India to allow LBOs for distressed assets
Indian banks will be allowed to support leveraged buyouts of distressed companies by “specialized entities” according to plans released by the Reserve Bank of India. Under a liberalized regulatory regime for asset sales, sector-specific private equity firms are also encouraged to play an active role in rescuing troubled enterprises.
The measures, which first emerged in a draft proposal published in December and will become effective from April 1, are part of a broader effort to help the banking system address the increasing number of distressed companies and projects. The goal is to ensure financial distress is recognized early and dealt with promptly, thereby maximizing recovery for lenders and investors.
Private equity firms and large non banking financial companies (NBFCs) with proven expertise in resolution and recovery will be able to participate in auctions of non-performing assets, although they require regulatory approval to do so. They are expected to bring in additional funds for restructuring plus expertise to manage target companies.
Incentive structures may be built to encourage private equity investors and other institutions to participate in restructurings. These include allowing banks to provide financing to specialized entities formed to acquire troubled companies, although they should ensure that these entities are adequately capitalized.
The government is also open to taking minority positions in these entities.
The vast majority of private equity investments in India are in the form of growth capital, in part because acquisition finance is not available from domestic banks. However, industry participants say international lenders are becoming more comfortable with the uncertainties inherent in providing offshore financing against onshore assets.
Several PE investments have used leverage in the last 12 months, including Partners Group's acquisition of CSS Corp, Baring Private Equity Asia's purchase of a majority stake in Hexaware Technologies and KKR's control deal for Alliance Tire Group. In each case, additional comfort has come through the companies' offshore revenue streams.
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