India central bank invites buyout groups to clean up bad debts; Opening salvo in war against India’s indebted industrial groups

December 17, 2013 2:39 pm

India central bank invites buyout groups to clean up bad debts

By James Crabtree

Raghuram Rajan, India’s central bank governor, has fired the opening salvo in a battle against the country’s heavily indebted industrial tycoons, calling for private equity groups such as KKR and Blackstone to take over distressed companies.A sharp slowdown in Asia’s third-largest economy over the past two years has seen many big industrial conglomerates struggle to repay loans, prompting a rise in problem debts across the country’s state-dominated banking system.

Mr Rajan signalled his intention to crack down on the traditionally cozy relationship between business owners and their lenders shortly after taking over at the Reserve Bank of India in September.

On Tuesday, the RBI published a discussion paper outlining measures designed to allow banks to tackle problem debts, restructure loans and potentially force indebted industrialists to hand over control of their companies.

“There is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors,” the RBI said in a statement.

It also pledged a “more liberal regulatory treatment of asset sales”, in particular stating that “leveraged buyouts will be allowed for specialised entities for acquisition of ‘stressed companies’.”

Moves to encourage private equity are especially bold in India’s consensual corporate system, where bankruptcies are rare and banks seldom seek to wrest businesses from the control of their “promoters”, as family business heads are typically known in India.

The move was welcomed by Sanjay Nayar, head of New York-based private equity group KKR in India, who said the private equity industry in the country was likely to look to take advantage of any more liberal rules.

“Many companies in India have excessive leverage compounded by project delays, but some of them are otherwise decent businesses,” he said. “If the RBI takes a comprehensive approach to tackling the problem of non-performing assets, and banks and promoters also do their bit, private capital will definitely flow in.”

“We’ve played an active role in this sort of activity in Europe,” Mr Nayar added, referring to KKR.

The RBI also proposed that business owners ought to be forced to transfer equity to their lenders in exchange for debt forgiveness, as commonly happens in the US and Europe.

“The general principle of restructuring should be that the equity holders bear the first loss rather than the debt holders . . . to ensure more ‘skin in the game’ of promoters,” it said.

The new measures could also see banks emboldened to seize personal assets as part of restructuring programmes, a relative rarity in India, but one which was undertaken against brewer and airline tycoon Vijay Mallya earlier this year.

“This is really a sign that Mr Rajan is flexing his muscles and saying to the banks that the way you are trying to recover debts is unacceptable, the level of debts are getting intolerable, and something needs to be done,” says Ravi Trivedi, a consultant and former head of banking at KPMG India.

“If I were a promoter, I’d be pretty worried by this, given it means that if they get into trouble it might well mean that their villa and their yacht get put into the kitty as part of an rescue deal.”

The RBI’s move follows wider signs of a push to curb bad debts, including an interview with the FT this month in which the chair of India’s largest bank, State Bank of India, said she planned to push indebted industrialists to sell assets and raise fresh equity.