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Edelweiss sees asset reconstruction as a business of resolution, not of recovery: Rashesh Shah

Edelweiss sees asset reconstruction as a business of resolution, not of recovery: Rashesh Shah

We don't buy blind; we buy only where we see a higher probability of resolution. Recovery is a fall-back option, says Chairman & CEO of Edelweiss Group, Rashesh Shah.

Chairman & CEO of Edelweiss Group, Rashesh Shah. Chairman & CEO of Edelweiss Group, Rashesh Shah.

Edelweiss ARC is India's largest asset reconstruction company in terms of assets under management (AUM), managing Rs 20,000 crore. The Chairman & CEO of Edelweiss Group, Rashesh Shah, spoke to Business Today's Anand Adhikari and Mahesh Nayak on why he entered the ARC business and how he plans to grow.

Q. Why did Edelweiss enter the ARC business?

A. By 2007 (after 10 years in the capital market business), we had a fairly good market share and were well entrenched in the capital market business. Our growth was so rapid that our pre-tax profit in five years grew from Rs 1 crore in 2003 to Rs 400 crore in 2008. We realised in 2007 that we have to be in the credit space. Therefore, today we are in all three financial services businesses - credit, insurance and capital markets.

Credit is a big ocean. There are many verticals in credit: wholesale, auto finance, working capital, gold loans, home loans, micro finance and infra financing. And everybody has found its own space. If you look at IDFC or L&T, they do infra financing; HDFC does housing. There are three things one looks at when one enters a business: first, it should be a large market or potentially a large market; second, the competition should be less intense; and third, do you have the skill set and capability in the space? If yes, then this is an attractive market segment.

So, when we looked at the distressed assets market, there was only ARCIL and not many other players. The hypothesis was that this was a specialised business and it will continue to be, but we did not think there would be big NPAs in India. Then with the kind of credit growth we had in India, we realised there would be NPAs. In fact if we look at 2008/09, there were NPAs but on the retail side. Therefore, we realised that it was a specialised business in the distressed asset market.

We did not want to be a buy-out fund. We wanted to be a distressed asset specialist either in fund format or ARC format that was fairly open-ended. Importantly, we saw this business differently. Most people see this business as a recovery business, but we saw it as a resolution business.

Q. What exactly do you mean by resolution?

A. Recovery means stripping of assets and selling them to recover the money. In resolution business, there is aggregation of debt. Often, you require additional money, which we can give or arrange, along with investment banking advice, M&A, bringing in a strategic partner, and restructuring ability. You also require the knowledge and trade-off between equity and debt. You can offset some of the debt and convert it into equity but you have to know how value is created in equity.

For example, say, you have Rs 4,000 crore of debt and the entire debt is unsustainable. At that point, equity value effectively is zero because debt is under water. If you do a restructuring by converting Rs 1,000 crore into equity, then you keep Rs 3,000 crore as debt, which means the interest burden is lower. Every time you restructure debt, you create equity value. The more I remove debt, the more I create equity value and the more I create debt, the more I reduce the equity value. As interest gets accumulated, the equity value gets eroded.

So, resolution has many parts: from debt aggregation, fresh infusion of funds, conversion of debt into equity, restructuring to the control of escrow account. All this requires a good mix of people with financial background, investment banking background, equity market and all of that. You can become a third party with all the skill sets, but not a bank.

Q. So far, how has your experience been as an ARC player?

A. I should admit that we were ahead of time. We thought we would start right away in the business, but we saw slow growth in the first three years as banks never sold assets and we wondered why they aren't selling. What happened is, as the banks' debt kept on mounting, after 2012 and 2013 they opened the floodgates. Before that we were buying, but they were small loans. Before 2012 and 2013, banks were selling assets below our expectations and after 2012-2013, they were selling aggressively, which was way above our expectations.

Q. When you talk of restructuring, where does the money come from?

A. The banks won't lend. Yes, banks don't finance and this is a big gap in India. We have to finance the companies and, therefore, debt aggregation becomes important. Once you aggregate the debt, you can restructure. And once you restructure, restarting the business becomes easier. Mostly what happens is that the company is viable; it is just that it is indebted.

For instance, we are financing a mall in Bangalore. It's a high-quality mall where 90 per cent of the work has been done. He has got tenants; he just requires about Rs 50 crore to complete the mall. Once completed, it will be worth Rs 600 crore. His current outstanding debt to the bank is around Rs 400 crore. He couldn't service the debt and hence it became an NPA. We acquired the loan from the bank and we are giving Rs 50 crore to complete the mall. If we don't give the additional fund, then Rs 400 crore is also gone and the mall is useless as the value is zero. The building is constructed, but there is no flooring or electrical work done. The Rs 50 crore is going to come from my NBFC. [Another ARC has also invested Rs 20 crore in this project.]

Q. What are your views on the new RBI policy on debt restructuring of acquiring 51 per cent stake by banks?
A. This is enforcement and recovery. It will work as a threat. If I take 51 per cent as a bank, I have to create equity value and to create equity value one needs to resolve a complex array of things. I think this will work as a threat and force promoters to restructure. I don't think banks can acquire 51 per cent stake and run a company. That's a different ball game. But yes, the new rule is a great tool in the hands of the banks, which can be a great deterrent for defaulting promoters.

Q. Why are ARCs playing under the $1 billion space? And what has changed since last August when the 15:85 norm came into force? A. ARCs are required for bad loans anything under Rs 10,000 crore, since anything more than that will be handled by banks on their own. Anything above Rs 10,000 crore will never come to the ARC. First, there are capital limitations as ARCs will require Rs 1,500 crore (15 per cent of 10,000 crore) which is very high. Secondly, the top management of the lending banks get involved to resolve a large loan on their own.

Till now, ARCs were seeing themselves as an agency model and still many see themselves as an agent earning a fee. We see the ARC as a partnership model wherein you take a risk along with the bank. We have put Rs 2,000 crore of our own money. The mindset has to be that you are a capital base business, not just an agency business. If you see the capital base of many ARCs, you will see them as an asset management company (AMC). You have to be a mix of an NBFC and an AMC. You have to have your skin in the game.

Q. What main lessons have you learnt in the past two-three years?
A. You can't be adversarial with the bank or the promoters. You have to try and find a win-win-win solution for the bank, the promoter and the ARC. If you have to revive an asset in a clean way, you have to find a win-win solution that makes some upside for the promoter.

At the same time, you have to ensure that you don't make the bank carry the load and give all upside to the promoter. Therefore, you have to strike a fair balance between all the three. Earlier, ARCs were being adversarial. They were buying at a low price from banks and arm twisting the company to squeeze out more to earn money. But this doesn't work. What I have learnt is it has to be a win-win-win business and not a win-win business.

Q. Do you have a plan B in the ARC business?
A. You can always get into recovery mode. In some cases, you have to get into recovery mode but this happens when plan A fails. If resolution doesn't happen, we always have the security to get into recovery mode. We also make an assessment when we buy an asset.

We don't buy blind; we buy only where we see a higher probability of resolution. Recovery is a fall-back option. There will always be 20-30 per cent cases where you will have to be in recovery mode, but the intention is to resolve and revive as there you add value, while in recovery you destroy value.

Published on: Jul 15, 2015, 8:13 PM IST
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