For Indian bankers, 2010 would count as a watershed year. It almost wasn’t one. Kolkata-headquartered steel maker Ispat Industries, with a 3.3 million tonne steel plant in Dolvi in Maharashtra, was floundering.It had around Rs 9,500 crore of debt on its books (as much as Kingfisher Airlines' debt) and an interest outgo of Rs 1,200 crore. A 15-month financial year from April 2009 to June 2010 had ended with a loss in excess of Rs 300 crore, following the over Rs 1,000 crore loss recorded for 2008-09. The bankers (IDBI, ICICI, State Bank of India among many others) wanted a management change. The promoters PK Mittal and VK Mittal had agreed to sell their 40%-odd stake, and yet the sale was not going through. Like all Indian promoters, the Mittals too seemed keen to hold on in the hope of one more tailwind to turn around the company. In late 2010, the banks decided to try a new strategy of starving the company of working capital.“The idea was to choke some of the working capital loans for the steel plant’s finishing mills but leave the blast furnace running,” says an investment banker who was in the midst of all this at that time but wants to remain anonymous. “Within 42 days the plant was sold.” Sajjan Jindal-promoted JSW Steel bought Ispat Industries in December 2010. It is one of the biggest deals in recent history in which a flagship plant of a large group changed hands, after lenders forced their hand.At the time of the deal, Jindal reportedly said that it took him eight days to convince VK Mittal about the merits of the acquisition Mittal, for his part, had reportedly said he had been scouting for partners for two to three months, and that JSW was “a perfect fit”.Mittal couldn’t be reached for this feature. Six years on, in 2016, one would be tempted to assume that getting distressed assets to change hands would have become easier, what with banks armed with mechanisms like strategic debt restructuring (SDR); this allows banks to take over 51% of a company’s equity and sell it. Yet, only a handful of transactions in distressed assets have been sealed. The pressure from the Reserve Bank of India (RBI) on Indian public sector banks to recognise bad loans with an aim to clean up bank balance sheets by March 2017 has not helped.With bad loans in excess of Rs 4 lakh crore and cumulative losses of Rs 18,000 crore, bankers seem to have grown feet of clay when it comes to selling assets of the defaulters. Even in cases where promoters have been eager to sell or monetise their performing assets, there has been tardy progress.At last count, between steel and power plants there were 57 units up for sale in India (see Assets for Sale). Add to that over two dozen road assets, a few ports and a Formula One racing track. “This round of mergers and acquisitions will test the resolve of all players, and humble many,” says Kaustubh Kulkarni, managing director and head of investment banking at JP Morgan “We are flush with sell mandates, the market is abuzz, but deals are rare,” says Sandeep Upadhyay, managing director, Centrum Infrastructure Advisory. Among the larger notable deals that have concluded are two cement transactions: Reliance Infrastructure sold its cement unit to Birla Corporation for Rs 4,800 crore in February 2016 and Jaypee Group sold its Karnataka plant to Ultra Tech for Rs 16,000 crore in April.In the same month Sajjan Jindal’s JSW Energy picked up the Chhattisgarh power plant of Jindal Steel and Power, promoted by his brother Naveen, in a deal estimated at between Rs 4,000 crore and Rs 6,500 crore. GVK Power sold a 33% stake in Bengaluru airport to Fairfax for Rs 2,149 crore. Last October, Gammon Infrastructure had sold its nine road assets to an entity set up by Canadian fund manager Brookfield and Kotak for Rs 6,750 crore. And in November, Reliance Infra signed a deal to sell 49% in its Mumbai power distribution company to the Canadian Pension Fund for Rs 15,000 crore.However, for the rest, there are dealbreakers aplenty. A reluctant promoter is often the first culprit. And if he is willing, often his numbers are dodgy. An investment banker recounts how last year he got a debtridden steel plant promoter to meet prospective buyers. During the course of the meeting, the promoter asked the investor to provide him with $300 million and he would sell his plant to a proxy and buy it back, making some money for the investor in the process.He told the investor that he does not intend to sell his steel plant and is attending the meeting only to please the bankers.“This has happened to me at least 100 times,” the banker says. In fact, earlier this year the RBI sent out a warning to banks to be careful of such deals or round-tripping, where the promoters set up a proxy to buy their own firms and in the process get the banks to lower the debt in the new entity.In another case, related to telecom infrastructure, a private equity (PE) firm spent almost $1 million on a due-diligence exercise. After the process found several holes in the numbers presented by the promoters, the PE wanted to negotiate down the price, and the deal fell through.While promoters are coy about selling out, the bankers are paranoid. Recognising a bad loan hits the balance sheet of the bank, and offering a debt-haircut as a part of the deal to the new buyers means the fear of future scrutiny for PSU bankers. Banks have been talking about change in management in two steel companies for some time now. Essar Steel, promoted by the Ruias, and Bhushan Steel both have debt of Rs 40,000 crore on their books and have been declared as nonperforming assets.Yet, instead of forcing their hand, as the bankers did for Ispat, bankers have been hesitant and want to offer them more chances. Essar Steel has just been given a new 15-day deadline to submit a fresh repayment plan that runs out in mid-June. Bhushan Steel has again been given a June 30 deadline to ramp up production. An Essar spokesperson said that the company is not aware of any meeting of bankers or a deadline, but added that it has submitted a proposal to the banks and discussion on the same is in progress. Nitin Johri, chief financial officer of Bhushan Steel, said: “We have already reached the targets set by banks, without any additional working capital. We will slowly ramp up further. Sale of assets are also in the pipeline.”While these two companies are still managed and controlled by their promoters, the banks have already invoked the SDR mechanism for 19 other companies in the last one year. Not a single one among these has been sold yet. In fact, sources say that after taking over these assets, banks are in no position to run them. As a result the promoter continues to manage the asset. After State Bank of Patiala took charge of Monnet Ispat & Energy, it received 17 notices from the incometax department, leaving the bank officials in a quandary.It is not that there are no buyers. There are Indian companies like JSW or even Tata Steel, which are in the market for a steel plant. Vedanta, for example, is looking for a port (see Buyers on the Fray). Private equity funds like Blackstone or TPG are scouting around for revenue-generating assets and have even changed the approach and are open to buy out ventures instead of just buying a stake. Indian professionals like former ArcelorMittal chief financial officer (CFO) Sudhir Maheshwari through his venture Synergy Capital or former Orange CFO Sanjiv Ahuja are also looking for a play in India.But everyone wants a discount and lower debts on the books. The state of some of these assets is so bad that Kulkarni of JP Morgan says one would need to pay the buyers instead to take them over.There are cases of asset stripping that scare away buyers. Many of the 37 power plants up for sale just have a boundary wall and some equipment lying in boxes. Horror stories include unpaid employees and security guards selling whatever they can lay their hands on. Then there are stories about promoters who have given up on proposed projects and have themselves resorted to selling machinery to take home some cash.There is a power plant in Maharashtra that does not even have a security guard. Of the 37 power plants, at least 20 do not have either a fuel-supply agreement or a power purchase agreement in place. Many plants and machinery bought piecemeal from Chinese vendors now may need to be replaced, and replacement is not an easy task, as some of the vendors may have also folded up. SBI chief economist Soumya Kanti Ghosh says: “The government will have to work out some kind of an indemnity clause for bankers to be able to take a haircut on their debts and sell such assets.” And only last week, finance minister Arun Jaitley promised to protect bankers who cut genuine deals to lower non-performing assets on their books.This, of course, brings us back to the original question — are Indian promoters, bankers and shareholders ready for the concept of management change? Kulkarni of JP Morgan believes the time has come. He says: “Indian companies have been built on the asset aggregation model. That is now changing.”And Deshpande of Centrum points out how GMR has changed its motto to “asset light is asset right”, indicating it will stay away from putting large assets on its balance sheet. The Reliance Anil Dhirubhai Ambani Group has also displayed a similar intent. It has been consistently shedding assets from its books through the last few years, even as it brings in strategic partners like Nippon Life Insurance for Reliance Capital subsidiaries. It is now keen to monetise its revenue-generating assets to be able to invest more in defence manufacturing, its chosen area of investment.Reliance ADA officials did not respond to emailed queries.However, not everyone plays with a straight bat still. An investment banker, speaking on conditions of anonymity, reports how a company wanting to sell assets had insisted that nothing be put up on company websites or on the bankers’ website. “They insisted that letters be addressed to certain prospective buyers.We wrote the letters and then much later realised that the company did not even send out all of them,” the I-banker says. He adds: “There is this situation in India where promoters know each other through family relations and often offer to save each other in times of trouble, creating a shroud of non-transparency.Add to that, bankers who get pulled into the same circles follow the promoters to fund acquisitions abroad without understanding what they are getting into. Can you imagine, one of the companies under SDR today had flown all its bankers to Pattaya for the final meeting!”For the last three years, debates on debt-heavy Indian companies have relied on an annual series of reports by Credit Suisse titled “House of Debt”, written by a team of researchers led by Ashish Gupta.The report tracks the travails of the debt-heavy Indian corporate sector. Gupta’s team also comes up with a quarterly health tracker of these companies.The groups covered in the report’s 2015 edition are Adani, Essar, GMR, GVK, JSW, Jaypee, Lanco, Reliance ADA, Vedanta and Videocon. In the June edition of the quarterly update, Gupta pointed out that while sales and EBITDA (earnings before interest, depreciation, tax and amortisations) of the Indian corporate sector moved up in the January-March 2016 period, those of the debt-heavy conglomerates, as a category, went down substantially (see The Malaise gets Deeper) quarter on quarter.A month ago, in May 2016, SBI’s Ghosh had put out a report countering Gupta’s line, suggesting hidden treasures in the houses of debt and there are ways these groups are moving towards becoming “House Sans Debt”. Ghosh told ET Magazine: “The CS report looks at ability to service interest. But it does not look at some other important data like debt to net worth or debt to market capitalisation. Some of the large corporate groups with debt still have unlisted businesses in their stables that can be utilised to deleverage debt.”Ghosh says he sees Rs 2 lakh crore of debt deleveraging ahead, out of which Rs 1 lakh crore could happen in the financial year 2016-17.He also expects initial public offerings to play a big role in the deleveraging exercise. In fact, Ghosh points out there are success stories that need to be taken note of. “Haldia Petrochemicals has been turned around, hand-held by State Bank of India.Indo Count Industries that went into CDR (corporate debt restructuring) in 2008 has repaid its debt,” he says.Clearly, the signals, as Ghosh reads them indicate that for many companies redemption from debt default can happen without a sell-off or change of management.That’s something Gupta of Credit Suisse can’t agree with. Says Gupta: “We are looking at the interest cover numbers (ratio of interest payout to earnings before interest and taxation) and ability to pay back debt. Many of the large groups with interest cover of less than one, to de-leverage may need to sell more than just road assets, as these are only a small part of their capital employed and debt.” Even after selling the crown jewels, the picture has not become rosy, as the exit of revenue-generating assets is not helping lower the interest cover ratio for some as it takes away EBITDA too.Ajay Saraf, executive director of ICICI Securities, says that while there are buyers for road assets in the market, there are not many for power and steel. However, he feels that asset sales must happen now as there is some kind of a consensus on protecting bank officers. “Buyers are not willing to pay for the debt on the books. Now with the RBI push, and banks having done the provisioning, it may have become easier for them to take haircuts on the debt.” He adds that the newly passed bankruptcy code will also boost the asset sale process as it envisages bypassing the management. Perhaps it’s finally time to dust off those "for sale" signs.Hemant Kanoria, chairman of the infrastructure-focused financial services group SREI , has many claims to fame. But of late, his having made money out of buying Kingfisher Airline’s debt is the one that rings loud and clear. He spoke to ET Magazine on how he did that and how distressed assets can be turned around. Edited excerpts:We had acquired the Rs 450 crore Kingfisher debt from ICICI Bank at a discount in 2012 and we had created a ring-fenced security around it. The debt was backed by shares of United Spirits. When we realised that things were not going in the right direction we sold the shares. We were able to recover our money and we also deposited a surplus of Rs 650 crore with the receiver of the Karnataka High Court. We did not just rely on cash flows of the company, but ensured the investment was ring-fenced with other securities.(SREI was aided by the sudden spurt in USL scrip before the Diageo investment between 2012 and 2014 from Rs 800 to Rs 2,900.)An asset is like a human body and it is a complicated process to find a solution to its problems. A road project may be stuck because the promoter could not pump in cash on time or the lenders did not want to lend more or may be some piece of land acquisition is stuck.A power project may be stuck because of the lack of fuel or power purchase of agreements. There can be hundreds of things. Because of our experience with infrastructure, we are aware of the problems and can work on solutions, arrange for funds, or speak to governments. We can bring in a wideangle approach and try and solve the problem. We are better off than some asset-reconstruction companies because most ARCs have become specialists in some small area. On the other hand, because we have an infrastructure play, we understand the problems that can happen and can bring in expertise in both financial restructuring as well as in operational aspects.On banks' ability to take haircuts on debt We need a transparent framework for banks to be able to sell their debt at a discount or take a haircut on it so that in future the Central Vigilance Commission or an enforcement agency might not come in and take a different view of the entire deal.