Special situations in financial services is a fast-growing investor class whose mandate is potentially transformational - Shyam Maheshwari

 

Shyam Maheshwari SSG Capital

Shyam Maheshwari was the former Chief Executive Officer, Founder and Partner of SSG Capital Management, and is primarily responsible for SSG’s investment activities in India. He has 17 years of experience in the deal sourcing, analysis and investing industry. India’s IBC has now been suspended for new referrals for one year. Shyam Maheshwari feels that until the IBC resumes, stressed and distressed companies will either continue to go along, being impotent to change or they may revert to the pre-IBC status: compromising and arranging under the Companies Act with the bias on lenders to determine debt restructuring.

Shyam Maheshwari was the former Chief Executive Officer, Founder and Partner of SSG Capital Management, and is primarily responsible for SSG’s investment activities in India. He has 17 years of experience in the deal sourcing, analysis and investing industry.

‘Special situations’ conjures up something vaguely mysterious, in the vast array of financial services. However, this is a fast-growing investor class whose mandate is potentially transformational. This includes gaining control of distressed or insolvent companies, typically by acquiring their non-performing loans, restructuring them with fresh capital and smarter management and bringing out inherent value and finally exiting via sale.

According to Shyam Maheshwari, India’s IBC was designed to do much the same: an attempt to consolidate and accelerate the paths to debt resolution, backed by law. But the IBC has now been suspended for new referrals for one year, in recognition of the devastating impact of the Covid-19 pandemic on business activity. Shyam Maheshwari feels that until the IBC resumes, stressed and distressed companies will either continue to limp along, knowing their fate but impotent to change course or they may revert to the pre-IBC status – compromises and arrangements under the Companies Act with the bias on lenders to determine debt restructuring.

One consequence of this interruption is that the burden of negotiating and implementing a restructuring has essentially shifted from the courts to the creditors. This is the ‘special situation’ that financiers relish because they get to demonstrate their ‘art of Restructuring’. The temporary halt on referrals to the IBC is a timely moment to reflect on its efficacy and ask how the process can be sharpened for a more impactful resumption. Shyam Maheshwari believes that there are two more important longer-term benchmarks for judging its success:

• First, has IBC changed credit culture
• Second, does IBC encourage more out-of-court settlements between all stakeholders.

On the first point, based on SSG’s observations of the lending community, the answer is a resounding yes. On the second point, Shyam believes much more needs to be done and the next 12 months will be a critical opportunity to test resolve. Shyam Maheshwari thinks that the post Covid-19 era should see more resolutions outside of IBC, a development that would suggest IBC is not viewed as an effective and efficient process. That perception had formed quickly after IBC’s launch, two years ago, when it hit stumbling blocks over interpretation that reflected its ambiguous drafting.

The tilt to stay outside of IBC was apparent before Covid-19, as evidenced by Altico Capital, an NBFC whose lenders ran a resolution process that arguably was swifter than the log-jammed IBC, eventually selecting SSG as the preferred bidder. Banks will always favour a restructuring or exit at a good, even right price instead of risking delay, loss of value and the uncertain outcome of IBC jurisdiction.

Shyam Maheshwari believes that two critical factors can help position India for the next wave of NPLs. These include early recognition of NPAs and proactive restructuring, and making it easier for companies to raise equity capital quickly. In the views of Shyam Maheshwari SSG, quoting the first factor, RBI has done a commendable job with its review of asset quality in the banking segment. Therefore, Shyam expresses hopes that a similar exercise is also done with the non-bank financial sector.