Will be first takeover by banks under new rules
Given how rapidly bad and stressed assets of banks, especially those in the public sector, are growing—those for PSU banks rose from 11.7% of loans in FY14 to 13.5% in FY15—they present both the biggest threat to the economy as well as opportunity. With loans going bad, and banks needing to provide for them in their books, this increases the need for capital from the government—if PSU banks are to grow their loan book at a brisk pace, they need R2.6 lakh crore of capital between FY15 and FY19, according to Crisil, money that the government is in no position to give them. To the extent banks are able to take over stressed assets and sell them—at a deep discount—this alleviates their cash crunch and also gives a big fillip to the investment cycle as, say, a power plant that is not viable at its current price becomes viable if bought at a 25-30% discount. In other words, if banks are able to ease out owners and sell their companies/plants at a discount, India’s next round of growth can be relatively asset-light. This is where Electrosteel comes in—it is the first company that banks are about to take over under the new strategic debt restructuring route (SDR) that RBI has cleared recently. While banks were always free to raise their equity holding in companies once borrowers defaulted, Sebi rules forced them to pay a high price for this since the formula took into account the price for a period before the actual conversion—this is why, in 2011, when Kingfisher was defaulting on loans, a consortium of banks converted the debt into equity at a price that was 60% higher than the prevailing market price. The SDR route changes that as banks can now convert the shares at a discount to the face value. Banks have now invoked the rule to hike their equity and are in talks with two firms—Tata Steel and a Singapore-based firm—to take over Electrosteel once they hike their stakes via the SDR.
Banks have, in the past, tried to get rid of errant promoters by using various tools at their disposal including declaring them to be wilful defaulters, but the process has been very slow. In the case of Vijay Mallya, the process of declaring him a wilful defaulter remains stuck in courts. When SBI tried to take possession of even a Mallya bungalow in Mumbai—the takeover of the Goa bungalow is caught up in a fight over whether Portuguese law applies!—it had to fight a battle with, if you please, the taxman which had also filed a suit against Mallya for recovery of taxes. In other cases, such as one involving telecom companies, the government doesn’t allow bankers to take over spectrum—the most valuable asset of telcos – in case borrowers default. In the case of the Delhi-Gurgaon expressway which was in default, lenders had a long struggle to take over the company with NHAI creating all manner of hurdles. And, as the RBI Governor has said on various occasions, there simply aren’t enough debt recovery tribunals to ensure defaulter cases are quickly settled. There have, of course, been some cases over the past year where banks have been able to convince lenders to sell some of their assets to other firms at a discount, but it remains a very small start. If the Electrosteel example is replicated in other NPAs, this could be a big opportunity, for bankers as well as the economy.