M&A in stressed assets: Issues and challenges

Recently, there has been an increased focus on M&A activity in stressed assets. A significant factor in this regard has been a drive by the Reserve Bank of India (RBI) towards greater provisioning for stressed loans and more transparent recognition of non-performing assets.

Last year, the RBI notified guidelines for “strategic debt restructuring” (SDR) by banks. Under the SDR guidelines, a consortium of banks may acquire control over the borrower (by converting a part of their outstanding loan into equity) and then bring about a change in management of the borrower. Once the conversion of loan into equity is completed, banks are permitted to maintain the asset classification of the existing loan for 18 months, irrespective of the status of repayments during this period.

The SDR guidelines require banks to divest their equity holdings in the borrower to a “new promoter” as soon as possible. However, while there has been interest in the underlying assets, significant hurdles are being faced in negotiating the sale of a controlling stake in such entities.

Shuva Mandal is national practice head, general corporate, M&A and private equity, and Sayak Maity is a principal associate-designate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.