The Hindu Business Line : ARCIL seeking a gateway for FIIs in distressed assets

The Asset Reconstruction Company of India Ltd (ARCIL), India's first asset reconstruction company, has approached the Government for permitting FIIs to invest in a new instrument in India — distressed assets.

ARCIL has made representations to SEBI, RBI and the Finance Ministry to allow FII investment in a new category, which is neither equity nor debt but a separate instrument - security receipts with underlying distressed assets.

"We have made representations to the regulators and the response from them has been encouraging," said Mr Rajendra Kakker, Managing Director and CEO of ARCIL. Several FIIs such as GE, Citicorp, Clear Water, Merrill Lynch and Morgan Stanley are waiting at the doorsteps to enter this yet-to-be-developed market for distressed assets in India.

Currently there are two instruments that FIIs can invest in India i.e., equity and debt. The cap on FII debt investment varies from time to time between $1.0 billion and $1.5 billion. "We don't want FII investment in distressed assets to be limited due to any cap; therefore, we want another window for investment in it," explained an ARCIL official.

ARCIL officials are, however, unsure when the approvals are likely to come through.

The security receipts market, or the junk bond market as it is called in many developed and developing countries, works like this - A bank/FI sells a bad loan to ARCIL which floats a security receipt to represent it. These receipts can be subscribed to by investors such as FIIs and even be traded. In a year's time ARCIL is slated to arrive at NAVs for these instruments. Currently in the absence of FIIs as investors, the banks/FIs, which sold the bad loans themselves are subscribing to the security receipts.

These security receipts will have a face value of Rs 1 lakh and will have no fixed obligation or interest component attached to it as is the case of a `pass through' certificate. The returns will be dependent on the NAV, which will be based on the resolution of the borrower account. So if there is an economic or specific sector-wise upturn and the borrower turns a good repaying one, the NAV will rise and the amounts recovered will be paid to the receipt holders in the form of dividends.

Currently ARCIL has acquired 116 cases with principal outstanding assets of Rs 3,089 crore from SBI, IDBI, ICICI Bank, Punjab National Bank among others.

ARCIL's acquisition was made through the floatation of security receipts worth Rs 1,600 crore which were subscribed to the selling banks themselves. Therefore, for the time being, from the banks' point of view, the bad assets have merely moved from the advances book to the investment book in `standard non-SLR' category but with the burden of provisioning and the cost of the receipts itself.

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