Title: Distressed debt investments in India: what more needs to be done to strengthen regulations?

Authors: Vikas Srivastava

Addresses: Finance and Accounting Area Group, Indian Institute of Management Lucknow, IIM Road, Prabandh Nagar, Lucknow, 226013, India

Abstract: The paper suggests possible use of government guarantees and credit default swaps for turning around distressed infrastructure sector assets in India, where project finance bank loans are predominant source of funding. The paper lays down the evolution of distressed debt regulation through secondary research and argues out that even now with the introduction of Insolvency and Bankruptcy Code, 2016, political/regulatory risk is unmitigated. The 'turnarounds' can be made more effective if fairly priced government guarantees can be modelled on the lines of credit default swaps. Distressed debt investors would then include the cash outflows for this guarantee in their valuation models. The paper uses a structural model to estimate probability of default on a sample of power companies and then lays down the conceptual framework for pricing the government guarantee. The paper concludes that this further improvement in regulations will, at the end of the day, be beneficial to banks, distressed debt investors, governments and even tax payers.

Keywords: distressed debt; infrastructure finance; credit default swaps; CDSs; government guarantees.

DOI: 10.1504/IJICBM.2019.099289

International Journal of Indian Culture and Business Management, 2019 Vol.18 No.3, pp.368 - 380

Received: 27 Feb 2018
Accepted: 02 Sep 2018
Published online: 24 Apr 2019 *

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