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9/20/2018 The concern is how sacrosanct the IBC process is: Shantanu Nalavadi | Business Standard News
https://www.business-standard.com/article/companies/the-concern-is-how-sacrosanct-is-the-ibc-process-shantanu-nalavadi-118091901372_1.html 1/10
Surajeet Das Gupta Last Updated at September 20, 2018 07:19 IST
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The concern is how sacrosanct theIBC process is: Shantanu NalavadiUnlike in Europe and Asia where most stressed assets are in the real estate space, in India it is in good qualityoperating assets across growth sectors, such as steel, cement, pharma, says Nalavadi
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Shantanu Nalavadi
His private equity fund has been at the centre of a storm as it waitsfor a �nal call in court on its o�er to buy Binani Cement with itsBharat Dalmia partner, against UltraTech Cement. ShantanuNalavadi, managing director of India Resurgence AssetManagement Business, a joint venture between PiramalEnterprises and Bain Capital Credit, has also been scouting aroundfor other stressed asset deals. Edited excerpts of an interview withSurajeet Das Gupta:
You have been a key player in distressed asset sales. How doyou di�erentiate yourself from competitors?
In this space, at one end of the spectrum you have pure-creditNBFC (non-bank �nancial corporation) players; on the other side,you have private equity (PE) players that engage in pure-equitytransactions. Ours is uniquely positioned in between the two,providing both credit and equity solutions for purchase of assets inthe distressed space.
Our focus is distress to control, a combination of acquiring bothequity and debt, to drive e�ective resolution with strong
9/20/2018 The concern is how sacrosanct the IBC process is: Shantanu Nalavadi | Business Standard News
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operational and control oversight. Our strength is our ability towrite large cheques, both as debt and for equity participation. Inaddition to our �exible strategic model that allows us to selectivelypartner with third parties such as mutual funds or NBFCs to raisecheaper domestic debt. Or with equity investors, includingstrategic ones, to raise larger funds or for joint management. Ourfocus, in addition to restructuring the capital of the distressedcompany, is also on operational restructuring to ensure thecompany turns around and positions itself among the top three orfour in the sector it operates in.
How do you leverage the 50:50 partnership between Piramal Enterprises and Bain Capital Credit?
Ajay Piramal, chairman of Piramal Group, has a 30-year history of taking contrarian bets. For example,he acquired over 40 pharmaceutical companies at a time when global entities were moving out of Indiadue to patent issues, and went on to successfully consolidate and integrate the business. When thesame global pharma companies came back to the domestic market, he created value by successfullyexiting the domestic formulations business.
He then invested in Vodafone, when telecom was going through its consolidation phase, and made a 20per cent IRR (internal rate of return) in the three years before he exited. Piramal Capital has successfullybuilt a large real estate book; it is considered a challenging sector. Given that they understand the sectorwell as a group, they have strong processes in place from a control and monitoring perspective. Everydeal we look at is discussed with Piramal and he brings his deep insights and rich India, as well asinternational, experience. Bain Capital Credit, on the other hand, is a $85-billion fund of which $35-billion is in the distressed (assets) space. They have invested successfully in almost every distressed(assets) market in the world. The India Resurgence joint venture e�ectively leverages this deep globaland local expertise of both entities.
Is the whole IBC (insolvency law) process going as you had expected, especially with the hugedelays in resolution?
Though the media perception is currently negative, we are very optimistic. Unlike in Europe and Asiawhere most stressed assets are in the real estate space, in India it is in good quality operating assetsacross growth sectors, such as steel, cement, pharma, etc. These are under-performing for reasonswhich are well known. It is a once in a lifetime opportunity for India Inc and investors like us, to investand consolidate in this space, especially against the backdrop of strong GDP (Gross Domestic Product)growth.
But, are you frustrated with the litigation process? For instance, you bid for Binani Cement and itis in the courts.
One must realise that the IBC law was written in only 19 months, and the Insolvency Board is open tosuggestions for amendment. For the stressed asset sale process to stabilise, it took 10 years in the US,and over 50 cases, before precedents were established. The bigger issue is that the IBC and litigationprocess in India is taking way too much time. It could be resolved if there were more judges in thetribunals. From what one reads in the newpapers, this is being addressed.
What do you see as the most important concern?
9/20/2018 The concern is how sacrosanct the IBC process is: Shantanu Nalavadi | Business Standard News
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About how sacrosanct is the IBC process. Indian strategic players would not have in�nite capital forfuture rounds of stressed assets purchase. They are already leveraged while buying assets in the �rstround, which are large deals. Also, they will be fairly engaged in consolidating these assets into theirexisting businesses. So, �nancial investors will have to come in to meet the large requirement of capital.But, one has to ensure the process of buying a stressed asset is watertight, not open or chaotic, as it iscurrently. If stressed assets resolution failed in the past 10 years despite numerous attempts, it isbecause there was no de�ned and stringent process from start to close. Financial investors work in astructured process. They expect that the highest bidder would get the asset when a tight process is runand closed in a �nite timeframe. I �nd no reason why the other companies that are keen to buy theasset cannot o�er their best bid on day one, instead of disrupting the process by improving their o�ersat a later stage. Because of this you have litigation, which spreads over a long time, also resulting in lossof interest income for banks. Additionally, the value of the stressed asset also depreciates over theduration of the litigation.
ALSO READ: IBBI suspends insolvency professional's licence over use of its name
Big PE funds seem to have not done too well in the �rst round. Why?
There are practical problems. There isn’t a perfect data-room set up for diligence or indemnities beingprovided, which PE funds are used to. Also, as seen in the current round, the sale process is notstructured and run in line with the rules and framework of the IBC. Consequently, ease of doingbusiness is impacted.
How are you seeing the next 28 assets up for bidding?
We will �lter through and bid for the good assets, both from the next list of 28 companies and from theassets emanating from the Reserve Bank’s February 12 circular (the �rst list of big cases for insolvencyresolution). So far, we have evaluated 250 potential deals and hope by December to have invested inthree to four deals. That is the rigour and process we follow to invest.
What is your exit strategy for stressed assets. What is the time period?
We are �exible but it varies from three to �ve years. In some cases where we are buying stressed assetswith underutilised capacity, we are not betting on growth but on increasing the capacity. In others, wewill go for expansion of capacity after a turnaround and that should set the stage for our exit. On thedebt side we would look at a quicker exit in two to three years, as once the cash �ow improves, were�nance with cheaper loans. This helps us in improving overall equity returns, where we also areinvestors.
Is your focus on putting in more debt or equity?
We do not have a cookie-cutter approach. Our approach is deal-speci�c. What we buy is the enterprisevalue, in which debt is a key component – we either fund on our own or take a third-party debt optionfrom the domestic market, whichever is cheaper. At the fund level, we would invest 70-80 per cent indebt and 30 per cent in equity. Our strategy is to o�er the best hybrid solution, both in terms of debtand/or equity for the most e�ective turnaround.
Read our full coverage on Insolvency and Bankruptcy Code
9/20/2018 The concern is how sacrosanct the IBC process is: Shantanu Nalavadi | Business Standard News
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READ MORE ON INSOLVENCY INSOLVENCY AND BANKRUPTCY CODE IBC RULES
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First Published: Wed, September 19 2018. 23:12 IST
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