Why India’s New Bankruptcy Law Has PE Cheering

India’s $133B in stressed assets is exerting a powerful pull on private equity players. And they have the right skill sets to jump in.

India is at the top of the agenda for many private equity investors these days. On a visit to New Delhi last March, TPG co-founder Jim Coulter called the country his firm’s “single focus” and said TPG would invest $1B a year in India over the next three years—if it can find the right investments.

Certainly the timing is right. The Indian economy is forecast to expand 7.5 percent in the year starting in April and India has $133B in stressed assets, which have recently become available at steep discounts.

The PE skillset—taking the wheel and getting a company back on track—is why PE is attracted to India’s current macrodynamic. In addition to TPG, other large firms shopping for Indian assets include JC Flowers, KKR and Brookfield Asset Management. Brookfield just announced plans to invest $1B in distressed assets through a joint venture with the State Bank of India.

“What has brought this opportunity into focus with global PE investors is the Reserve Bank of India’s effort to empower lenders to become more proactive about the stressed assets on their balance sheets,” says Nikhil Shah, managing director at global professional services firm, Alvarez & Marsal. “We’ve seen a slew of new regulations empowering banks to restructure the non-performing loans, even with a change of management within those firms, or to sell these positions, with the objective of allowing banks to drive better recoveries.”

India’s parliament in May passed a new bankruptcy law that should make it possible to wind up a failing business in as little as 90 days. It currently takes an average of almost four-and-a-half years to resolve insolvency in India. The current debt recovery rate is about 25 percent, which is 136 in the World Bank’s resolving insolvency ranking, far below China’s 55.

About 11.5 percent of bank loans to companies in India are distressed and banks don’t have the capabilities needed to manage these distressed assets. “This creates an opportunity for PE because banks don’t have the bandwidth to manage these businesses and drive improvements in operating cash flow,” says Shah. In a recent survey by Alvarez & Marsal, 33 percent of banks say replacing existing management and maintaining promoter cooperation are the biggest challenges with respect to revival of a stressed asset.

Sectors within India with the most distressed debt include energy, textiles, and infrastructure. “There was a lot of credit provided to steel, power, and infrastructure companies,” says Shah. “In steel, there is currently global overcapacity in places like China because of the lower demand for construction and infrastructure. Steel firms that borrowed a lot of money to set up plants and new capacities are feeling the pain.”

Distressed deals face challenges, of course. Restructuring must be consensual or else the legal wrangling can drag on for a decade. Consensual means getting all lenders and promoters of the company onboard and paddling in the same direction—and this in itself can be a time-consuming process. Often debt holders and equity holders have very different destinations in mind.

Until now there have been just a few distressed debt deals involving PE firms. But lenders in India holding distressed debt are in a selling mood. Several months ago, the Reserve Bank of India forced all banks to conduct an asset-quality review of their top 150 accounts and justify the marking of those accounts on their books. Most banks were forced to mark down the value of their assets substantially.

“Earlier, banks were trying to prop up the value of these assets,” Shah says. “But being forced to mark down the value, they are much more realistic and practical about what they are willing to do with those assets. And selling to PE is becoming a real option.”