Globally, 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 Rs 1,02,068 crore in terms of book value have been picked up by ARCs at a price of Rs 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". And closer home, how will the Chinese situation affect India? 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.