November 20, 2000

The A warning on NPAs
RBI and SEBI ought to take note of this new trick conjured by a leading financial institution to reduce its bad loans. According to sources, the institution has been quietly offloading its holding of worthless corporate debenture through the secondary market accompanied with a comfort letter which promises to buy the debentures back at the original sale price, if the company defaults on redemption or interest payment. Market intermediaries admit that such deals are bad and dangerous, but argue that it is not their job to point this out to the FIs. Also, there are a lot of takers for such debentures. The buyers reckon that their risk is on the FIs and not on the companies — hence it is a safe investment. But what about this institutions’ risk, which is quietly moved off the balance sheet and postponed to some indeterminate future? Already all the institutions are saddled with large NPAs and unless the RBI watches out, such skillful fudging will create an Indian Bank like collapse sometime in future.

No disclosures
When FIs met the takeover panel, one expected them to come up with a smarter set of excuses to avoid disclosure of their equity holdings and supervision by SEBI. Instead, they trotted out the same hackneyed reason about disclosure adding to the paper work and increasing administrative costs. FIs argued that they should not be subject to open-offer rules and that it is perfectly valid, so long as they remain neutral players. So far, they have shown no inclination to destabilise existing management however bad it is or even to protect their own investments, so it seems fair not to ask them to make an open offer when they increase their stake because of debt conversion or subscription to additional equity. It is another matter that this is usually part of their strategy for evergreening accounts and is bad for their own financial health, but it does not trigger the need for an offer to minority shareholders. On the other hand, the FIs arguments about destabilising markets with their disclosures or increased administrative burden are so trite that they can only be dismissed. In fact, the Bhagwati panel ought to force FIs to disclose their holdings, not so much because it will have any impact on the ownership of companies, but in order to send a signal that the institutions are not above the law and subject to the same accountability as other players.

Check and mate
From the perspective of a mere observer, the Gesco takeover is among the most interesting these days. At the time of going to print, it’s seems as though the Sheth-Mahindra combine has won the latest game in a hard fought match by buying out IFC Washington at an expensive Rs 44. However, the high price indicates desperation and seems like a huge gamble based entirely on an expensive line of credit. Until last week, one could only admire the finesse with which the raider — Dalmia clearly advised by an excellent strategist in John Band had nicely cornered Deepak Parekh. The demand for a line of credit similar to the one given to the Mahindras, backed by an escrow deposit of Rs 14 crore in HDFC was such a neat touch, that it had to be admired. Will Dalmia continue his bid at the new offer level of Rs 44. In order to stay in the race, they have to top the offer price. So far, the Dalmias have not revealed their cards, not revised their offer price of Rs 27. Will they spring another surprise or will they back out?

Favouring incumbents
IFC Washington’s deal with the Gesco management to sell its shares for Rs 44 each is another indicator of how the takeover rules work in favour of incumbent management. The Dalmias and the Gesco promoters were both wooing IFC but it is far easier for an existing management to up the stakes than for a raider who risks a failure of his bid itself. The takeover statistics prove this. So far there have been only eight hostile takeover as against 1,000 friendly ones. Of these, two were unsuccessful, two are in court and two were withdrawn. Even among the friendly ones 75 per cent received exemptions from making an open offer. Naturally, minority shareholders find open offers risk and in fact prefer to take advantage of the higher secondary market price during the takeover. If SEBI is serious about corporate restructuring, the takeover panel has to ensure that it makes things a little easier for predators to launch hostile raids.

Updated weekly.

The author's e-mail address is: suchetadalal@yahoo.com

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