost capital. WL Ross & Co, though, has made decent returns in the last 10 years. Hong Kong-based SSG Capital has entered India through the ARC route. The idea was to go for a complete buyout, takeover the management, and revive it. KKR, too, is buying a stake in Mumbai-based IARC.

Vinayak Bahuguna, CEO and MD, ARCIL, says: “Globally, the strategy has been recovery and not restructuring. It means stripping of assets to get back money.” With hopes of regula­tions changing, it is hoped that India will also open floodgates for the vultures to grab their prey.




In cases where an ARC decides to opt for the asset­stripping route without the consent of the promoters, there is lot of resistance. ARCH has struggled to sell Tulip Star Hotel (erstwhile Centaur near Mumbai’s Juhu beach) for many years. The company has successfully chal­lenged the SARFAESI notice of ARCIL in the past. Board for Industrial and Financial Reconstruction (BIFR) is yet another escape route where, after the failure of a corpo­rate debt restructuring (CDR), promoters can immediately approach the board. “Once you take a SARFAESI action, BIFR action gets abated. But practically, it doesn’t hap­pen,” admits an ARC official.

Many ARC heads say that the legal system is the joker in the pack that spoils the recovery process. Globally, AMCs are set up to resolve NPAs. They have the backing of a ju­diciary to help in repossession and sale of assets. The reality in the Indian context is that you cannot throw a promoter out of the company. Shah’s biggest learning in a short

VIVEK NAIR, Chairman and MD, Hotel Leelaventure

“We have represented to the government for longer term loans for the hotel industry by including existing hotels in the refinancing scheme”

period is: “You cannot be adversarial with banks and promoters. You have to find a win-win deal involving the ARCs, banks and promoters.” There are currently 20 lakh recovery cases pending in Lok Adalats, Debt Recovery Tribunals (DRTs) and SARFAESI. According to the RBI, 11,73,100 crore worth of money is locked in courts with the recovery record at 131,100 crore as on March 31, 2014. (see Resolution Through Courts).

The Banker’s Guide

Bankers hold a grudge against ARCs that they are unable to turn around the stressed assets despite a lot of flexibil­ity in restructuring a loan. “ARCs have limited financial muscle, which leaves little scope for revival,” says the head of a PSU bank. ARCs have spent barely 13,400 crore




. Interview with Rashesh Shah at

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to acquire total assets ofT1.89 lakh crore of book value till date. If all the NPAs do find themselves in the market, that’s another ^3.10 lakh crore which require at least T22.500 crore of capital from ARCS by the 15:85 princi­ple. That’s the kind of money ARCS do not have today because of various reasons: they are not allowed to go public for now and there is no secondary market for se­curity receipts.

ARCS find it difficult to access funding for basic needs like working capital. The selling banks cannot lend, while non-bank entities, such as private equity, demand 18-20 per cent interest with priority in repayment over existing debt. This leaves the responsibility of a haircut on debt on the capital-starved ARCS. CRISIL points out in its recent study that an ARC had to arrange for working capital for a textile company (name withheld) when banking channels shut their doors on it. Similarly, an­other ARC arranged funds for a mid-sized developer to complete the project.

There are some who suggest that the ARC game play has changed with a higher initial contribution at 15 per cent for them. “This requires an integrated approach (in­volving) support from PE firms, distressed funds and turnaround specialists, among others,” says Hari Hara Mishra of a Delhi-based ARC.

“There have been a couple of transactions in the re­cent past where foreign institutions were interested in ARCS. For example, KKR showed interest in International Asset Reconstruction Company (IARC) and Hong Kong- based SSG Capital in Delhi-based ACRE. For global players, investing in ARCS enable them to take an exposure in the growing distressed market and, this may prove to be a win-win for both. “These global investors provide transfer of technical knowledge, information and capabilities, which is going to equip ARCS to handle complex cases. This will also provide access to global network in terms of investments and industry knowledge,” says Munesh Khanna, Partner (Corporate Finance) at PWC.

“Foreign capital must come here because ARCS are starved of capital. The track record of ARCS has been abysmal in terms of return on equity,” says Vinayak Bhuguna, CEO and Managing Director of ARCIL. The return on equity is barely double digit. So the perform­ance has to go up to attract foreign capital. Currently, the capacity of ARCS to take up more fresh bad loans is also limited because of their low capital base. According to a report on ARC business in India by turnaround spe­cialist Alvarez & Marsal, the current capitalisation of all ARCS put together is around ^3,000 crore. “With the cash component increased to 15 per cent of acquisition, the net worth of ARCS would be sufficient to acquire only ^20,000 crore of stressed assets. Assuming ARCS acquire the NPAs at a discounted norm of 60 per cent of the book value, all ARCS put together can garner ^33,300 crore of NPAs,” says the report.

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