Return
to Story Page
To print: Select File and then Print from your
browser's menu
Biju Mathew & Tamal Bandyopadhyay
MUMBAI, FEB 7: Banks and financial institutions are launching an "operation clean up" by converting institutional debt into equity in "erring" companies and eventually taking over the management. An informal discussion with Reserve Bank of India deputy governor SP Talwar has already been taken place in this regard, an institutional source said.
ICICI, IDBI, IFCI, UTI, LIC, and GIC have joined hands to orchestrate the "management-takeover" move. At least three banks -- Bank of India, Bank of Baroda and Union Bank -- are supporting the institutions in the "movement".
"This is the only way to tackle the growing non-performing assets (NPAs) problem. The institutions have been drawing up the plan for quite some time. Now some of the banks have joined them to bolster the move. The pressure will be from both sides -- the term lending institutions as well as the working capital lenders," sources said.
"We will not resort to reschedulement of loans to bail out a company. That will be the last item on ourpriority list. Our objective, henceforth, will be converting debt into equity and eventually opting for a change in management," an institutional source said.
The installation of a new management will not be a difficult task as in most of these companies the dues to financial institutions and banks together, when converted, would amount to more than 51 per cent of the equity which will give them the controling say in the management, sources said out.
The institutions have recently had an informal meeting with RBI deputy governor Talwar to galvanise the banks for a co-ordinated action with FIs on the matter. They also want RBI support to ensure that all the banks will join together in stopping new credit to an identified defaulter.
To start with, each institution and bank may take up the case of top ten defauling accounts in each segement of industry and get into action. "The plan is to convert the institutional debt into equity at the first stage at those companies which have defaulted on debtrepayment. Any `misdeed' of the company would then trigger a change in management," sources said.
Traditionally, the loan covenants have a clause empowering the lenders to convert their loans into equity on default by the corporate. Banks and institutions have been using this clause more as a threat than actually converting debt into equity.
"We are realising that we cannot wait any longer. The time is fast running out. We would start by initiating the move with the top ten defaulters in largest defaulting sector," said a top financial institution source.
Once the institutions take control of the companies, they will ask the existing management to stepdown and replace with induction of a new management, who would either bring in additional fund or the required expertise to turn around the company.
The institutions will adopt the `roll-up' strategy to turn around those companies that are constrained by their uncompetitive size in a globalised market. Under this strategy, the institutions will have theoption of bunching up many sick companies in the same sector and making them viable in size. This strategy has been tried out successfully in the US and other markets.
Sectors like textiles, polyester, sugar and steel are prime prospects for the `roll-up' strategy. In these sectors the number of NPA acounts on account of low economies of scale are numerous and a merged entity would make successful business sense.
INSIGHT
Companies will still need funds
Banks and institutions have for long been trying to adopt measures aimed at acquiring management control in erring companies. Demanding that the promoter holdings be kept with them as collateral while forwarding further loans to such companies was one such measure. The current idea of converting their collective debt into majority holdings in firms is a sound one. By selling off the management control, the lenders will be able to realise a far greater proportion of their dues than would otherwise have been possible. The move will alsohelp the companies so far as interest outgo will be lower if debt is converted into equity. However, two caveats remain. First, converting debt to equity does not alter the fact that these companies require more funding. The question is whether the company is viable or not. The second point, of course is, whether there is the political backing for the move.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------