The Indian government has taken an aggressive approach to the nation’s distressed companies since the Insolvency and Bankruptcy Code (IBC) was implemented in 2016. This is because effective use of the code is considered critical for the Indian banking sector.

Notably, investors – private equity and debt funds, asset reconstruction companies and strategic buyers – both in India and abroad, have been paying close attention to the National Company Law Tribunal (NCLT), the adjudicating authority for the insolvency resolution process for companies and limited liability partnerships under the IBC, because of a particular feature.

Once a company enters the NCLT process, the company’s existing owners are not allowed to buy their shares back, two deal advisory consultants in India confirmed with Private Debt Investor.

Such a situation is ultimately forcing the troubled companies away from existing ownership structures where their credit problems occurred in the first place, according to another industry source.

Because of this mechanism, foreign private credit managers are starting to see many existing owners try to sell their assets via trade sales and reallocate their debt burdens before they go bankrupt.

“There are long queues of assets that are going to bankruptcies. So, we are doing transactions to recapitalise businesses before they fall into insolvency,” the source added.

One example of a privately negotiated recapitalisation deal came from Bain Capital, a Boston-headquartered alternative investment firm.

India Resurgence Fund, Bain Capital Credit’s joint venture with Piramal Enterprises, provided $156 million to Archean Group’s marine chemical business, as per a disclosure in November 2018. “The capital is to be returned once the turnaround is fully implemented,” the announcement said, indicating the investee company’s plan for financial recovery.

India RF is a closed-end fund managed by Asset Resurgence Mauritius Manager, a Securities and Exchange Commission filing showed in March. The joint venture was announced in August 2016 and the fund secured its AIF category II approval in June 2017.

Requests for comments on the joint venture to both Bain Capital and Piramal Enterprises were not returned.

Among other foreign alternative investment managers, Värde Partners, a Minneapolis-headquartered private credit manager, announced  a strategic partnership with Aditya Birla Capital, a Mumbai-headquartered financial services provider. Apollo Global Management also formed a joint venture with ICICI Venture Funds Management Company, disclosed as AION Capital.

Data compiled by PDI show that  Abu Dhabi Investment Authority, Allianz (via its investment arm Allianz Investment Management), and Caisse de dépôt et placement du Québec all gained Indian distressed debt exposures through alternative investment funds in the country.

CDPQ acted as an anchor investor in distressed fund EISAF II, based on the Canadian pension’s multi-year partnership with Edelweiss Group, a Mumbai-based financial services provider, as PDI reported in January. The fund series targets a net internal rate of return between 16 and 18 percent.

Distressed and special situations funds in India fall within the category of type II AIFs. Official data as of Q1 2019 showed that the latest cumulative type II fundraising figure is as high as INR 2,053.6 billion ($30 billion; €26.6 billion) in total commitments.