RBI panel backs PE to buy up to 40% of distressed Indian banks

The report arose from concerns about the fragile state of the country's banks given the rapid rise in the proportion of stressed assets. According to the reviewing panel, additional capital is required to cover non-performing loans as well as to fall in line with Basel III requirements.

It cites a string of examples of private equity investors and sovereign wealth funds taking controlling stakes in distressed banks since the Asian financial crisis. These include: Temasek Holdings' investments in Bank Danamon and Bank International Indonesia; Farallon Capital Management's investment in Bank Muamalat Indonesia; Newbridge Capital and The Carlyle Group's turnarounds of Korea First Bank and KorAm Bank, respectively; and Orix and Softbank assuming control of Japan's Nippon Credit Bank.

On a more general level, the panel noted that ownership constraints among private sector banks reduce the kind of investors these banks can attract, resulting in a proliferation of small shareholders who tend to be disengaged. "Allowing larger block shareholders generally enhances governance," the report said.

It proposes creating a category of authorized bank investors, comprising all diversified funds managed on a discretional basis that are deemed fit and proper stakeholders. They would be allowed to take 20% equity stakes in banks without regulatory approval, or 15% plus a board seat. All other financial investors would be subject to a 10% ownership cap.

The report also proposes alterations to the current rule that obliges promoters who start out with large stakes in banks to reduce their holdings to no more than 15% over a period of several years. The ceiling would be raised to 25%.

As for public sector banks, it is recommended that the government reduce its holding to below 50% and - where such lenders are in distress - consider bringing in private equity investors with board representation.

The recommendations follow the introduction of a liberalized regulatory regime for asset sales that could allow PE firms to play a role in rescuing troubled enterprises - and receive support from Indian banks to complete leveraged buyouts of such enterprises. The RBI published a draft proposal on the issue in December, with the measures set to become effective in April.

It is part of an 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.

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• Topics
• Financials
• Credit/Special Situations
• Restructuring
• South Asia
• Regulation
• Financial Services
• regulation
• India
• Distress