Opening India's Stressed Asset Market: A necessary catalyst?

A substantial pipeline of distressed assets positions India as a key market for global investors seeking opportunities in asset resolution and recovery.

By Dhananjay Jain 

India’s financial ecosystem is undergoing a significant shift, with foreign investors showing increased interest in the stressed asset market. Asset Reconstruction Companies (ARCs) have been instrumental in addressing non-performing assets (NPAs), and recent regulatory changes have made the sector more conducive to global participation. Encouraging foreign investment can inject additional capital, accelerate resolution timelines, and strengthen financial stability.

Why Now?

India’s stressed asset market has become increasingly attractive to foreign investors, driven by a combination of regulatory reforms and market dynamics. The implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 significantly streamlined the resolution process for NPAs, offering a transparent and time-bound framework that has enhanced recovery rates. Coupled with reforms by the RBI, such as revisions to the ARC framework, including increased capital requirements and expanded eligibility for Security Receipts (SRs), the regulatory landscape has become more robust and conducive to foreign participation. Furthermore, the establishment of entities like the NARCL and IDRCL signals the government’s commitment to addressing high-value distressed assets, creating structured opportunities for foreign capital.

Indian banks continue to seek capital efficiency by offloading NPAs, creating substantial investment opportunities for foreign players with expertise in restructuring and asset turnaround. India’s gradual liberalisation of its financial services sector, evidenced by increasing Foreign Direct Investment (FDI) inflows, further reinforces this trend. The combination of a structured legal framework, regulatory improvements, and a substantial pipeline of distressed assets positions India as a key market for global investors seeking opportunities in asset resolution and recovery.

Benefits to the Indian Economy

The influx of foreign investment into India’s stressed asset market yields significant economic advantages by directly injecting capital and specialised expertise into the financial system. This capital is deployed to acquire non-performing loans, restructure businesses, and revitalise struggling companies, thereby enhancing liquidity and providing crucial resources for economic activity. Furthermore, foreign investors bring valuable expertise in asset restructuring and turnaround management, strengthening India’s financial capabilities. This increased participation boosts market confidence, signalling faith in India’s economic prospects and regulatory framework, which attracts further investment. By fostering a more mature and sophisticated financial ecosystem, promoting international best practices, and revitalising distressed businesses, foreign investment contributes to job preservation, economic expansion, and a more resilient financial sector, ultimately driving long-term growth and stability.

Benefits to Foreign Investors

Foreign investors are increasingly drawn to India’s stressed asset market due to the potential for high returns driven by valuation gaps and the diverse investment avenues available, including direct asset acquisition, partnerships with Indian ARCs, and Security Receipt investments. This strategic entry into India’s expanding financial sector allows for a long-term presence, bolstered by a regulatory framework offering clarity and transparency. Global firms such as Apollo Global Management and Oaktree Capital Management, along with various hedge funds, have demonstrated interest in India’s stressed asset market, leveraging the structured resolution framework of the IBC. While specific investment details are often confidential, it is known that these and other international firms have participated in acquiring large NPA portfolios from Indian banks and partnered with domestic ARCs, drawn by India’s large, growing economy, ongoing regulatory reforms, and the sheer volume of available distressed assets.

A balanced approach to foreign participation in India’s stressed asset market necessitates robust regulatory safeguards, emphasising due diligence and strict compliance with Indian laws to ensure transparency and accountability. Strategic collaborations between foreign investors and domestic ARCs are crucial for fostering a more efficient resolution ecosystem, leveraging local knowledge and international expertise. Furthermore, it is essential to implement strategic asset protection measures, particularly in sensitive sectors, to prevent undue foreign control over critical infrastructure and maintain national economic security. This approach promotes healthy market dynamics while safeguarding India’s strategic interests.

ARCs: The Backbone of the Ecosystem

Existing ARCs have played a pivotal role in India’s financial ecosystem, developing deep market expertise and strong institutional relationships. However, their ability to resolve large and complex distressed assets—particularly in infrastructure—remains constrained by capital limitations. Strengthening ARCs through regulatory support and broader capital access is essential for enhancing their effectiveness. Expanding the investor base for SRs, including HNIs, has been a topic of discussion within the industry and could inject much-needed liquidity into the sector. Additionally, foreign investment brings not only capital but also global expertise in asset restructuring, potentially improving resolution outcomes. The establishment of the NARCL and the IDRCL underscores the government’s commitment to addressing high-value distressed assets. Allowing for greater foreign participation, within a well-regulated framework, could enhance their impact. A strategic collaboration between domestic and foreign ARCs can foster a more efficient and sophisticated ecosystem, combining local insights with international best practices. The outcomes of the Asset Quality Review (AQR) and subsequent regulatory measures indicate a clear policy direction toward a more robust financial system.

Strengthening the ARC market through structured foreign investment and policy-driven reforms is essential for sustaining this momentum and ensuring long-term financial stability.

(Dhananjay Jain, ED & CEO, Areion Group.)

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