IBC makes it easier for super-rich to lap up stressed assets

Thanks to the Insolvency and Bankruptcy Code (IBC) and resolution via the National Company Law Tribunal, it has become easier for the super-rich looking to directly buy stressed assets.

These mechanisms have helped streamline the process and made it more transparent for investors. What is aiding faster resolution is that most banks are facing non-performing asset issues and would be happy to get rid of these assets so that they can shore up their profit and loss account.

According to IBC data, in the July to September quarter of this fiscal, financial creditors realised a total of Rs 10,617.32 crore from 18 stressed companies.

According to Prateek Pant, head - product and solutions and co-founder of Sanctum Wealth Management, ultra high net-worth individuals (UHNIs) looking to buy stressed assets are typically looking to expand their own business and look for an asset that is a strategic fit or complements their existing business.

"There have been different regulations in the past but those have not necessarily had the kind of impact. The issues have been - How do you determine a certain structure for doing resolution and settlement, which is legally binding on everybody involved. How do you get everyone into the common platform? Now the whole IBC process through NCLT has actually simplified this,'' Pant said.

Why investing in stressed assets is attractive?

The advantages of bidding through the NCLT is that it is a transparent process, with legal backing to pick up distressed assets at an attractive valuations in a time-bound manner. In the past UHNIs/promoters would have been cautious about buying distress assets due to the litigation worries and regulatory roadblocks.

If you are in the lines of businesses where you are looking to expand your capacity rather than doing something as a greenfield project, here you may have an attractive asset which is under stress due to unsustainable leverage that can be acquired at a discounted value. It may be possible for investors to get assets at 60% discount to book value, say experts.

While the UHNI bidder may have to invest more capital or renegotiate some terms with suppliers and dealers, these things are known upfront and the bidder takes that into calculation while bidding for it.

"But it still works out a lot more productive because you could be getting added capacity or new product lines at attractive valuation in a transparent and clean process. It becomes revenue effective from day one unlike a greenfield project,'' Pant said.

With the IBC, the credit culture in the country has undergone a phenomenal change and rights of creditors have been clearly established, said Anshu Kapoor, head of global wealth management, Edelweiss Financial Services.

It has made it easier for UHNIs looking to invest in stressed asset funds as well as those looking to pick up a direct equity stake in stressed assets. With IBC, rights and powers of creditors are clearly earmarked.

"Investing in a financial product that will further invest in stressed assets would not have happened in a large manner if you did not have the robust mechanism of IBC. Some of the large bids that have come in the NCLT have come from groups backed by UHNI founders or promoters in these areas. It could be an allied sector, it could be a sector where they want to get into or a region they want to get into. Many of the bids are coming from promoters or owner groups that are in that sector,'' Kapoor said

Stressed asset funds v/s direct equity:

While investing in a stressed asset fund the investor goes by the quality of the team managing the fund, their track record, how many assets have they earlier taken over, how many have turned around, how many they have exited, how big is the fund, what is the sponsor commitment in the fund. While investing directly, investors have to stitch together all these capabilities. They also have to deal with regulatory aspects and people working in those companies.

Also, while investing in a fund, the investor does not get control of any asset or an opportunity to expand the business. The fund manager buys the asset at the right price, turns it around or disposes of the asset and in the process make financial returns for the investors. It is purely a financial investment, Kapoor said.

BIG BUCKS FLOWING IN

• Rs 10,617.32 crore - Financial creditors realised from 18 stressed companies in the July to September quarter of this fiscal
   
• What is aiding faster resolution is that most banks are facing non-performing asset issues and would be happy to get rid of these assets so that they can shore up their profit and loss account