Vulture funds on the prowl

Vultures are scavengers, they circle around the prey which they know is going to die soon; this way the hunt is easy. In the same vein, in the corporate world, we have “Vulture Funds’. The concept is similar to the bird – hunt for companies that are on the verge of dying. And currently such funds seem to have a very busy time, spoilt for choice.

Starting from November’15, the RBI allowed foreign portfolio investors (FPIs) to invest in bonds that are in default, partly or fully, if the residual maturity is at least three years. With the advent of SDRs on the rise due to rising NPAs and high debt companies being unable to repay, vulture funds are on the lookout for distressed assets  as they can buy these at a steep discount and then put a lot of pressure on companies to perform.

Excluding financial companies, the BSE 500 entities together have Rs 27 lakh crore of debt in their books. According to RBI, 11.1 per cent of total bank advances of Rs 68 lakh crore were stressed as on March 2015. While 4.6 per cent of these loans were bad debts, the rest of the stress came from restructuring.

Vultures, in a way, clean up the ecosystem and similarly, vulture funds help clean up the financial system. Both sound morbid but essential.