<article>Attempts to find foreign buyers for stressed assets in which banks have converted debt into equity have failed to take off.</article>

Attempts to find foreign buyers for stressed assets in which banks have converted debt into equity have failed to take off.
Differences in valuation and difficulties in conducting due diligence on potential buyers based overseas have impeded the process.
Overseas investors’ interest has waned after an initial scramble to purchase stressed assets put on the block by creditors who have converted debt into equity under the so-called strategic debt restructuring (SDR) initiative.
The reason: deals are taking too long to close. Banks are wary of striking deals because there isn’t enough information available about potential buyers, said three people involved in potential transactions.
“There is no way for banks to conduct due diligence of these buyers. Since they are governed by a different regulatory regime, the complete details about the company or the source of funds aren’t clear to us. In such a scenario, banks do not want to rush into deals,” said one of the three people cited above, a senior official at a large public sector bank. The banker spoke on condition of anonymity as these talks are confidential.
As banks fret about due diligence, investors, on their part, are complaining about the lack of clarity on the valuation of these assets.
Typically, equity in stressed assets is sold at a discount and involves banks taking a significant haircut—the discount at which an asset is sold. Lenders are not willing to accept any meaningful haircut.
Buyers have been suggesting a 40-50% haircut on grounds that debt in stressed cases is often unsustainable compared with the size of the company, said the second person, a stressed asset expert who also spoke on condition of anonymity.
“Bankers are, however, adamant and say that a 50% haircut would raise too many questions and could lead to vigilance investigations which they would rather avoid,” said the second person.
The SDR scheme, introduced by the Reserve Bank of India (RBI) in June 2015, allows banks to convert a part of a defaulting borrower’s debt into majority equity and assume operational control.
Under the original scheme, banks were given 18 months to find a buyer.
In February, RBI reviewed these norms and said that at least 26% stake in the stressed asset must be sold within 18 months and the rest can be sold in tranches.
During this 18-month period, the asset is exempt from adverse asset classification norms. In September last year, the banking regulator extended the benefits of a stagnant asset classification in cases where banks had initiated a change in management outside the SDR route as well.
Companies where banks have invoked SDR include Electrosteel Steels Ltd, Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, VISA Steel Ltd, Lanco Teesta Hydro Power Pvt. Ltd, Jyoti Structures Ltd and Alok Industries Ltd.
In a notification to stock exchanges on 29 March, Unity Infraprojects Ltd said that its lenders had decided to invoke their powers under the SDR route to convert a part of the debt to majority equity in the company.
Buyers have not been found for any of these assets so far.
<h3 style="text-align: justify;">Transparency</h3>
Lenders are trying to streamline the process of selling equity in stressed projects and introducing greater transparency. Forensic audits are being mandated for assets where debt has been converted to equity and third-party valuation reports are being sought.
“Lead banks in all stressed cases where banks have assumed control have been told that the transactions have to be as transparent as possible and accompanied by a forensic investigation, proper viability tests and valuation studies,” according to the third person mentioned above, a senior official at a state-owned bank which is part of at least five cases where lenders have agreed to convert a portion of the debt into majority equity.
Lead lenders such as <a style="color: #000080;" href="http://dealstreetasia.com/tag/SBI">State Bank of India (SBI)</a> and <a style="color: #000080;" href="http://dealstreetasia.com/tag/icici-bank">ICICI Bank Ltd</a> have also been told to invite expressions of interest (EOI) through advertisements on their website to ensure transparency.
In cases such as those of Electrosteel Steels, Adhunik Power and Natural Resources Ltd and Gammon India, the lead lender SBI on its own or through its arm, SBI Capital Markets Ltd, put up notices on 3 March, 10 March and 11 March inviting EOIs to take over a majority stake in the companies.
An EOI is not a binding agreement or bid, which means that lenders do not necessarily have to auction the controlling stake to those who have shown interest. Once the EOI is in, the consortium would reach out to a suitable buyer and request a bid.
Any responses would be required to be presented to the lending consortium, which would then have to approve a buyer, said the second public sector banker.
“This will not only make the sale a transparent process but will also ensure that banks are able to find suitable buyers at a reasonable price. We do not want any case where the buyer has taken us for a ride, just because it is a stressed asset sale,” he added.
Experts say that if the stake sale process is not transparent, investors usually factor in possible hidden liabilities in their bids, resulting in a lower valuation of the asset.
Most potential investors currently find information inadequate and skewed towards the creditors. That means investors take longer to evaluate an asset and bid for it, according to Satish Gupta, managing partner, Vertex Capital Partners, a distressed asset advisory firm.
“Sale processes run by banks on arm’s length and professional basis will provide greater credibility and shall result in better response and pricing from international and domestic investors. It is important to note that unlike sale transactions by companies and promoters, lenders don’t provide representation and warranties,” said Gupta.
Also Read:
<a style="color: #ff0000;" href="http://www.dealstreetasia.com/stories/india-sbi-decides-to-go-slow-on-using-sdr-27491/">State Bank of India to go slow on SDR, will invoke it only when there is clarity on potential buyer</a>
<a style="color: #ff0000;" href="http://www.dealstreetasia.com/stories/24525-24525/">India: Lenders approach PE biggies TPG, KKR &amp; SSG with SDR assets of 9 firms</a>
<a style="color: #ff0000;" href="http://www.dealstreetasia.com/stories/india-lenders-take-over-visa-steel-under-sdr-rules-13457/">India: Lenders take over Visa Steel under SDR rules</a>
<h4 style="text-align: justify;">This article was first published on <a href="http://www.livemint.com">Livemint.com</a></h4>

Attempts to find foreign buyers for stressed assets in which banks have converted debt into equity have failed to take off.

India: Banks face hurdle in finding foreign buyers for stressed assets

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