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India breaks the circle of distressed debt

India’s distressed debt market has a problem. Specialist firms, often set up by a consortium of banks, buy the assets from one arm of a bank, package them up, and then have to sell them back to the original banks. After intense lobbying from firms such as Arcil, the Indian government has changed the rules. Niranjan Rajadhyaksha reports.

The Indian market for distressed debt is showing the first signs of life. Asset Reconstruction Company of India Ltd (Arcil) sold the assets of seven large companies in the last quarter of 2005. Arcil had acquired the rights to dispose of these assets when it bought loans extended to these companies that were non-performing from a group of banks a few months earlier. India does not have a cash market for non-performing loans as yet. So Arcil, the only active asset reconstruction company in India, gives the seller banks security receipts (SRs).

These securities are redeemed for cash only after the acquired company is restructured and its assets are sold. Arcil keeps 20% of the upside, and gives the rest to the banks that have invested in the SRs. The buyers of the SRs for these seven companies were rewarded with a fat return of 29% on an annualized basis.

In January 2006, Arcil made another big sale. It disposed of the assets of Pennar Aluminium, an ailing company whose bankers had sold their bad loans to Arcil in August 2005. After the company was restructured, its assets were put up for sale. Seven companies were in the running to buy Pennar Aluminium, including two of India’s largest metal producers, Sterlite and Hindalco.

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