Asia's Richest Banker Spots a Once-in-a-Lifetime OpportunityBy , , and
Sovereign wealth and pension funds also interested, Kotak says
Bankruptcy court process, deep discounts are key attractions
For India, it’s a $207 billion mess, a pile-up of bad loans years in the making that’s dragging on growth. For the nation’s wealthiest banker, it’s the kind of opportunity that very rarely presents itself.
What has billionaire Uday Kotak salivating is the government’s attempt to finally draw a line under delinquent loans, with recent steps to overhaul India’s bankruptcy laws and recapitalize state-owned banks. The moves are intended to lift a burden from the country’s banks and encourage them to accelerate lending, supporting economic growth.
Over the next year, the assets and debts of about 50 of India’s biggest defaulters may be sold off by court-appointed professionals, in a process in which banks are expected to take deep haircuts on their loans. The companies’ borrowings total an estimated 3 trillion rupees ($46 billion), close to one-third of total recognized bad loans in India’s banking system.
“The whole insolvency and bankruptcy process is a once in a lifetime event,” said Kotak, the managing director of Kotak Mahindra Bank Ltd., in an interview. “Through this you could actually get assets that would give disproportionate returns for long periods of time.”
Funds controlled by Kotak Mahindra are looking at deals involving the assets and debts of some of the first 12 companies going through the bankruptcy courts, Kotak said. Industries including steel are of particular interest, according to the banker. Pricing of assets put up for sale should become clearer by the end of the first quarter, he said.
Banks are likely to face losses of up to 60 percent on their loans to the companies headed for bankruptcy courts, according to Kotak.
Sovereign wealth funds from the Middle East and Southeast Asia, along with several global pension funds, have also expressed interest, Kotak said. He didn’t name the funds, but TPG, KKR & Co., Caisse de depot et placement du Quebec and Clearwater Capital Partners LLC are among overseas firms who have said they might invest in stressed Indian assets.
“India is now as open and transparent as you can get anywhere else in the world. The rules of the game are very clear,” Kotak said. “There is no bias against or for foreign players versus the Indian ones” except in a small number of sectors where foreign ownership is capped by the government, he added.
Kotak, whose $10.2 billion fortune makes him the seventh richest person in India and the wealthiest banker in Asia according to the Bloomberg Billionaire’s Index, said the government’s move to resolve the bad-debt crisis is a watershed moment for his country.
The insolvency and bankruptcy law put in place by Prime Minister Narendra Modi’s government shifts the balance in favor of the creditor from the borrower, creating greater accountability for the family owners of India’s major companies, Kotak said.
“For the first time, founders fear losing control of the company if dues are not paid,” he said.
The sense among some Indian executives that they could walk away from their debts without facing consequences was a major factor limiting past efforts to bring delinquent loans in check. The government’s announcement last month that it will inject a record 2.1 trillion rupees into state-owned banks is another sea change, in that it should give the lenders sufficient capital to write off bad loans weighing down their balance sheets.
However, Kotak expressed concern about the way that the founders of defaulting companies are free to put in bids to regain control of those same assets through the courts. “In the absence of a change in the law, the promoter is well within his rights to bid,” he noted.
As a result, creditors should put in place safeguards, such as forensic audits of any such bidders, to ensure they haven’t willfully defaulted on their loans, he said. “If it is so, then they should not be allowed to bid,” said Kotak. “If the issue is that underlying asset got into trouble because of extraneous circumstances, like the marketplace or government policy, and not because of any issues with the promoter, then it’s a different category.”
The federal government has set up a panel to review provisions of the 11-month old bankruptcy law including whether to bar defaulting founders from repurchasing assets, India’s Corporate Affairs Minister P.P. Chaudhary said in a phone interview on Monday. “The implementation of the law has to be reasonable, justified and not opposed to public policy,” Chaudhary said.
Kotak Mahindra’s bad-loan ratio stood at 2.6 percent at the end of March, about a quarter of the level in the banking system as a whole. The bank’s shares have gained more than 43 percent so far this year, outpacing the 41 percent rise in its peers as measured by the Bankex Index.
Kotak, who started out in finance in 1985 by setting up an investment company with a 3 million rupee loan from family and friends, said the next few months will be crucial in determining whether India manages to stamp out the epidemic of soured debts.
“You have the Indian courts, policy making system and several other moving parts that have to move in tandem. At this stage I feel reasonably confident that the problems will get resolved. But always be aware of something being different,” he said.
— With assistance by Adrian Leung, and Shruti Srivastava