India’s politicians and bureaucrats often get knocked for their dithering and inability to make clear-cut decisions. So it’s only fair to praise them when they get something right. In recent weeks, the government has made three announcements that could have huge implications for India’s distressed debt market.
The big news is that foreign investors will be able to buy Indian banks’ and financial institutions’ bad debt. The moves could also help develop a junk bond market.
Specifically, the government will now allow foreign investment in asset reconstruction companies (Arcs). These are India’s equivalent of China’s asset management companies created to help dispose of Chinese banks’ bad debt.
The way they work is as follows. An Arc issues the bank with a security receipt when it buys its bad debts. These receipts are considered as an investment on a bank’s balance sheet, and their value depends on the pricing of bad loans. The bank only gets money when it cashes in its security receipts. The amount it receives, though, depends on how successful the Arc is in recovering money from the debtor. Arcs can also take control of a company if they manage 75% of its bad debt.