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Stressed Assets market can flourish with incentives and price discovery: CEA Subramanian 

Digi World Blog , Oct 14, 2020

Chief Economic Adviser Okay Subramanian on Wednesday mentioned that incentives and a market to find the worth of distressed property maintain the important thing for the stressed assets market to flourish in India.

Subramanian mentioned that the IBC course of is unquestionably an necessary step in the best path, however a couple of extra points must be taken care of.

One of these is the incentives that banks have, particularly the PSU banks, he mentioned.

“It is because those who work in the stressed asset market clearly understand that when a company goes into the stress, judgement is clearly involved. The company typically suffers from debt overhang and the fact that new investment by the equity holder may go to debt holders, makes equity holders not make the investment. This leads to the underinvestment problem,” he mentioned at a FICCI webinar on ‘Investment Opportunities in Stressed Assets in India’.

In such negotiations, Subramanian mentioned, the face worth of the debt is diminished, which allows some pores and skin within the recreation.

“What evolves then is a significant amount of judgement, the ability to price the value of loan with a necessary haircut. It involves taking a hit on P&L statement. There is always a possibility of hindsight bias, which can create enormous risk aversion. If a decision is read as a possible mala fide intent, that can also make bankers skittish in being able to take that judgement,” he mentioned.

“But such judgements are very important for the distress market because the loan has to be sold at a necessary hair cut. Given the risk involved in any distressed situation, a potential investor would want a return that would be commensurate to the substantial risk that is involved,” he mentioned.

Another facet Subramanian recommended is the necessity for a marketplace for worth discovery of the burdened property as with out that “the process of taking the hair cut itself becomes difficult.”

Distressed funds play an necessary function in such circumstances, Subramanian mentioned, so do company bond markets.

India’s burdened property market is estimated at $115 billion.

Subramanian mentioned the IBC is an evolving course of and there’s scope for making it extra environment friendly. “The ecosystem of creative destruction is a very important part of any economy. If we look at the Indian economy before IBC, while we had entry, the exit process was not enabled well. As a result the credit culture that prevailed earlier was far from salutary,” he mentioned.

Rashesh Shah, previous President, FICCI and Chairman & CEO at Edelweiss Group, mentioned that India is a superb funding alternative. Even as there’s a velocity bump, the expansion story on a long-term remains to be underway for the almost $3 trillion economic system, he mentioned.

“A lot of opportunities in India come from savings, consumptions and also from investments. I don’t call assets ‘stressed’. Assets are not stressed in India, it is the promoters and balance sheets that are stressed. Since IBC came in, a lot of assets found new owners and those assets did very well,” Shah mentioned.

Shah mentioned that alternatives don’t lie in recoveries however in revival and the IBC code in India can be targeted on that.

“Often this revival does not need a new management, operating capability or an overhaul in strategy. It just needs a new capital structure and investments. A lot of projects are stuck at 80-90 per cent in real estate or manufacturing, which require last mile funding. There are a lot of investment solutions to convert these stressed assets to high performing assets. There are tremendous opportunities for investors. All they require is patience and a flexible long term capital,” Shah mentioned.

Pavan Kapoor, Ambassador of India to UAE, mentioned that various of UAE sovereign funds are invested in numerous sectors in India as highways, building, inexpensive housing, telecom, and ports and logistics.

“The government has been making progressive steps to facilitate further investments in stress segments such as infra, construction mining, metals, and gems and jewellery,” Kapoor mentioned, including that India has emerged as the very best performing nation in South Asia in dealing with insolvency in the previous couple of years and carried out higher than many high-income nations by way of restoration charges.

 

 

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 Investment Opportunities in Stressed Assets in India