Implications of Investing in Distressed Assets in India
Table of Contents
What is Implications of Investing in Distressed Assets in India
- From the beginning of the 21st century, India has been experiencing strong growth along with many companies expanding their capacities. With the expansion of companies loan books of the companies also increasing at the same pace. Although, since 2012, the country has a sudden growth in the number of stressed loans. Distressed assets Investing brought on because of unconditional corporate diversification, postponement of project approvals, and cost overruns. From the beginning of the COVID-19 pandemic, the stress started compounding.
- As per the current situation, the NPAs in the banking sector which is around 10% of the total assets ($135 billion).
- Due to increasing stress in all the sectors of the market (mainly real estate) and also affected the Indian non-banking finance companies (NBFCs). Generally, those companies work on ‘wholesale credit’. The NPAs (except banking NPAs) currently stand for nearly 7% of the total assets in India. Which is approximately equal to $25 billion. Along with this, the total value of distressed assets is nearly $160 billion in the Indian financial structure.
- Corporate debt plays a major role in this stress and the expansion of the pandemic caused an unexpected increase in the Indian retail NPAs because the capital raised by companies cannot be utilized properly during the pandemic. The expectation is that the retail NPAs would increase from 2% (2018) to 4% (2021).
- Investors who are interested in this market have good scope, with sensible refinancing and restructuring, if the distressed assets can possibly be turned successfully.
Under this Blog, we are examine scope of investing & the implications in distressed assets in India.
The investment environment for distressed assets in India
- The outlook of investments in distressed assets in India is changed in recent years because of the lack of robust regulatory, legal, and resolution frameworks, due to these reasons most investors stayed away from investing in distressed assets. The promoters used to utilize this system for their personal benefits due to the lack of lender-friendly laws. Meanwhile, the banks continued the practice of ‘loan ever greening’ in the face of liberal oversight.
- But, in the previous few years, The resolution process for NPLs (non-performing assets) on the banks’ balance sheets has changed considerably. The introduction of the Insolvency and Bankruptcy Code (IBC) gave a legal structure to the distressed asset resolutions, with well-defined responsibilities, processes, and timelines. In the past few years, the authorities are working very efficiently on these challenges. As a result of this, many investors have started investing in distressed assets to acquire these assets at discount.
Navigating the distressed assets space as an investor
If you are interested in investing in distressed assets, there are certain things you must consider:
1. Consider the risks and rewards
- The mortality rate and payoffs of distressed assets investing in India are like convertible debt (repay loans by converting them into certain no. shares in the future). It is possible because the businesses generally have a clean balance sheet and a relatively good past record. If you want to get even more returns, it is important to watch the company closely and create an ultimate resolution plan. Always consider the element of risk involved in these kinds of investments. There can be problems related to valuation, liquidity, and price recovery.
2. Low correlation with debt markets
- Distressed assets investments are one-time opportunities for financial engineering. They have a low correlation with traditional asset classes like debt markets or equity. This is always a good initiative for investors who are looking to implement a diversification strategy.
3. Legal issues
- The Indian judicial system is quite accommodating with the appeals led by the promoters. It has been observed that the time range of adjudication is very long. With the introduction of the IBC, it is expected that things will change. But much of it remains the same. There is a chance of changing the government policies, which is going to affect the returns. With the counter appeals and legal issues, it is expected that there will more clarity on this as the time passes.
4. Take the help of experts
- Searching for distressed businesses and transforming them requires an appreciable amount of effort. This is possible if you consider experienced professionals in the industry for the valuation services. Partnering with experts on private equity funds and other special situations. With the help of a larger network, you could be able to handle business precisely, source opportunities, assets valuation, and conduct reference checks. Along with this, experts can also help in identifying the value of the distressed assets, even before it goes under the distressed category, and also be beneficial in avoiding valuation traps and legal issues.
5. Robust framework for incentives
- During the turnaround, investors must establish a fair and robust framework that gives incentives to all stakeholders. Equity earn-out transactions with promoters have shown to be successful in the past, according to experts. If the interests of the stakeholders are not aligned, restructuring projects can be derailed. Consequently, the capital invested will be squandered away.
Conclusion
- The potential of ‘buy low sell high’ makes distressed assets investing more exciting. If you follow the expert’s guidance to acquire the distressed assets it has a lot of possibility of bouncing back. The key is to perform due diligence so that the traps related to litigations, pricing, and operations can be avoided.
- If you are facing any difficulties, we are available for you in performing due diligence by providing asset and business valuation services that are the best in the industry. To know more, contact us Today!
- IFCCL is a well-known and renowned name in the fields of valuation consulting and allied services, insurance survey and loss assessment, insurance advisory services, and corporate finance and deal advisory services.
- Our company has been rendering and enrolling plant and machinery valuation services to all major nationalized banks, financial institutions, Valuation Consulting & Allied Services, and Non-Banking Financial Corporations (NBFC) for the last 3 decades.
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The information / articles & any relies to the comments on this blog are provided purely for informational and educational purposes only & are purely based on my understanding / knowledge. They do noy constitute legal advice or legal opinions. The information / articles and any replies to the comments are intended but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as a legal advice or an indication of future results. Therefore, i can not take any responsibility for the results or consequences of any attempt to use or adopt any of the information presented on this blog. You are advised not to act or rely on any information / articles contained without first seeking the advice of a practicing professional.