India will witness the entry of a new breed of overseas professional service providing firms who help banks recover and restructure defaulting assets.
Three-four firms have already made their entry in the wake of the Supreme Court upholding the constitutional rights of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002.
Bill O'Chee, special counsel, Knights Restructuring Services, another firm in the area, told Business Standard, "The recent verdict of Supreme Court enables overseas companies from Australia, Hong Kong, Britain, South Africa to enter India which have similar Commonwealth law." Chee said it will not be long before other players from Australia step in.
Knights Restructuring Services Southern India Pvt Ltd is a subsidiary of Australia-based Knights Insolvency Administration Ltd. It was set-up in India in October, 2003. He said that they have invested around Rs 3.5 crore (Rs 35 million) in India to date.
According to the Securitisation Act section 13( 4) secured creditors (banks) can takeover the management of the secured assets of the borrower, including the right to transfer by way of lease, assignment or sale and realise the secured asset.
Section 13 (5) allows the banks to appoint any person (referred as manager) to manage the secured assets, the possession of which has been taken over by it.
Since banks do not have the professional skill to manage the defaulting assets of companies under the above section, banks can appoint and take help from professional services providing firms on recovery and restructuring of defaulting assets.
He argues that asset reconstruction companies, which buy out the bad debts of the banks, are out to buy them cheap. They are able drive the price down further when there are several banks running after the same defaulters.
The net result is that the banks lose out on returns when they sell out their bad debts to the ARCs. On the other hand, recovery and restructuring service providing firms with their commission linked to the recovery volume work to help the banks to maximise their recovery.
Though a senior official from Standard Chartered Bank said that the ARC will be actually outsourcing its recovery and restructuring of bad debts to the service providing firms. Therefore recovery and restructuring service providing firms will be complementary to the ARC.
K K Gupta, associate director, Armedas promoted by the UK-based Megharaj Group, said that they offer recovery and restructuring service to banks and have been in India for the last two years. He said that ARCIL had outsourced some of its restructuring of bad debts to them.
Reserve Bank of India approval is not required for setting-up a recovery and restructuring service providing firm. Chee says though it's easy to set-up a service providing firm. Only firms having prior experience and knowledge dealing with such cases can be successful.
This is why experienced overseas players especially from Australia will be looking at setting-up offices in India. The firm should be backed by professional indemnity insurance cover.
S Khasnobis, president and COO, Asset Reconstruction Company (India) Ltd, said that there will be more players in this segment, given that the investment requirement for setting-up recovery and restructuring service firms is very small compared to setting-up an ARC.
RBI had recently ordered that minimum owned funds of securitisation and reconstruction companies should not be less than 15 per cent of the total financial assets acquired by the company on an aggregate basis or Rs 100 crore (Rs 1 billion) whichever is less.
ARCIL is only ARC that is functional in India. Asset Care Enterprise and Asrec India Ltd, the asset reconstruction company set up by UTI Mutual Fund, will start operations in a couple of months.
ACE is promoted by IFCI, Tourism Finance Corporation, Punjab National Bank, Life Insurance Corporation, Bank of Baroda and United Bank of India and Asrec had recently roped in four foreign banks namely Citibank, Standard Chartered Bank, Deutsche Bank and ABN Amro.
ARCIL had acquired non-performing assets aggregating Rs 3,067 crore (Rs 30.67 billion) in the first seven months of its operation for the year ending March 31, 2004. ARCIL is promoted by State Bank of India, IDBI and ICICI Bank.