Money & Banking

Sale of assets to ARCs continues even for IBC cases, says Siby Antony of Edelweiss

Radhika Merwin BL Research Bureau | Updated on January 25, 2018 Published on January 25, 2018

SIBY ANTONY, Chairman, Edelweiss ARC

The deadline for the first set of large accounts under Insolvency and Bankruptcy Code (IBC) is fast approaching. But the resolution of stressed assets does not stop with large defaulters alone. Given that a default of just more than ₹1 lakh can trigger insolvency under the IBC, the large number of smaller bad loan accounts that could enter the system in the coming months present a huge challenge for banks as they may not have the bandwidth to handle all the cases. Asset reconstruction companies (ARCs), given their expertise and capital base, can help banks offload some of these accounts to ensure more focussed and efficient resolution, says Siby Antony, Chairman, Edelweiss ARC. Currently, the company has 25 cases under IBC for resolution. Excerpts from an interview:

With the IBC in force for resolution of stressed assets, what is the role of an ARC now?

The evolution of the entire ARC business has been in the positive direction. The 15/85 structure — 15 per cent upfront payment on sale of bad loans to ARCs and security receipts (SRs) issued in respect of the balance 85 per cent — that was introduced in August 2014 was a very positive move.

This makes pricing of the asset critical for an ARC. While there is a general perception that pricing is an issue between banks and ARCs, it is not so in all cases. In good assets, pricing is attractive both for banks and ARCs.

Moreover, what ARCs bring, aside from capital and expertise, is complete focus. Even after cases have been referred to the NCLT (National Company Law Tribunal) under IBC, banks have been selling assets to ARCs. Banks may be constrained in handling the number of NCLT cases.

Hence, offloading assets to ARCs who can step into lenders’ shoes may be a more efficient way of resolution under the IBC regime.

In any case, the resolution plan has to be approved by the committee of creditors — 75 per cent by value.

IBC has also helped ARCs that have been aggregating debt — all lenders on board in individual accounts. We, at Edelweiss ARC, have been focussing on aggregating debt. In the case of Binani Cement, for instance, we have been able to aggregate 70 per cent of debt.

We are the largest lender (after stepping into the shoes of the lenders), after SBI, to Essar Steel. We had bought over the Essar Steel account at 55-60 cents to a dollar.

Do you think banks will prefer to retain the larger accounts and, maybe, sell off smaller accounts to ARCs to handle IBC proceedings?

It may be so, particularly after the recent ordinance that excludes certain promoters from bidding.

So, banks may think twice before referring such cases to NCLT, where finding strategic buyers may be difficult.

There are three categories of accounts. One, the RBI’s 12 big accounts that were referred to the NCLT.

Then comes the RBI’s second list of defaulters that is being referred to for IBC. The third set of accounts are still to be identified and referred to for resolution under IBC.

Now, in the first set, some banks are still selling accounts to ARCs. As the deadline for resolving these accounts is fast approaching (by March), many of them may need a higher 100 per cent provisioning as per RBI guidelines.

In the second list, there may not be as many bidders, and we have also been buying some accounts from banks under this list.

In the third set of accounts, there may be even few or no bidders and banks could be staring at liquidation.

Hence, if something can be salvaged from these accounts, banks would rather sell them to ARCs to manage the resolution process.

Recently, SEBI allowed the listing of security receipts of ARCs. But for now only qualified institutional buyers through private placement are allowed. What will be the impact of this move on ARCs and the stressed asset industry as a whole?

While in due course, expansion of the investor base will happen, perhaps, the initial thoughts are that it is better to wait and watch before allowing retail investors, even HNIs, from investing in these SRs. After all, these are more or less junk bonds. However, this is a step in the right direction and as the market matures, this will help the industry in two ways.

One, the acquisition of the stressed assets would happen at realistic prices.

Second, there will be more investors in the market, as the listing of SRs will offer an exit route. Importantly, banks sitting on SR book can also exit some of their investments and raise money.

Watch the video with Sibi Antony on the BL website.

Published on January 25, 2018

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