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

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.