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India should consider creating legal provisions for setting up an asset management company (AMC) that will take market risk in turning around stressed assets, said Atanu Mukherjee, President of MN Dastur & Co.
Earlier, a project consultancy mainly for the steel sector, Dastur now offers a wide range of services, both to industry as well as lenders on, among others, strategy and asset restructuring.
Talking about the steel sector that contributes 60-70 per cent of Dastur’s revenue, Mukherjee said with huge excess capacity in the global market and the ongoing down-cycle, there is no immediate upside for the sector. This means the issue of stressed assets will continue to haunt the country’s banking sector. The prevailing restructuring mechanisms such as Asset Quality Reviews, Strategic Debt Restructuring and Sustainable Structuring of Stressed Assets (S4A) are “failing” to serve the purpose, he said.
There are two key reasons for this, he said. First, India lacks a debt resolution and insolvency mechanism, taking haircuts is anathema to public sector banks (for fear of corruption charges). Second, the prevailing tools do not offer any incentive for promoters to relinquish control. Instances are common where promoters use their grip on the asset and the people, including trade unions, to scuttle such attempts.
Keeping the promoter out of the restructuring initiative is “risky,” Mukherjee says.
He sees the need for creation of an AMC, which will have seed capital from the government but would not be directly controlled by it.
The AMC will raise additional finances from investors and private capital for taking over liabilities from lenders and swap the debt with equity to take direct interest. The promoters shouldn’t oppose relinquishing control to professional managers as they would get a share of the enhanced value once the asset is turned around.
“We are one consultant who had been associated right from conception stage of these projects. And, as we find in majority of the cases, the assets turn sick due to low operational efficiency. It would be the job of the AMC-controlled professional management to take harsh decisions,” he said.
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