The Telegraph
Saturday , December 22 , 2012
Since 1st March, 1999
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Dollar fillip for asset rejig firms

New Delhi, Dec. 21: Foreign investment in asset reconstruction companies has been raised to 74 per cent from 49 per cent. The investment covers FDI as well as FII investment.

With asset reconstruction companies (ARCs) facing a cash crunch and FIIs lobbying for relaxation of the norm, the government has decided to allow a composite foreign investment limit of 74 per cent, which could be either FDI or FII investment.

However, no FII will hold more than 10 per cent and no foreign direct investor more than 50 per cent.

Similarly, the FII limit for investment in security receipts issued by ARCs has also been raised to 74 per cent.

Finance ministry officials said the change would be notified by the RBI and Sebi. The officials said current norms were seen as being unnecessarily restrictive.

“There was no ground to hold back FII investment in asset reconstruction companies when we are allowing higher foreign stakes in banks,” officials said.

Asset reconstruction companies help to clean up balance sheets of banks and financial institutions by taking over bad loans and disposing of the underlying collaterals.

The net NPA ratio of state-run banks rose to 1.53 per cent in 2011-12 from 1.09 per cent in 2010-11.

ARCs have been lobbying for this relaxation, arguing this will be a non-debt creating inflow of forex reserves.

Big worry

Analysts expect at least 25-30 per cent of corporate debt restructuring being done now to turn bad as the economy continues to remain sluggish. India’s GDP (gross domestic product) grew 5.4 per cent in the first half of this year and is expected to grow about 6 per cent in the next half.

A report prepared by brokerage firm Prabhudas Lilladher says the corporate debt reconstruction cells of banks “expected Rs 20,000-25,000 crore of run-rate (assets being referred for debt restructuring) to continue, with many large accounts such as Suzlon, Abhijeet Group and specific units/SPVs (special purpose vehicles) of GMR, Lanco already being referred”.

Asset restructuring companies expect a part of this to come to them as bad loans which have to be disposed of.