Vulture Funds in India
The Vulture funds can be best understood by their analogy with Vultures. As an animal is about to die, we see circling vultures patiently waiting to pick over the remains of its carcass. Similarly, the vulture funds are those funds which pick over the remains of a rapidly weakening debtor.
They do so by purchasing the debt or bad assets from a creditor at lowest possible price and then charge the highest possible amount by various means mainly including suing the debtors. This also includes the purchase of the cheap foreign debt being bought by private funds and later suing the debtor for a larger amount than the purchasing price.
Are Vulture Funds successful elsewhere in the world?
Yes. The central idea is to use the litigations to recover the debts. When an asset becomes bad asset, the poor creditors are in distress and sale this bad asset to a low price so that at least some part of that debt can be recovered. On the other hand, the Vulture funds rely upon a “Pari passu” clauses of the litigations which say that all creditors be treated equally.
The vulture funds find favour from the judiciary and legislations also. This is because; the courts have been willing to enforce a vulture fund’s right to collect the full value of the debt. The arguments in favour of vulture funds often rely on the ‘Pari passu’ clauses which require that all creditors be treated equally.
Obviously they flourish in those economies which are in shambles. Thus, these funds have flourished in the poor countries such as those of Latin America and Africa.
Status in India
One can say that India indeed has a favourable environment for these vulture funds, thanks to the locked in assets such as in real estate. Many US-based buyout funds are in fact looking around to acquire bad assets in India. Foreign banks and funds have been looking for buyouts of the assets of companies which have failed or about to fall.
One example of a recent Vulture Fund activity in India was the acquisition of OCM India limited by WL Ross & Co LLC for $37 millions.
Nevertheless, so far, the Vulture Funds have been undesirable in India. The reason given is that – for a developing country like India as the actions of these vulture funds limit debt relief, thereby saddling the national economy with huge debt loads.
Vulture funds with reference to other countries
One of the first nations to face a vulture fund lawsuit was Peru. Other example countries Argentina, DRC etc. A vulture fund named FG Hemisphere had tried to seize the embassy of the DRC in Washington as payment for the debt!
The World Bank estimates that more than one-third of the countries that have qualified for its debt relief programmes have been targeted with lawsuits by at least 26 vultures. The funds have so far received payouts totaling $1bn.
Recently, Donegal International, an offshore vulture fund, came into limelight when it won an award for $15 million from impoverished Zambia in the U.K. High Court. Donegal paid $3 million for some old Zambian debt, and then sued for $55 million, although the London judge reduced the award to $15 million.
Summary
An analogy of vultures and vulture funds is worth enough to understand the Vulture Funds. The concept is new in India and off late, it has been a subject of debate if the vulture funds can flourish in India. The environment here is conducive but some opine that actions of the vulture funds will limit the debt relief and also burden the economy with huge debt loads. So as of now, Indian environment does not support growth of vulture Funds. Peru was the first country in the world to face a vulture fund lawsuit. Other examples are Argentina and DRC and other such countries in Africa. They buy up the debts of countries in chaos and war. Most typically, they seek to profit from buying loans and bonds at large discounts. Vulture funds purchase debt claims as a secondary lender. This means that vulture funds are not primary lenders, but rather are entities that have purchased the debt from some other source, such as a bank.
