Rajan's Crackdown on $59 Billion Bad Loans Means India M&A Surge

Reserve Bank of India Governor Rajan Unveils Interest-Rate Decision

Raghuram Rajan, governor of the Reserve Bank of India.

Photographer: Dhiraj Singh/Bloomberg
  • Lenders take control of defaulting companies under RBI plan
  • Banks have 18 months to dispose of assets, recover dues

Reserve Bank of India Governor Raghuram Rajan’s war on bad loans is set to spur a slew of mergers and acquisitions after he allowed lenders to take control of defaulting companies and sell those assets to recover dues.

The volume of deals in India will jump from a five-year high as banks, racing to meet a 2017 deadline to tidy up books, seek to dispose of their holdings in distressed companies, M&A advisers say. Lenders have already started converting debt owed by 10 firms into equity since Rajan introduced the strategic debt recovery mechanism in June and they have 18 months to find suitors and sign sale deeds.

“We are seeing interest from both domestic and international firms in picking up some of these assets,” Ajay Saraf, executive director at ICICI Securities Ltd., the No. 2 M&A adviser for India last year, said in a telephone interview on Dec. 14. “Banks attempting to recover stressed loans will add significant numbers to mergers and acquisitions.” 

Stressed Assets

Indian companies from steelmakers to infrastructure builders that borrowed heavily to expand capacity in the years after the 2008 financial crisis are saddled with debt they can’t service after the global slowdown. As the nation’s banks struggle to pare stressed assets from a 13-year high, Rajan has ordered them to clean up their balance sheets by 2017 to help revive credit growth and spur the $2 trillion economy.

Lending rose 9.8 percent in the 12 months through Nov. 27, RBI data show, close to February’s 8.88 percent, which was the slowest pace since 1994.

Gammon India Ltd., Monnet Ispat & Energy Ltd. and IVRCL ltd. are among the ten companies for which creditors have invoked the SDR mechanism, exchange filings show. The firms have a combined 641 billion rupees ($9 billion) of loans outstanding, according to Religare Securities Ltd.

By the end of the fiscal year through March, the total debt of all companies coming under SDR may rise by $50 billion more, according to estimates by Dinkar Venkatasubramanian, a partner based in Gurgaon near New Delhi at Ernst & Young LLP’s transaction advisory services. He is part of a team that is helping lenders recover loans from at least six delinquent firms.

India had 2.7 trillion rupees of loans in the restructured category and more than 3 trillion rupees of non-performing loans, latest central bank data show.

The SDR process allows lenders to maintain classification of stressed assets as “standard,” helping slow the pace of bad-loan formation, according to Moody’s Investors Service. Banks can also bring managers of their choice to make the companies profitable under SDR.

However, if they fail to sell these companies within the deadline, provisions on these loans could triple, hurting their profitability, Vibha Batra, group head for financial sector ratings in New Delhi at Moody’s local unit ICRA Ltd.

“This can be a game-changer if executed well,” said Hyderabad-based Jagannadham Thunuguntla, head of fundamental research at Karvy Stock Broking Ltd. “Can they turn around their businesses and can they successfully divest their ownership stake to any interested buyer? That single point can determine the success or failure of this plan.”

Indian companies sealed M&A deals worth $62.3 billion in 2015, the highest since 2010, according to data compiled by Bloomberg. Many of them involved highly leveraged companies seeking to cut debt. The major ones were Suzlon Energy Ltd. selling its German unit to funds managed by Centerbridge Partners LP for 1 billion euros in cash and Tata Teleservices Ltd. selling its stake in tower company Viom Networks Ltd.

The volume could’ve been higher had it not been for demands by controlling shareholders for better valuation despite the distress they were in, said Ernst & Young’s Dinkar.

As for initial public offerings, local companies raised 922 billion rupees from equity markets this year, again the most since 2010, according to data compiled by Bloomberg.

"There is a market for these assets,” he said. “It may not be very attractive now, but then you have to make it salable in 18 months. And, we are trying to do that.”

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