Implications of Investing in Distressed Assets in India

India has been growing rapidly since the early twenty-first century, with numerous businesses expanding their capacities. Bank loan books were likewise expanding at a rapid rate. However, the number of stressed loans has increased dramatically in the country since 2012. This occurred as a result of unrelated corporate diversification, project approval delays, and cost overruns. With the COVID-19 epidemic, this anxiety was amplified.

Non-performing assets (NPAs) in the banking sector currently account for around 10% of total assets (or roughly USD 135 billion)

Increased corporate stress in the real estate and other sectors has had an impact on Indian non-bank finance companies (NBFCs), particularly those that provide wholesale loans. Non-bank non-performing assets (NPAs) account for about 7% of India’s total assets. This equates to approximately USD 25 billion. The overall amount of distressed assets in the Indian financial sector now stands at roughly $160 billion.

While corporate debt was the primary source of stress, the outbreak of the pandemic resulted in a surge in Indian retail nonperforming assets (NPAs). NPAs in the retail sector was predicted to rise from 2% in 2018 to 4% in 2019. (2021)

Investors that are interested in this market have a lot of options. Distressed assets may be successfully turned around with viable refinancing and restructuring.

In this article, we will examine the implications and scope of investing in distressed assets in India.

Investment environment for distressed assets in India

In recent years, the environment of distressed asset investments in India has changed dramatically. Investors were initially hesitant to participate in distressed properties due to a lack of robust regulatory, legal, and resolution frameworks. Due to a lack of lender-friendly laws, the promoters used to take advantage of the system. In the meantime, despite insufficient regulation, banks continued to perform ‘loan evergreening.’

However, the resolution mechanism for NPLs (non-performing assets) on banks’ balance sheets has altered dramatically in recent years. The Insolvency and Bankruptcy Code (IBC) gives distressed asset resolutions a legal structure, with well-defined roles, processes, and timelines. As a result, many domestic investors have been actively investing in distressed businesses to buy these assets at a reduced price.

Navigating the distressed assets space as an investor

If you’re thinking about investing in distressed assets, there are a few things to think about:

Consider the risks and rewards

Distressed assets India investment has a similar mortality rate and payoffs to convertible debt. This is because most organisations have a clean balance sheet and a pretty good track record. The collaterals they’ve committed also indicate that they’ll make a profit. If you want to get even better results, you should work together with the firms and develop an effective resolution plan. However, you must recognise the element of risk that these investments include. Valuation, illiquidity, and price recovery can all be problematic.

Low correlation with debt markets

The majority of distressed asset investments are stand-alone financial engineering possibilities. Traditional asset types such as debt markets and equity have a limited link with them. For investors wishing to implement a diversification plan, this is a fantastic chance.

Legal issues

Historically, the Indian court system has been very sympathetic to promoter-led appeals. It has been noted that adjudication timelines have been rather long. Things are expected to change with the implementation of the IBC. Much of it, however, remains to be seen. There is a possibility that government policies will change abruptly, negatively impacting returns. With the counter-appeals and legal challenges, it is believed that the situation would eventually become clearer.

Take the help of experts

Scouting for troubled firms and reviving them takes a lot of time and work. This is why you should consider hiring a valuation service from a seasoned expert in the field. You can also consider collaborating with professionals in private equity and unique scenarios. You would be able to discover prospects, perform precise business and asset valuations, and complete reference checks with the support of their extensive network. This can help you avoid appraisal pitfalls and legal problems. Aside from that, the experts can assist in spotting potentially valuable distressed assets even before they are categorised as distressed.

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. As a result, the capital invested will be squandered.