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    How India can fix its debt problem

    Synopsis

    An alternative investment fund (AIF) for our finance industry will at least rekindle sentiments.

    debt-agenciesAgencies
    As the $260 billion-stressed debt problem compounds by the day, investors are also finding it tough to digest the various Santa Claus stories involving white knights marching in to save these organisations.
    Piramal Group chairman Ajay Piramal, Edelweiss CEO Rashesh Shah, Indiabulls chairman Sameer Gehlaut, Yes Bank CEO Ravneet Gill, and Kapil and Dheeraj Wadhawan of Dewan Housing are as different as different can be. But when roughly a third of India’s financial system is on life support or under suspicion, would you blame the market for finding it tough to differentiate between insolvent shadow banks, illiquid brokerages and lenders staring at a potential deposit run?

    As the $260 billion-stressed debt problem compounds by the day, investors are also finding it tough to digest the various Santa Claus stories involving white knights marching in to save these organisations. Barring a handful, every other brand is today a metaphor of institutional malaise, in desperate need of a vote of confidence. Unfortunately, that has not been forthcoming.

    When panic overrides the entire system, it is symptomatic of the triumph of fear, and only the government can be a powerful countervailing force to prevent a complete collapse. So, the need for a solution like the Troubled Asset Relief Programme (TARP), which came into effect in the US after the 2008 Lehman Brothers collapse, has never been more acute in India. We already have a template in the National Investment and Infrastructure Fund (NIIF) handy for replication.

    A National Banking and Finance Fund (NBFF) — a pool of sovereign money backed and leveraged by foreign capital to revive faith — anyone? As banker-turned-academic Ananth Narayan pointed out in an article (bit.do/fkw7s), we can learn from the Danaharta model that was used by Malaysia to clean up their bad loan overhang — by creating an investment vehicle (asset management company) that took over stressed assets after the Asian crisis in the late 1990s.

    Exactly a decade after Danaharta was wound down in 2005, NIIF was born with GoI’s support to bankroll cashstrapped infrastructure projects that are the backbone of any economy. It was a just-in-time solution as cash-strapped developers lacked liquidity to complete projects or pay their creditors. GoI stepped in with its cheque book to be its anchor investor with a 49% stake.

    That gave comfort to other marquee institutional and sovereign investors from around the world to join forces as co-investors of the fund. Professional fund managers, an independent governing council with the finance minister at its helm, and an independent board, were put in place to get it off the ground.

    Today, NIIF functions independently and takes business calls to acquire highways, power plants, logistics companies and now even airports, on its own or with partners. It is salvaging broken balance sheets of companies and their lenders, giving them an exit route.

    But these aren’t bailouts, or throwing good money after bad like numerous bank recapitalisations. Just like any private equity (PE) fund, NIIF will flip these assets in the future after turning them around and enjoy an upside.

    GoI’s involvement has made regulatory approvals easier, and provided an avenue for global capital to take part in the India growth story. The shortage is not in global capital today — limited partners have reportedly earmarked three times more money for Indian debt than Chinese — but in trust. An alternative investment fund (AIF) — an NBFF —for our haemorrhaging finance industry will at least rekindle sentiments.

    More importantly, such a structure allows GoI to leverage its own scarce resources, and foreign investors to ride piggyback without contravening the stringent ownership and voting rights guidelines that govern most of our lending institutions.

    But global money that wants to sink its teeth into deep Indian distress has already been singed while dealing with our bankruptcy courts. So, GoI’s intervention will also be equally essential to keep the whole process outside the court’s jurisdiction, unlike the recent rules that allow shadow banks to be referred to the Insolvency and Bankruptcy Code (IBC).

    It also has to indemnify the new buyer from any past misconduct, or ring-fence the asset from any future enforcement after possession changes hands. Baby steps have already been taken, but a robust framework, especially for bigger financial companies, can make or break all efforts. Half measures like the proposed realty fund the government has proposed to complete stalled apartment projects nationwide won’t work either.

    Simultaneously, a new board of esteemed professionals needs to take over each of the targets to cleanse companies, re-audit their books, ensure fair value of assets, negotiate with lenders and the potential new AIF investor, much like what happened in Satyam and is ongoing in Infrastructure Leasing & Financial Services (IL&FS). These new boards will cease to work for the shareholders and, instead, get the best deal for creditors and deposit-holders, even if that means pain at the outset in lieu of future profit-sharing.

    Views expressed are author's own


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