Asset Reconstruction Companies (ARCs) in India have been aggressively bidding for stressed assets post Insolvency Bankruptcy code (IBC). India’s largest ARC, Edelweiss ARC is expecting up to 20% returns from distressed assets, since banks are looking at ARCs as a solution than just a buyer for junk assets.
“From 2002 to 2014, ARCs were acting as agents of the bank. During that period banks were selling their junk assets in exchange for 5% cash. In August 2014, Raghuram Rajan, former governor of RBI, asserted that ARCs should have skin in the game,” says Siby Antony, Chairman and MD at Edelweiss ARC.
Asset Reconstruction companies (ARCs) were formed under the ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The idea behind this act was to create a system where banks and financial institutions can generate income from the stressed assets & NPAs. Post acquiring these stressed assets from banks, ARCs would then put those stressed assets on the path of resolution.
“ARCs investing in distressed assets should get a return around 18-20%, to get this return the recovery of the stressed asset should be at 1.5% of the acquisition price.’Edelweiss ARC has been successful in redeeming the acquisition price in all acquired stressed assets,” says Antony.
Edelweiss ARC was successful in reviving Ballarpur Graphics Paper. The EBITDA (Earnings before interest, taxes, depreciation, and amortization) of the firm was nil in July 2017, Edelweiss ARC brought it at 100% and post-resolution the current EBITDA stands at $6.15 million. ARCs take around 1.5 years for financial engineering to revive the stressed assets.
‘’Banks should carefully study the history and intent of the promoter, choice of the industry in which they are going to lend. ARCs should acquire assets which are operative in nature and which carry EBITDA potential,” adds Antony.
IBC is a big threat to the promoter. IBC mandates that promoter can lose their ownership if they fail to repay their dues to the creditor. Also, the reason for ARCs to grow further.
