The Ordinance will therefore have a bearing on all future defaults including the cases identified by RBI for the second round of NCLT.
However, the harsher provisions of the Ordinance have a few grey areas and unintended consequences.
The grey
The RBI might classify an account as stressed even before it has actually become NPL in which case the promoter will have to bring in funds earlier to prevent being called a defaulter for over one year.
Banks often engage in a one-time settlement with borrowers and this has similar characteristics of the promoters getting back control of their assets at a discount.
… & the ugly
As is evident, the Ordinance clearly bars promoters of the first list of twelve cases before NCLT from participating in the bidding process. With the revival of the steel cycle, there is palpable investor interest in steel assets that dominates this list and a couple of other companies (like the auto ancillary company) may also see investor interest.
However, beyond this list, there will be many more assets which might not draw an equal amount of interest from competitors/financial investors. If the promoter is out of the fray, these assets are likely to fetch distressed valuations leading to a higher hair cut for the banks.
We also got to remember that not all defaulters are “wilful” in the sense that stress in many companies may be linked to external/macro factors and a promoter losing business to competitor/financial investor might go against the spirit of enterpreneurship.
As the resolution of India’s great NPA saga moves into high gear, many companies may not find buyers leading to liquidation thereby impacting jobs. Finally, financial investors may not always have a necessary bandwidth to run the show and effect a turnaround in the absence of the promoters.
Now the winners
However, as the system ponders over the nuances of the Ordinance, it clearly gives an edge to the solvent bidders. Global giants like Arcelor Mittal to home-grown competitors like JSW Steel, Tata Steel and Vedanta will definitely have reasons to welcome the changes. We have a positive long-term view on these potential acquirers.
There is a long list of private equity investors/pension funds and more are likely to queue up in a bid to make money from India’s junk.
In our opinion, yesterday’s tweak of the ordinance is unlikely to be positive for Indian banking sector as a whole. Beyond some of the lucrative assets, the overall haircut to the system in the absence of the promoters is likely to be higher although it is difficult to quantify the same at this stage. However, a bank like Kotak that has recently raised capital (to the tune of Rs 5,803 crore) specifically with an eye on buying stressed assets will be in a vantage position. The bank’s chief expects disproportionate returns from this once in a lifetime opportunity. We have a positive view on Kotak Bank as well.