To back the growth plans of ARC, JM Finance, its parent company, has already invested about Rs 2.8 billion as capital in 2017-18 and is expected to invest another Rs 2 billion in the next few quarters.
Anil Bhatia, managing director and chief executive officer of JMFARC last week highlighted some key trends and developments that will bolster the asset reconstruction space.
“Typically, when a company begins defaulting on their loans and their accounts are classified as non-performing assets (NPAs) they tend to, lose focus while trying to manage daily cash flows, employees, and legal situations.
Our belief is that we look at the underlying value of assets and if we see strong future business potential, we provide right financial, operating and management support,” Bhatia said.
Asset reconstruction companies (ARCs) are specialist financial institutions that take over the ownership and management of a stressed or defaulting company, and either restructures their balance sheets, which could involve renegotiating loan agreements to ease some of the cost-pressures or arrange for working capital lines of funding, if required.
The new business plans can involve replacing the stressed or defaulting firms’ existing management with reputed industry professionals.
Some ARCs, like JMFARC, like to bring in a strategic partner with the requisite experience in a particular sector. In the Alok Industries insolvency case, JMFARCs resolution plan included partnering with Reliance Industries Limited (RIL) given its experience in the textile industry.
Once a company’s debt is restructured and/or a new business strategy is put in place, the ARC monitors the progress of the firm.
“If productive assets are not leveraged properly, it is an absolute loss of the available resources. So, the focus should be on putting assets to maximum use,” Bhatia said.
In the likelihood of the company’s earnings being turned around, they can seek refinancing opportunities or tap cheaper sources of funds.
If in case it is a listed company, the turnaround of operations and improved performance will be reflected in rising stock prices and market capitalisation.