As India tackles its bad loans problem, large local groups and global funds are gaining advantage

By March, seven companies had evinced interest in buying Lanco Infratech.

The company began life in 1986 as a construction contractor, but grew into a power and infrastructure behemoth after liberalisation. Much of this growth was funded by bank loans. In June 2017, after missing its loan repayments, the company found itself on the Reserve Bank of India’s first list of defaulting companies that would have to face insolvency proceedings. At the time, Lanco Infratech owed Rs 45,200 crore to banks and another Rs 5,300 crore to its business partners.

The list of companies that queued up to buy the infrastructure firm was intriguing. There were seven large bidders, four of them from outside India. They operated in disparate fields from international finance and energy to mining and real estate.

Lanco Infratech illustrates a broad pattern that is becoming apparent as India’s National Company Law Tribunal tries to recover bad loans from companies. The tribunal is selling these companies in whole or auctioning off their parts. Alongside, some companies are making their own attempts to reduce debt by selling off some of their units. Through this process, a small group of Indian and foreign companies are taking most of the assets on sale.

With as many as 2,511 companies on the block, this is possibly the largest change India has ever seen in the ownership of its corporate assets. “This has been the big topic of discussion in cocktail circuits of Bombay the last six months – that outsiders are buying out our assets,” said the head of a Mumbai-based investment bank who did not want to be identified.

Who is buying?

The first set of buyers are global organisations with access to cash, looking for new opportunities. They include pension funds like Canadian Pension Plan Investment Board, sovereign funds like Abu Dhabi Investment Authority, private equity firms like Blackstone, asset management firms like Australia’s Macquarie Group and financial institutions like Russia’s VTB Bank.

Then, there are asset reconstruction companies like Edelweiss. These specialise in buying distressed assets at low valuations and selling them after engineering a turnaround or selling off their parts – landholdings, plant machinery, and so on.

The second set is foreign companies like ArcelorMittal and Japan’s Nippon Steel. They see these auctions as a beachhead into India.

The third set is a small group of Indian business houses – Sajjan Jindal’s JSW Group, Adani, Tata, Vedanta, Piramal and Birla. Some of them, said a person familiar with the National Company Law Tribunal’s proceedings, are looking to expand their operations by acquiring projects on the cheap. Others, such as Birla, are trying to strengthen core businesses like cement.

Some of these companies have balance sheets strong enough to borrow on their own. Others “regarded as close to the government”, added a steel analyst, are able to raise bank loans too. Still others have tied up with international funds or global peers. For instance, in its attempt to buy Essar Steel, ArcelorMittal tied up with Nippon Steel. Elsewhere, Tata Power and ICICI’s private equity division have formed Resurgent Power to bid for projects.

Curiously, one of India’s most cash-rich companies, Reliance, seems to be sitting this out. It has only bought one company since the insolvency proceedings began – Alok Industries in June.

The final set of buyers is composed of relatively unknown companies like Goyal MG Gases and Worlds Window. These companies are mostly new to the sectors they are eyeing. Their promoters too are mostly unknown.

Most of these buyers are picking up companies for a song. Reliance bought Alok Industries for 22% of its outstanding loans. Liberty House picked up Amtek Auto for 28% of its outstanding loans. Tata Steel paid Rs 17,000 crore for Bhushan Steel, even though it owed banks Rs 37,248 crore. Still, despite the low price tags, the number of bidders is very low.

Few bidders

Some of the buyers such as international pension funds and asset management companies are picking up stable projects.

In the steel sector, most of the bidders are existing companies in the sector – or companies like Arcelor Mittal that want to enter India. According to a Mumbai-based investment banker who did not want to be identified, such buyers are trying to reduce uncertainty and unfamiliarity by tying up with local partners. “Everyone coming in is partnering with someone who knows the system,” the banker added.

Added another Mumbai-based executive familiar with the Company Law Tribunal’s proceedings, “If they can get a project at 17%-30% of its valuation – after factoring in India risk, political risk, currency risk, repatriation risk and opportunity cost, that is a good buy.”

This low price creates two exit options for the buyers. The first is similar to strategies adopted by venture capital firms, which make small investments in several startups, knowing that if even one of the bets pays off, they will eventually more than recover their total investment. In the case of India’s debt-ridden firms, asset reconstruction companies are paying so little that their risk of loss is limited. At the same time, if even one company from their portfolio rebounds, the buyer will recover all their investments. Otherwise, they can cannibalise the company and sell it for its parts.

“This has been the big topic of discussion in cocktail circuits of Bombay the last six months – that outsiders are buying out our assets.”

What it all means

The two overlapping trends – foreign funds and a handful of international and Indian business groups buying insolvent companies at discounted prices – come with poorly understood implications.

India’s core sectors have been dominated by public sector undertakings and Indian entrepreneurs. But now, as control over private businesses moves to foreign funds and Indian business groups – most of whom have also tied up with each other – the nature of these markets will change in ways good and bad.

Some of the global companies will come with better know-how and greater regard for the rule of law. In Delhi, the National Highways Authority of India has just awarded a 30-year highway toll collection and maintenance contract to Macquarie. A senior official at the authority who did not want to be identified said the Australian company has skills in highway management and maintenance that Indian firms lack. The company is also bound to operate under a tighter legal regime, the official added. “The rule of law with which these companies have to comply is tighter than what we have,” he said.

But there are downsides. One is the risk of these stranded assets being put back up for sale instead of being revived. “A buyer who pays 20 cents on the dollar will sell at 50 cents and make his money,” said the CFO of a power plant who did not want to be identified. “He will not run the project.”

Beyond the top 50 companies, the steel analyst noted, the insolvent projects are not in a good condition. The demand for these will be lower so most of them will sell at very low rates. “Steel projects in the second layer will see much larger write-offs, as high as 70%-90%,” he said. This will happen in the power sector too. “Only plants with power purchase agreements or fuel linkages will do well,” he predicted. “Others will see 60%-70% write-offs.”

There are also questions about the provenance of some of the money coming into the country through these purchases. Illicit money is zero-cost money – it does not have to pay interest to lenders. In that sense, reputed companies may struggle to compete when bidding against them.

This is the second part in a four-part series on India’s attempts to tackle its bad loan crisis. You can read the first part here.