RBI to allow leveraged buyout of stressed assets

By Anuradha Verma

  • 31 Jan 2014

The Reserve Bank of India has decided to allow leveraged buyouts in the country through specialised entities which want to buy stressed companies supported by bank lending. The banking regulator had last month mooted a proposal to allow such leveraged buyouts which could open up a new investment opportunity for large private equity firms in India.

The draft proposal has been retained in the final framework released by RBI on Thursday (for full report click here).

The framework, which has been created to help banks recover bad loans to ease the financial stress in the system, will be fully effective from April 1, 2014 but banks and specified non-bank lenders should put in place necessary system and infrastructure to effectively implement it.

At present, banks are not allowed to finance acquisition of promoters’ stake in Indian companies. The underlying reason being promoters should acquire equity stake from their own sources and not through borrowings.

This has also stopped global buyout firms from participating in one big chunk of the market, a segment they are associated with in the developed economies. As a result, even big buyout majors such as KKR, Carlyle and Blackstone tend to largely focus on growth capital investments in India.

RBI said it would allow banks to extend finance to ‘specialised’ entities put together for acquisition of troubled companies. The lenders should, however, ensure that these entities are adequately capitalised, it added.

It said that private equity firms and large NBFCs with proven expertise in resolution/recovery will be allowed to participate in auctions through explicit regulatory affirmation. Request for providing authority to such entities under SARFAESI Act on selective basis to deal with specific assets will be taken up with the government by RBI.

The banking regulator said appropriate incentive structures may be built so as to provide greater role to PE firms and other institutions in restructuring of troubled company accounts. These institutions can be expected not only to bring additional funds for restructuring but also bring in expertise for management of the business unit in question.

The framework also calls for early formation of a lenders’ committee with timelines to agree to a plan for resolution, incentives for lenders to agree collectively and quickly to a plan with better regulatory treatment of stressed assets if a resolution plan is underway and accelerated provisioning if no agreement can be reached.

It also seeks to improve current restructuring process, make future borrowing more expensive for those who do not co-operate with lenders in resolution.

The framework also wants to make the regulatory treatment for asset sales liberal where lenders can spread loss on sale over two years provided the loss is fully disclosed and take-out financing/refinancing over a longer period and not be construed as restructuring.

(Edited by Joby Puthuparampil Johnson)