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Global investors may make a beeline for bad loans

"With the Essar Steel judgment out, it has now become easier for distress asset transactions to happen. Now, it needs to be seen how banks open up to sell their sticky assets," says Jayesh Mehta, country treasurer, Bank of America.

, ET Bureau|
Nov 18, 2019, 08.23 AM IST
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The Ruias-promoted Essar Steel was admitted to the National Company Law Tribunal, Ahmedabad, in August 2017.

Mumbai: The Supreme Court judgement in favour of the world’s top steel maker Arcelor-Mittal taking control of debt-ridden Essar Steel is expected to provide a new lease of life for India’s distressed asset market with an estimated annual fund flow of $3 billion, bankers and analysts said.

International investors were watching this case, which now sets a benchmark for New Delhi’s fight against bad loans and the judgement clearly lifted global investor sentiment, they said. “While international buyers are lined up, the sellers should now come up,” said Jayesh Mehta, country treasurer, Bank of America. “With the Essar Steel judgment out, it has now become easier for distress asset transactions to happen. Now, it needs to be seen how banks open up to sell their sticky assets,” he said.

The verdict from the top court will also provide much-awaited relief to lenders, who are staring at one of the largest cases of bad debt issues of the world in recent times. “The Essar mandate clearly has lifted investment sentiment for global investors seeking opportunities in India,” said Rashesh Shah, CEO, Edelweiss group that runs a stressed asset fund of $1.3 billion. “We are expecting $2-3 billion global inflows to own local stressed assets annually from now,” he said. In the past five years, estimated $3 billion international money has flowed into domestic stressed assets.

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“Essar judgement clearly demarcates limits of judicial interference over the proceedings resulting into more certainty and conclusiveness,” said Shiju P Veetil, senior partner, IndiaLaw LLP. “This will attract serious foreign players towards the distressed asset.” “Excessive judicial interference significantly impaired insolvency proceedings,” he added. The latest Supreme Court verdict is said to have lessened legal wrangling between creditors and expected to accelerate resolutions. The Committee of Creditors’ authority is also established.

The Ruias-promoted Essar Steel was admitted to the National Company Law Tribunal, Ahmedabad, in August 2017. It was under prolonged litigation and well past the government’s bespoke deadline of 330 days. “The Essar judgement has upheld the sanctity of a capital structure,” said Rahul Chawla, managing director at Deutsche Bank. “The IBC (Insolvency and Bankruptcy Code) law and its constituent authority have been reaffirmed. Both these will give belief in and robustness to the law and buyers of distressed paper will now have more courage to bid.”

Earlier in the year, Deutsche Bank AG set up a unit in India to buy and reorganise soured debt. “If the secondary task force recommendations for broad basing investors that can buy INR distressed paper can be implemented quickly, then market transactions will increase,” said Chawla. A task force appointed by the Reserve Bank of India proposed a self-regulatory body to develop suitable benchmarks for trading corporate loans in the secondary market.

Such expected bout of fund flows would also give opportunities for local experts dealing with soured debt. “The business of non-performing assets needs both capital and the ability to resolve bad loans,” said Shah from Edelweiss. India is facing one of the worst bad loan mess in the world as more than 2.4% of total loans in India’s banking system may be under stress on top of the 9.6% bad debt ratio as of June, the highest among major economies, according to Credit Suisse estimates.
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