The startup scene in India has become more competitive because of a high frequency of booming companies and smooth exits. Therefore, there are increasing possibilities of startups getting ino the debt traps.
To protect the interests of the lenders in such crisis, there is a need for a distressed funds market, Frankly Wearing Founding Partner Naman Wadhwa said.
Distressed funding allows investors to get an opportunity to buy a company’s debt and acquire enough of it, he said. At the same time, it makes space for debtors to own the company, instead of paying investors’ amounts for debt repayment, he added.
Distressed Funds are attractive for other reasons too. The investors get regular cash in the form of interest payments which is compulsory unlike the payment of dividends, specially in the case of startups, Wadhwa said.
The lenders also enjoys corporate restructuring power and prioritizing debt repayment over long-term sustenance, he said.
With bankruptcy code in place, startup failures can be cushioned by the existence of distressed asset purchase possibility, Wadhwa said.
Means of crowdfunding can also be used to cushion distressed firms, which can be done in the form of a private equity fund, that can be transformed into a publicly tradable asset, he said.
A mechanism can be set up to allow ARCs like Edelweiss’ Asset Management Department or DSP Blackrock’s Distressed Debt Funds for attracting more funds, while necessarily categorizing these investments to be of greater risk for public interest, Wadhwa said.
The pooling of funds from the crowd will have a two-fold benefit – incentivising fund managers to advertise strongly to potential retail investors, which will increase awareness and reeduce risk on large investment firm, that cannot afford to reduce its liquidity by placing funds in a distressed asset, Wadhwa said.
A mechanism can be created within these ARCs to function like Private Equity Players, wherein they can charge a management fee for entering investments into these entities and taking charge of the management of these organizations, he said.
Active participation in management of distressed entities will increase the chances of gain via investment in debt situations, creating more situations like that of 100 per cent gain as illustrated above, while still being a safe bet for these organizations, Wadhwa said.
In worst case scenarios for investors, they lose the ability to recover their debt, but gain the control of the entity, he said.
They can then infuse further capital into these corporations for CapEx/OpEx purposes and aim at maximizing returns thereby, he added.
Such a setup can boost interests of venture capitalists and create a greater demand for direct investments in innovative problem-solving startups, Wadhwa said. This, in turn, will make large investors interested in lend-to-own situations, he said.
“Therefore, requiring strong regulatory policies in place before a market like this is to be established as this could hamper the growth stage that the start-up space in India is, also worsen the process this measure primarily wants to cushion by aggravating the problems that the Small and Medium Enterprise owners may face,” he said.