India’s Distressed Asset Market: Ready for growth

Private equity funds scouting for distressed assets in India will have to be strategic in selecting the acquisition route

By Winnie Shekhar   

The introduction of the Insolvency and Bankruptcy Code (IBC), 2016, revolutionised the distressed asset acquisition landscape in India by consolidating multiple insolvency laws and providing regulatory clarity. Combined with the Reserve Bank of India’s (RBI) new draft framework for securitization of stressed assets, the distressed asset sector which was once plagued by endless litigation is now becoming an increasingly structured opportunity for global private equity players. Recent times have seen massive global interest in the segment, while Essar Steel was acquired by ArcelorMittal–Nippon for Rs 42,000 crore (2019); DHFL saw a ₹36,600 crore PE bid from Oaktree, though Piramal won.

Recent years have seen massive global interest in the segment. While Essar Steel was acquired by ArcelorMittal–Nippon for ₹42,000 crores (2019), DHFL saw a ₹36,600 crore PE bid from Oaktree, though Piramal eventually won.

IBC: The Game Changer

The IBC enables private equity funds to acquire control through resolution plans under the corporate insolvency resolution process (CIRP), which is designed to conclude within 180–270 days. Specialised institutions like the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI) oversee the process, ensuring greater transparency and consistency.

IBC focuses on a creditor-led resolution process, where the committee of creditors (CoC) serves as the central decision-making body, bringing commercial judgment and governance to the process. This framework provides PE investors with greater certainty and speed while preserving underlying business value.

As an added benefit, Section 32A of the IBC offers immunity to the acquirer from prior criminal liability of corporate debtors (excluding certain tax and regulatory claims), ensuring a clean acquisition without legacy baggage.

The IBC (Second Amendment) Act 2018 also clarified that Competition Commission of India (CCI) approval must be obtained before CoC approval, eliminating delays and regulatory uncertainty. In practice, the CCI has supported the time-bound process by granting approvals within 15–20 days in several cases.

Other Regulatory Pushes

The IBC regime has been supported by several other regulatory alignments. Governance issues in NBFCs were addressed by extending a similar framework through the Financial Service Provider Rules of 2019. This allows the RBI to appoint administrators in case of insolvency of an NBFC (as seen in the case of DHFL).

SEBI has also exempted acquirers coming through CIRP from open offer requirements (e.g., Tata Steel–Bhushan Steel, JSW–Monnet Ispat).

The RBI’s Master Directions – Transfer of Loan Exposures (2021) expanded eligible buyers of stressed loans beyond banks and ARCs to include all companies under the Companies Act, 2013. The directions also mandate Swiss Challenge auctions and two independent valuations of the underlying loan or asset for transfers exceeding ₹100 crores, improving price discovery and governance.

Foreign investment in corporate debt has remained limited. Asset Reconstruction Companies (ARCs), set up for this purpose by the government under the Securitisation Act, 2002, have struggled to play a major role. Many ARCs have been burdened with old, poor-quality loans, lack sufficient capital, and face a weak secondary market for distressed assets. As a result, they have handled only about 25–35% of total NPA resolutions since the IBC came into effect.

In 2021, an RBI expert committee recommended overhauling the ARC model, suggesting that ARCs should be allowed to submit resolution plans directly, invest smaller amounts initially, and attract a wider pool of investors.

Major Challenges for Investors

The IBC imposes strict rules on who can bid for distressed assets. Section 29A of the IBC disqualifies promoters of defaulting companies and their related parties. This was tested in the ArcelorMittal case, where indirect links to a past non-performing asset led to disqualification.

At the same time, funding options for such distressed assets are limited. Indian banks are not permitted to lend for equity acquisitions, and under FEMA and ECB regulations, foreign debt cannot be used to buy shares. This means PE firms must rely on internal funds or onshore investment structures such as AIFs or FPIs to structure these deals.

While the IBC mandates that resolution processes conclude within 330 days, in practice, many drag on well beyond that due to litigation. As of March 2024, the average CIRP took 679 days.

RBI’s Securitisation of Stressed Assets Directions, 2025: New Framework

To expand the distressed asset market, the RBI released these directions in April 2025 proposing a new model. Bypassing the ARC model, banks can now sell bad loans (where ≥90% are NPAs) to special purpose entities (SPEs). The SPEs issue security notes to investors, with assets segregated into retail and corporate pools.

These directions include provisions for independent resolution managers to handle recovery, dual external valuation reports to ensure transparent pricing, and strict investor due diligence.

Practical Considerations

Private equity funds scouting for distressed assets in India will have to be strategic in selecting the acquisition route — whether purchasing equity, being part of resolution plans, or acquiring debt. It often makes sense to use onshore AIFs or register as FPIs to acquire such assets.

Lengthy timelines caused by litigation, and the need for multiple regulatory approvals, will also need to be factored in.

Regulatory Progress and Market Outlook

Recovery rates under the IBC have now risen to 40–50% of claims, and promoters are also learning that failure to repay loans may result in losing their companies. As of April 2025, more than 3,400 companies have been resolved under the IBC, with a recoverable value of ₹3.58 lakh crore.

To address larger NPAs, the government has established institutions such as NARCL and IDRCL with sovereign guarantees. Model cross-border insolvency provisions (based on UNCITRAL principles) are also being developed to facilitate greater foreign engagement.

While challenges such as sluggish timelines, regulatory hurdles, and a shortage of specialised talent remain, India’s distressed asset space is now more robust than ever, making it an increasingly attractive prospect for global long-term capital.

(Winnie Shekhar, Partner, CMS INDUSLAW.)

Views are personal and do not represent the stand of this publication.