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Does an AMC & Alternative Investment Fund make sense

The Sunil Mehta panel has recommended an asset management company and Alternative Investment Fund structure for resolving defaults above Rs 500 crore. ET examines the good and bad of the plan.PROS - It shows that the government is committed to solving the bad loans problem. - It would be free of government intervention leaving banks with the liberty to take commercial decisions No investment from the government in AMC. - They have to raise capital from AIF. - Since it would have a private character, talent could be hired from market at best possible salaries. A multiple structure of up to Rs 50 crore, then between Rs 50 to 500 crore and above Rs 500 crore would streamline would streamline the process. CONS - Who would invest in the AMC? Would foreign funds when they can directly invest in the Securities Receipts of an Asset Reconstruction Company or buy a stake in ARCs. - How would an investor be able to redeem security receipts in 60 days when a resolution under even the IBC takes more than nine months. So, who would fund those SR? - If banks invest in the alternative investment fund, the bad loans just move from the right hand to left. NPA in bank accounts may fall, but it just got transferred, not solved. - If price discovery is through open auction of bad loans, some of the banks would sell to AMC and others may sell to ARCs – there are 24 of them. It doesn’t solve the problem of fragmentation. - Resolution of SME loans cannot be completed in 90 days. It is impractical since most of these assets don’t even attract interest from many due to local factors.

Source: ET

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