What Are Vulture Funds?
Vulture funds, also known as distressed asset funds, are specialized investment vehicles that acquire distressed or non-performing financial assets at significant discounts and seek to recover the full or a substantial portion of the original value. In India, the distressed asset market has grown significantly with the increasing volume of NPAs in the banking sector and the establishment of a more robust resolution framework through the IBC, SARFAESI Act, and DRT mechanism.
The Indian Distressed Asset Market
India’s distressed asset market presents unique opportunities due to several factors. The gross NPAs in the banking system, while declining from their peak, continue to represent a significant pool of distressed assets available for acquisition. The IBC resolution process regularly generates opportunities for strategic and financial investors to acquire viable businesses at discounted valuations. Asset Reconstruction Companies (ARCs) registered with the RBI play an important role in acquiring and resolving distressed assets.
Legal Framework for Distressed Asset Investment
The legal framework governing distressed asset investment in India includes the SARFAESI Act, which provides for the establishment and regulation of ARCs and the transfer of financial assets to them. The IBC provides the resolution and liquidation framework for corporate debtors. The RBI’s Master Direction on Transfer of Loan Exposures governs the sale of NPAs by banks to ARCs and other entities. SEBI regulations govern Alternative Investment Funds (AIFs) that invest in distressed assets.
Investment Strategies
Distressed asset investors in India typically pursue acquisition of NPAs from banks and financial institutions at a discount, participation in the IBC resolution process as resolution applicants, acquisition of assets in DRT and SARFAESI auction proceedings, and direct negotiation with distressed borrowers for restructuring and turnaround opportunities.
Risks and Due Diligence
Distressed asset investment carries unique risks including legal title issues, environmental liabilities, ongoing litigation, and operational challenges. Comprehensive due diligence covering legal, financial, operational, and regulatory aspects is essential. The involvement of experienced legal and financial advisors with deep knowledge of India’s distressed asset ecosystem is crucial for successful investment outcomes.
