The great Indian fire sale

The kerfuffle over the twin balance sheet problem afflicting India’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 the 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 has 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 commanded economy. The 2G spectrum and coal scams were manifestations of backdoor cronyism which allowed a quiet return to the licence permit raj by giving preferential access to precious and scarce natural resources virtually free.

Earlier, Atal Behari Vajpayee, through his privatisation programme, 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 and Jessop & Co type of negative story. For most part, these acquisitions were value accretive. Even Modern Foods has now been revived. HUL had shut down its manufacturing facilities in the north a decade ago, but 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 re-launched in Delhi this June with eight bread variants.

For Jessop, the oldest engineering firm in India, life has come full circle. Last year, on February 27, the Mamata Banerjee government took over the management of this 200-year-old entity 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 crores and that perhaps led it to the strategic divestment path back in August that year. The 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 crores.

The new Insolvency and Bankruptcy Code once again allows an opportunity for a great Indian fire sale. But the new insolvency resolution package unveiled by the government has a major inherent problem; it doesn’t preclude original owners from making a bid and buying them back cheap, shorn of debt. Instead of barring willful defaulters, it allows everyone to make a pitch for the stranded asset. Many reckon this loophole should be plugged and that can only happen if the government redrafts the rules to debar original promoters. Others believe the right way of going about this would be to bring an amendment 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 of and against it. Recently, Essar Steel and Bhushan Steel, which has undergone the insolvency process, triggered the debate when their promoters’ bid for stressed assets generated a controversy. Ideally, stringent measures, including forensic audit to scrutinise the promoters’ bidding for such stressed asset, 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 right of first refusal after checking their creditworthiness and antecedents by bringing about changes in the resolution plan. Moreover, they can work in conjunction with the 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 the 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. This has given the Jiwrajka family, the lenders and promoters in this case, time till mid-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 crores on revenue of Rs 8,326 crores in the year ending March 2016. So, this is a running concern crushed under a mountain of Rs 20,000-crore debt.

Let me give you another example. Early this month, Devonshire Capital, a global private equity major, picked up 51 per cent stake in Indore-based Ruchi Soya Industries Ltd as part of the latter’s debt restructuring plan. Ruchi Soya has a debt of Rs 8,000 crores and is facing an insolvency petition at the National Company Law Tribunal. As per the pact, a special purpose vehicle, MRIG Trading Pvt Ltd, 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 would be transferred to this SPV. The total consideration for the transactions is Rs 4,000 crores. Ruchi Soya will continue with businesses such as wind energy, edible oil crushing, refining and manufacturing.

Now one hears that Jaypee Infratech, a subsidiary of Jaiprakash Associates, presently undergoing insolvency proceedings at the behest of IDBI Bank, has received an 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 entity with a minimum net worth of Rs 1,000 crores as on March 31, 2017. Among the parties that have expressed interest are 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 Arcelor Mittal is keen on bidding for stressed assets facing insolvency proceedings. Among the 12 bad loan accounts referred by the RBI 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 Arcelor Mittal. The idea was to get the L.N. Mittal-helmed company to participate when the assets came up for bidding. Mittal has been keen on India ever since his greenfield venture flopped.

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.