From the Editor
http://www.businesstoday.in
The Bargain Hunters
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lobally, businessmen and financiers with an appetite for extra risk have often
made fortunes by buying and selling both distressed debt and distressed assets. Wilbur Ross, Jr., a Manhattan-based investor, with an estimated net
worth of over $3 billion, for example, makes his fortune by buying bankrupt or
near-bankrupt steel plants, coal mines and textile mills in the US and then turning
them around. Paul Singer, founder of Elliott Management, is another billionaire
who has made his fortune largely by buying distressed debt of both corporations
and countries and then fighting aggressively in court to make super normal profits.
His latest battle, when he bought the debt of Argentina at a fraction of its original
value and then insisted that he should be paid in full even though the country had
cut a deal with other creditors to pay less, made headlines across the globe. Elliott
and others, who specialise in distressed country debt, are often called vulture funds
because they swoop in on countries that are in serious trouble.
In India, distressed assets have been bought and sold, though not at the same
scale as it happens globally. The story goes that Ranbaxy came to Bhai Mohan
Singh when the original founders could not pay back a loan they had taken from
him. The Indian government has also occasionally sold off public sector companies that were ailing to private players.
A market for pure distressed debt secured by underlying assets, though, did not exist until the last NDA government tried to create a formal mechanism by passing the
Securities and Asset Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002. It led to
the creation of asset reconstruction companies (ARCS) that
could take over non-performing assets on the books of
banks that were willing to sell. However, despite its good
intentions, nothing much happened on the ground in
terms of sale and purchase of distressed loans until
Raghuram Rajan became the RBI governor. In fact, the
mounting bad loans and capital challenges in the PSU
banks also created a fertile ground for sale to ARCs.
Rajan has been pushing the PSU banks to clean up their books, and this has
led to a greater willingness to sell. Simultaneously, there is an increased interest
in picking up these assets and private players have entered the asset reconstruction arena. In the past two years, assets worth `1,02,068 crore in terms of book
value have been picked up by ARCs at a price of `43,243 crore and the market is
picking up pace.
There is still much that needs to be done before Indian financiers can make
the kind of money that international players do. A proper bankruptcy law would
help greatly as would a better market for corporate bonds. The finance minister
has already talked of both in his last Budget speech, and I suspect they will happen
in due course.
Our cover story this issue looks at the players and how the market is shaping
up. Meanwhile, as we go to press, we have seen both the Greek default as well as
a crash in the Chinese stock markets. To check out the effect of the Greek crisis
on global markets, see “Graphiti” on page 28. And closer home, how will the
Chinese situation affect India? On page 22, read about the reasons for the crash
in our Beijing correspondent Ananth Krishnan’s story, and the possible impact
in Dr Ashok Desai’s column (page 26).
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