Yes Bank’s ARC. top bidder for Cerberus

US-based Cerberus, one of the world’s largest distressed asset investors, is likely to acquire a controlling stake in Blackstone’s International Asset Reconstruction Company (IARC), which will be the investment vehicle for the transaction, the people cited above said on condition Of oblivion

IARC is one of India’s oldest asset reconstruction companies (ARCs), founded in 2002 by former Bank of America India CEO Arun Duggal and State Bank of India veteran MS Verma. In 2018, private equity firm Blackstone bought a 51% stake in IARC. HDFC Bank, ICICI Bank and Tata Capital also have stake in the firm.

The development comes after Cerberus postponed its plan to apply for a license from the Reserve Bank of India to acquire a majority stake in the ARC Yes Bank setup.

“Instead, the firm is looking to acquire an existing ARC business to invest in Yes Bank’s bad loans,” said one of the people cited above.

“Being a majority investor, Cerberus will have to apply for a new ARC license, but obtaining a new license from RBI is a time-consuming process. For example, Adani Group’s application to set up ARC is pending with RBI for the last two years,” said another person.

JC Flowers & Co has also submitted a competitive binding bid to buy a majority stake in the proposed ARC of Yes Bank. The sale of the property will be conducted through a Swiss auction where other interested parties will also be invited to bid for the property and match the highest offer. The sale of properties will take place as per the 15:85 structure, with 15% of the transaction value being paid upfront and the rest redeemed in the form of security receipts, depending on the recovery by the ARC.

The proposed transaction will mark Cerberus’ entry into the ARC business. Emails to Cerberus, IARC and Yes Bank remained unanswered.

Last year, the RBI had given in-principle approval to Yes Bank to set up an ARC, provided it is a minority investor, and there is an arm’s length between the seller and the buyer. However, Mint reported on January 13 that the bank wants the right to appoint chairman and key managers across all departments in the proposed ARC while holding a 20% stake.

Successful sale of bad loans is crucial for the revival of Yes Bank, which is looking to raise funds from outside investors to boost its balance sheet. The bank’s board has approved the recent fundraising of 10,000 crore through a mix of debt and equity.

Experts said the ARC business has been hit ever since the RBI made it mandatory for ARCs to conclude deals under the 15:85 structure instead of the earlier 5:95. This means that the ARC will have to pay 15% of the value of the asset in cash, compared to 5% earlier. While the idea was to give ARCs more skin in the game, these firms found it difficult to protect their capital under the new structure if recovery failed.

Besides this, the Securities and Exchange Board of India (SEBI) has recently come up with a guideline allowing distressed asset funds to buy assets directly from banks. However, this does not give the fund the same privileges that an ARC does and limits the opportunities for these companies.

“ARC business is not suitable as banks are not selling under 15:85. Instead they are selling for full cash. It’s hurting us,” another person quoted earlier