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India Must Resolve Corporate Issues With ‘Satyam Mindset’, Says Kotak MF’s Nilesh Shah

Nilesh Shah backs Satyam-like takeovers by the government to restructure existing debt.

A man plays Chinese chess while sitting in a park in a traditional hutong neighborhood in Beijing, China. (Photographer: Qilai Shen/Bloomberg)
A man plays Chinese chess while sitting in a park in a traditional hutong neighborhood in Beijing, China. (Photographer: Qilai Shen/Bloomberg)

India needs to resolve all corporate problems with a Satyam mindset, said Nilesh Shah, referring to the government’s takeover of struggling companies a day after the Narendra Modi administration seized control of a second lender to address the nation’s non-bank crisis.

“I’m happy that we have seen that kind of recovery and resolution in many companies,” Shah, managing director at Kotak Mahindra Asset Management Company and chairman at the Association of Mutual Funds in India, said.

The approach separates the “good Satyam” and “bad Satyam” and offers a viable template for creditors to follow while resolving debt in the current scenario, Shah said. “The benefit of resolving good Satyam has been fantastic for all the stakeholders. Employees have retained jobs, shareholders, have made money, lenders have recovered money and the reputation of the IT industry has remained unscathed.”

The Satyam-style rescue refers to the government setting up a managerial board to take over the erstwhile Satyam Computers Ltd. after an accounting scandal in 2009 and its eventual sale to Tech Mahindra Ltd. in a two-part bidding process. India has resorted such a measure after a decade when the government named Uday Kotak-led board to take over IL&FS group after surprise defaults a year ago. Yesterday, the central bank superseded the board of Dewan Housing Finance Ltd. in a similar move.

While lenders have been pushing for more robust and timely resolution plans, their attempts have been complicated by the fact that a big chunk of borrowings of some of the non-bank lenders are through debt securities held by mutual funds like Kotak Mahindra AMC. Unlike banks, mutual funds are not in a position to restructure existing debt, and didn’t agree to participate in the resolution plan.

The newly introduced window for financial service providers under the Insolvency and Bankruptcy Code is intended to help streamline the process and recovery easier for non-bank lenders. This route was taken to resolve Dewan Housing Financial Corporation.

“As a mutual fund industry, which had lent to some of these problem cases, we have now entered the era of recovery of money rather than writing it off,” Shah said. “We are really grateful to all the concerned judicial authorities, government, bureaucracy who have drafted rules and regulations which is now creating a level-playing field between borrowers and lenders.”

Kotak Mutual Fund also had exposure to debt-ridden Essel Group, the promoters of broadcaster Zee Entertainment Enterprises Ltd. The asset manager, after having closed some of its fixed maturity plans with exposure to Essel Group in April-May this year, had promised its investors to pay up the invested amount by September-end.

Shares of Zee Entertainment, offered as a collateral against debt, were sold to recover all dues including interest accrued till date, Shah said. “Today, after six months of agnipariksha, I feel happy and vindicated and we have honoured our commitment and we did what we did for promoters, what is good for our unit holders, our country and the overall market.”

When Zee Entertaiment’s shares started crashing earlier this year, Shah decided against selling them as he believed their intrinsic value was higher than what the market was offering. Selling the stock would have resulted in marginal recovery, but holding on to it would have continued risking his investors’ interests—a dilemma he talked about in an earlier interview with BloombergQuint.

Watch Nilesh Shah’s full interview here: