THE GREAT IN­DIAN FIRE SALE

Financial Chronicle - - EDIT, OPED, THE WORKS - SAN­DEEP BAMZAI

THE KER­FUF­FLE over the twin bal­ance sheet prob­lem af­flict­ing In­dian’s fi­nan­cial sys­tem is not go­ing away in a hurry. Over lever­aged cor­po­rates and banks en­cum­bered with those bad as­sets have acted as a drag on earn­ings for both seg­ments of the eco­nomic vec­tor. Com­pa­nies have gone un­der, un­able to deal with the bur­den of con­stant ser­vic­ing of those loans through in­ter­est pay­ments, while a vast swathe have been sent into in­ten­sive care for re­sus­ci­ta­tion. In­dia’s li­cence per­mit raj never ac­tu­ally went away, de­spite the un­fet­ter­ing of what was for years a strictly com­mand econ­omy. The 2G spec­trum and coal scams were man­i­fes­ta­tions of back­door crony­ism which al­lowed a quiet re­turn to li­cence per­mit raj by giv­ing pref­er­en­tial ac­cess to pre­cious and scarce nat­u­ral re­sources vir­tu­ally free.

Ear­lier, Atal Bi­hari Vajpayee, through his pri­vati­sa­tion pro­gramme, also al­lowed sev­eral pub­lic sec­tor com­pa­nies — sick and prof­itable — to be re­struc­tured and res­ur­rected. New life was breathed into many strug­gling PSUs, though for ev­ery Maruti, Balco, Hin­dus­tan Zinc and IPCL suc­cess story, there was a Mod­ern Foods, Jes­sop & Co type of neg­a­tive story. For most part these ac­qui­si­tions were value ac­cre­tive. Even Mod­ern Foods has now been re­vived af­ter HUL had shut down its man­u­fac­tur­ing fa­cil­i­ties in the north a decade ago. The com­pany con­tin­ued work­ing with its six man­u­fac­tur­ing fa­cil­i­ties, of which four are in the south and one each in Mum­bai and Kolkata. Last year, the com­pany was sold to Ever­stone Cap­i­tal and they re­launched in Delhi this June with eight bread vari­ants. For Jes­sop, the old­est en­gi­neer­ing firm in In­dia, life has come full cir­cle. Last year, the Ma­mata Banerjee gov­ern­ment took over the man­age­ment of this 200-yearold en­tity on Fe­bru­ary 27, 2016, as the main fac­tory of Jes­sop was ly­ing closed for more than four years. It be­came sick and was re­ferred to the Board for In­dus­trial and Fi­nance Re­con­struc­tion in 1995. By 2003, Jes­sop had a neg­a­tive net worth of Rs 358 crore and that, per­haps, led it to the strate­gic di­vest­ment path back in Au­gust that year. Pawan Ruia owned Ruia Coa­tex bought the con­trol­ling stake (72 per cent) in Jes­sop through a bid­ding process for a pal­try sum of Rs 18.18 crore.

The new In­sol­vency and Bank­ruptcy Code once again al­lows an op­por­tu­nity for a great In­dian fire sale. The new In­sol­vency res­o­lu­tion pack­age un­veiled by the gov­ern­ment has one ma­jor prob­lem built in, it doesn’t pre­clude orig­i­nal own­ers for mak­ing a bid and buy­ing them back cheap, shorn of debt. In­stead of bar­ring will­ful de­faut­lers it al­lows every­one to make a pitch for the stranded as­set. Many reckon that this loop­hole should be plugged and that can only hap­pen if the gov­ern­ment re­drafts the rules to de­bar orig­i­nal pro­mot­ers. Oth­ers be­lieve that the right way of go­ing about this would be to bring an amend­ment to bear, which pre­vents the orig­i­nal pro­moter from pick­ing up his old com­pany. The jury is out on this sen­si­tive is­sue and many bankers and in­dus­tri­al­ists have spo­ken out in favour and against.

Re­cently Es­sar Steel & Bhushan Steel which have un­der­gone the in­sol­vency process trig­gered the de­bate when their pro­mot­ers bid for stressed as­sets gen­er­at­ing a con­tro­versy. Ide­ally, strin­gent mea­sures, in­clud­ing foren­sic au­dit to scru­ti­nise the pro­mot­ers bid­ding for such stressed as­sets, would be one way for­ward. Gen­uine busi­ness losses or eco­nomic and cycli­cal down­turn may well be re­spon­si­ble in some cases for the debt bur­den. Cru­cially, the ex­ist­ing pro­mot­ers have the do­main knowl­edge and un­der­stand­ing to run op­er­a­tions and need to be given a ROFR (right of first re­fusal) af­ter check­ing their credit wor­thi­ness and an­tecedents by bring­ing about changes in the res­o­lu­tion plan. More­over, they can work in con­junc­tion with as­sets re­con­struc­tion com­pa­nies to re­shape the fu­ture of these run­ning con­cerns with em­ploy­ees and rev­enue books.

Take tex­tile man­u­fac­turer Alok In­dus­tries, one of the dirty dozen iden­ti­fied by RBI in June for bank­ruptcy pro­ceed­ings af­ter hav­ing de­faulted on loans. Now, it emerges that Re­liance In­dus­tries may well be a suitor for a cou­ple of the em­bat­tled com­pany’s di­vi­sions — cot­ton yarn, ap­parel fab­ric, home tex­tile and polyester yarn. The IRP had in­vited bids for Alok’s as­sets from suit­ors and Oc­to­ber 12 was the last day to place the same. The court is­sued the order fol­low­ing a pe­ti­tion filed by HSBC on be­half of a few un­se­cured lenders to set­tle dues amount­ing to $55 mil­lion. The ac­count was clas­si­fied as non-per­form­ing in the books of the bank by Novem­ber 2016. Alok In­dus­tries was ad­mit­ted by the Na­tional Com­pany Law Tri­bunal’s Ahmed­abad bench on July 19, which gives the lenders and the pro­mot­ers, the Ji­wrajka fam­ily, time till the mid­dle of Jan­uary to ar­rive at a res­o­lu­tion plan. They

will get an­other 90 days to come up with a work­able scheme, fail­ing which the as­sets of the com­pany will be liq­ui­dated. The com­pany posted a loss of Rs 3,502 crore on rev­enue of Rs 8,326 crore in the year ended March 2017. So, this is a run­ning con­cern crushed un­der a moun­tain of Rs 20,000 crore debt.

Let me give you an­other re­cent in­stance. As re­cently as ear­lier this month, Devon­shire Cap­i­tal, a global pri­vate eq­uity ma­jor, has picked up 51 per cent stake in the Indore-based Ruchi Soya In­dus­tries, as part of the lat­ter’s debt re­struc­tur­ing plan. As per the pact, a special pur­pose ve­hi­cle, MRIG Trad­ing, will be formed. Devon­shire Cap­i­tal will have full con­trol of the SPV as well as 100 per cent eq­uity in cer­tain spe­cific ed­i­ble oil brands and the dis­tri­bu­tion busi­ness of Ruchi Soya, to be trans­ferred to this SPV. The to­tal con­sid­er­a­tion for the trans­ac­tions is Rs 4,000 crore. Ruchi Soya will con­tinue with busi­nesses such as wind en­ergy, ed­i­ble oil crush­ing, re­fin­ing and man­u­fac­tur­ing, said a spokesman. Ac­cord­ing to sources, Ruchi Soya has a debt of Rs 8,000 crore. The firm was fac­ing an in­sol­vency pe­ti­tion at the Na­tional Com­pany Law Tri­bunal.

Now one hears that Jaypee In­frat­ech, a sub­sidiary of Jaiprakash As­so­ciates that is un­der­go­ing in­sol­vency pro­ceed­ings at the be­hest of IDBI Bank, has re­ceived in­ter­est from 18 po­ten­tial bid­ders. A num­ber of prom­i­nent cor­po­rate groups, in­clud­ing banks, as­set re­struc­tur­ing com­pa­nies and in­dus­try play­ers, have taken part in the bid­ding process for the builder’s as­sets. Amid a wider de­bate on whether pro­mot­ers should or should not be al­lowed to take part in bid­ding for toxic firms, it is learnt that the pro­mot­ers of Jaypee In­frat­ech are also keen to present a res­o­lu­tion plan. The in­sol­vency res­o­lu­tion pro­fes­sional had in­vited ex­pres­sions of in­ter­est from par­ties, stat­ing that to be shortlisted, the party should be a cor­po­rate body with a min­i­mum net worth of Rs 1,000 crore as on March 31, 2018. Among the par­ties who have ex­pressed in­ter­est in­clude Vedanta Group, Es­sel High­ways, Lodha Group, L&T, Cube High­ways from Sin­ga­pore, Ko­tak In­fra, SARE Group, Deutsche Bank, As­set Re­con­struc­tion Com­pany (In­dia) Lim­ited, Su­rak­sha Re­alty, Tata Re­alty and JSW. Global steel be­he­moth ArcelorMit­tal, is keen on bid­ding for stressed as­sets fac­ing in­sol­vency pro­ceed­ings. Among the 12 bad loan ac­counts re­ferred by the Re­serve Bank of In­dia for in­sol­vency pro­ceed­ings, five are from the steel sec­tor: Bhushan Steel, Es­sar Steel, Bhushan Power & Steel, Mon­net Is­pat & En­ergy, and Elec­tros­teel Steels. It has been re­ported that in July, a team from SBI Cap­i­tal Mar­kets, which is ad­vis­ing lenders on re­struc­tur­ing pack­ages for some of these com­pa­nies, had vis­ited London to meet the se­nior man­age­ment of ArcelorMit­tal. The idea was to get the LN Mit­tal helmed com­pany to par­tic­i­pate when the as­sets came up for bid­ding. Mit­tal has been keen on In­dia ever since his green­field ven­ture never took off in south­ern In­dia.

It is a fire sale with a twist and many suit­ors are queu­ing up for the bride. This way, In­dia’s acute twin bal­ance sheet prob­lem will also see res­o­lu­tion and gross cap­i­tal for­ma­tion may well be­gin again in the pri­vate sec­tor where in­vest­ment pipe­lines have been oblit­er­ated.

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