Govtchecks into IFCI through backdoor
NSUNDARESHASUBRAMANIAN
Mumbai, 17 October
In an unprecedented move that is in contradiction with its drive
towards divesting stakes in companies it owns, the central government
today turned acquirer, gaining control over publicly listed
institutional lender IFCI Ltd.
The government used an option to convert debentures it had issued 11
years ago when IFCI was in financial trouble to acquire control over
the lender. IFCI Ltd has issued 400 million shares worth ~400 crore to
the Government of India, making it the largest shareholder in the
company.
"The Committee of Directors (constituted for the purpose of issue and
allotment of equity shares on conversion of optionally convertible
debentures held by the Government of India), at the meeting held on
October 17 has allotted 400 million (40 crore) equity shares of the
company at par i.e ~10 each to the Government of India," the company
said in a statement to the exchanges.
The shares were issued on conversion of optionally convertible
debentures totalling the same amount held by the government. Following
this, the central government has become the largest shareholder in the
company, with a holding of 35.15 per cent. The issue has expanded the
equity base of the company, as total shares increased to 1.13 billion
from 737 million earlier.
This is likely to bring down the holdings of other shareholders
substantially. For example, Life Insurance Corporation, which held 8.4
per cent before the issue, will see its holding down to 5.44 per cent.
Similarly, PSU banks which held 5.97 per cent before the issue will
now hold just 3.87 per cent.
The dilution does not end here. In the second tranche, the government
is likely to convert another ~523 crore worth of debentures into
equity. "The second tranche of debentures worth ~523 crore will be
converted as soon as the government gets the debenture certificates,"
said an official familiar with the development.
In August, the Union Cabinet approved conversion of ~923 crore of
debentures held by it in IFCI into equity. The decision came after the
privileges committee of the Rajya Sabha found irregularities in the
appointment of chief executive Atul Rai and recommended a CBI inquiry.
The committee also had expressed concern over the government's
apparent lack of control over an institution in which it had invested
a substantial amount of money in the form of debt and grants. Some
insiders also point out that Rais closeness to Comptroller and Auditor
General of India Vinod Rai made him a soft target for vested
interests.
When the second tranche gets converted, the government holding will be
55.57 per cent. About 761,605 small investors own 33. 29 per cent.
Some of them had resisted the move. Some even moved the Calcutta High
Court, challenging the government decision. The court dismissed the
petition yesterday.
In the normal course, such acquisition of voting rights would have
attracted provisions of the takeover code, which requires the acquirer
to provide an exit option to minority shareholders in the form of an
open offer. However, the government was spared even this burden after
the market regulator granted a special exemption from making an open
offer. On August 29, the management of IFCI had written to the Sebi
expressing concern over the deal affecting the interests of minority
investors. But Sebi brushed aside these concerns saying, "Since a
substantial amount of public funds have been pumped into IFCI by Gol,
the enhanced accountability will provide additional safeguard to the
investment of public funds." The takeover also puts a question mark
over the future of the company's mercurial CEO, Rai. The love-hate
relationship between Rai, aformer Indian Economic Services officer and
North Block was a trigger that led to this forced acquisition, say
observers. Though, Rai was given a second term in office by the board
earlier this year, it is not clear if the new owner would like to
continue with him. Rai declined comment.
IFCI shares gained 0.3 per cent to close at ~30 on the BSE.
Aftergovernment As of June 2012 acquisition No. of % of No. of % of
Name Shares* Holding Shares* Holding
LICof India 61.9 8.40 61.9 5.44
PSU Bank 44.1 5.97 44.1 3.87
Nippon InvestmentAnd Finance Company 18.8 2.55 18.8 1.65
GICof India 16.5 2.24 16.5 1.45
Tourism Finance Corporation of India 15.6 2.12 15.6 1.37
Macquarie Bank 14.3 1.94 14.3 1.26
Oriental Insurance Company 10.2 1.39 10.2 0.90
Barclays Capital Mauritius 9.9 1.34 9.9 0.87
The Royal Bankof Scotland NV (London) Branch 9.7 1.31 9.7 0.85
Bakulesh Trambaklal 8.7 1.18 8.7 0.76
NewIndia Assurance Company 8.5 1.16 8.5 0.75
Total Outstanding shares 737.8 100.00 -GovernmentHolding - 400 35.15
Postissue total outstanding shares - 1,137.8 100.00
*in million; Data compiled by BS Research Bureau Source: Capitaline ABUYBACK?
IFCI's shareholders before and after the issue to government
Centre is largest shareholder by converting first tranche of debentures
Minimum land need forSEZto be lowered
NIVEDITAMOOKERJI & SHARMISTHAMUKHERJEE New Delhi, 17 October
Many key changes are in the works to change the contours of the
Special Economic Zone (SEZ) policy and boost growth across these
units. Following a discussion paper last November, the commerce
ministry has prepared a draft SEZ policy, detailing revision in the
minimum land requirement for these zones, easier contiguity norms,
clarity in land sale and transfer, relocation of the zones,
development of infrastructure, extending focus market schemes to these
units and exit policy for developers and units, among others.
Commerce Secretary S R Rao is slated to meet his counterpart in the
Revenue Department, Sumit Bose, later this month to firm up the
changes in the SEZ policy, it is learnt.
The minimum land requirement for multi-product SEZs may be brought
down to 250 hectares from 1,000 hectares now, while the maximum area
would remain capped at 5,000 hectares, according to the draft policy
that Business Standard has reviewed. For multi-services units, SEZ for
a specific sector, port or airport, the ministry has proposed reducing
the minimum size to 40 hectares from 100 now. In the case of
north-eastern states, union territories and some hilly states, the
minimum area requirement may be brought down to 50 hectares from the
current 200. Reduction in the SEZ land requirement will come as a
significant relief to developers.
For IT SEZs, the minimum land requirement criterion of 10 hectares may
be dropped, while enforcing the minimum built up area criteria. Also
providing an exit route to developers, they could be allowed to sell
after developing an IT SEZ. "Towards this end, sale of built up space
to units by the developer may be permitted. To ensure that the
incentive is utilized in the right earnest, such sale would be
permitted only after the minimum built up area requirement is
fulfilled by the developer." Other changes may include those on the
contiguity norms. For example, the contiguity between the processing
and nonprocessing area may not be insisted upon. And national or state
highways, railway lines, natural water bodies falling within an SEZ
area may be addressed through suitable mechanisms, according to the
draft policy. "Regulatory concerns from lack of physical contiguity
could be addressed by way of additional entry/exit gates manned by SEZ
personnel." Also, the Board of Approval (BoA) will have the discretion
to allow the developer to suitably address lack of contiguity and
relax the strict contiguity requirements through innovations
implemented at the expense of the developer, while not compromising
the regulatory concerns, it says.
The revised policy also aims to give clarity on sale and transfer of
land in SEZs, besides pointing at the need for focus market scheme and
infrastructure development funds for these units. In addition, the
draft policy talks of popularizing SEZs among the Indian diaspora
through embassies, consulates and road shows abroad to attract FDI.
SEZ rules allow 100 per cent FDI through the automatic route.
Vikram Bapat, executive director at PricewaterhouseCoopers (PwC), told
Business Standard
that there were some practical problems in the SEZ policy and that
changes were required. WHAT THE NEW SEZPOLICYMAY PROPOSE
|Lower minimum area of land required for multi-product SEZs to 250
hectares from 1,000; multi-service, sectorspecific units, airports and
ports to 40 hectares from 100 |Define contiguity as land connected
without a break, within a common boundary |Divisions due to highways,
railway lines, natural water bodies falling within an SEZ area, which
can be addressed through suitable mechanisms, should not constitute a
break in land contiguity |Permit sale of built-up space to units after
the minimum area requirement is fulfilled |Permit no transaction that
is merely a sale of land or even amounts to a sale of land
RBI tweaks priority sector lending norms
BS REPORTER,
Mumbai, 17 October
Heeding the demand of bankers, the Reserve Bank of India today revised
priority sector lending norms. Loans up to ~2 crore to companies
involved in farming and allied activities will be treated as lending
for direct agriculture under priority sector lending (PSL) status.
Also, credit to housing finance companies for onward lending for
rehabilitation of slum dwellers and economically weaker sections will
enjoy PSL status. The cap on such loans will be ~10 lakh per borrower.
The limit on loans to SMEs in services sector under PSL stands doubled
to ~2 crore. RBI said the eligibility under PSL (for HFC exposure) is
capped at five per cent of total priority sector lending. The maturity
of bank loans should be coterminous with average maturity of loans
given by housing finance companies. Banks should maintain necessary
borrowerwise details of underlying portfolio.
In July, bankers had raised certain concerns over revised PSL
guidelines. Later, RBI had discussions with CMD/CEOs of select banks
and officers in-charge of PSL.
In the earlier guidelines issued in July, the central bank had
completely taken out loans to HFCs from priority sector lending. The
decision was criticised by the stakeholders, including the chairman of
India's largest HFC, HDFC, and Deepak Parekh.
RV Verma, chairman, National Housing Bank, said, "The relaxed norms
gives enough space to HFCs to borrow from banks, and the five per cent
cap on loans to HFCs is reasonable. HFCs resource position would be
improved. They can get more funds from banks at lesser costs, as it
will be classified as priority sector loans." Referring to funding to
companies for agriculture operations, the banking regulator said the
short-term loans for raising crops and for pre and post-harvest would
be eligible for PSL status.
Earlier, loans given only to individual farmers up to ~25 lakh were
classified as priority sector lending.
RBI has also doubled the limit of bank loans to ~10 lakh per dwelling
unit for any government agency which would constructs the houses under
slum rehabilitation. PSLGAINS
|Loans to HFCs for low-cost housing to get PSL status |Loans up to ~2
cr to companies in farming will amount to lending to direct
agriculture |Entire agri loan with limit above ~2 crore to be indirect
finance to farming |Credit to services sector SMEs for PSL status
doubled to ~2 cr
Corporate agri loans up to ~2 cr to be treated as direct exposure; PSL
status for low-cost housing credit to HFCs
'Avoid litigation with creditrating agencies'
BS REPORTER
Mumbai, 17 October
Securities and Exchange Board of India (Sebi) Chairman U K Sinha today
asked companies raising capital from the public to be transparent,
adhere to norms and avoid litigation with credit rating agencies.
"My message to corporates is they should be willing to follow the
rules if they are raising money from the public or any institution,
rather than be upset if something has been changed," Sinha said on the
sidelines of the India Securitisation Summit.
When asked about companies dragging credit rating agencies to court,
he said, "I think good sense will prevail upon the companies. I am
also sure all courts in the country are aware if Sebi is regulating a
particular industry or particular instrument is being looked at by
Sebi…they will let the due process prevail, rather than come in the
way of this." Yesterday, Sebi officials held ameeting with officials
from credit rating agencies. At the meeting, various issues, including
litigation from some companies, were discussed. While Sebi asked the
agencies to ensure their rating methodology was "sacrosanct", the
agencies expressed concern on litigation and the fact that some
companies didn't share complete information with them.
Recently, Kolkata-based Srei Infrastructure Finance had moved the
Calcutta High Court after rating agency India Ratings & Research,
formerly Fitch Ratings India, cut its rating. Srei also terminated its
contract with the rating agency.
"It is for regulators to protect the interests of investors and ensure
rating agencies are able to express their opinion in a free manner,"
said Atul Joshi, managing director and chief executive, India Ratings.
Sinha said after wide consultations, Sebi might look at revising the
guidelines for credit rating agencies. "After yesterday's dialogue
with rating agencies, Sebi would engage all entities in the chain and
try to improve the system," he said, adding, "Our aim will not only be
to help the industry, but also ensure investors' interest is taken
care of." The Sebi chief also highlighted a few procedural hurdles
regarding rating companies' financial instruments, such as bank loans.
"There are issues. For example, how does one recognise and ensure
information flow when a company has defaulted to a bank, even for a
single day?" he asked. "As a rating agency, it is their duty to inform
the public about a change in the status of a company or an instrument
they have rated."
Sebi chief tells India Inc to be transparent, adhere to norms
>"Mymessage to corporates is theyshould be willing to follow the rules if theyare raising moneyfrom the public orany institution, ratherthan being upset if something has been changed"
>"Sebi would engage all entities in the chain and tryto improve the system…Ouraim will not onlybe to help the industry, but also ensure investors' interest is taken care of"
UKSINHA, Chairman, Sebi
Don'tpanic when a firm defaults
TANIAKISHORE JALEEL
Shareholders of Suzlon would be a worried lot after the wind-turbine
maker announced it was to default on redemption of $200 million of
foreign currency convertible bonds (FCCBs). But is the concern
unwarranted? In the past, companies like Wockhardt have faced similar
situations but recovered sharply.
When companies issued FCCBs during the 2006-08 boom, it seemed a good
idea. The rupee was at 40-to-thedollar levels and the Sensex around
20,000. The steep drop in the value of the rupee against the dollar
over the past two years has exacerbated the problem. "The result is
many FCCB issuers may have trouble finding funds to repay bondholders.
Those who can't will face payment default," said a Standard & Poor's
(S&P) report.
Some of the companies, which have their FCCBs up for conversion in the
remainder of 2012, include Pidilite Industries, Prime Focus, GTL
Infrastructure and GV Films.
Marketmen are of the view that investors should not press the panic
button yet. Arun Kejriwal of Kejriwal Research and Investment Services
says one should look at the difference between the conversion price
and the current share price. "If the conversion price is higher by
30-50 per cent, then the chances of a turnaround of the shares could
be less. One should exit such companies completely," he says.
If the conversion price is slightly higher or is the same as the
current market price, then one need not worry. However, new investors
should avoid companies with FCCBs coming up for conversion any time
soon, says Kejriwal.
Financial advisors say even if one were to exit, there could be
opportunities to re-enter the scrip later. V K Sharma, business head,
private broking and wealth management, HDFC Securities, says, "Once
there are signs of a turnaround by these companies and there is more
clarity with regard to the FCCB situation, one can enter the scrip
again. Entering these stocks at a lower level can help make profits in
the long run." There are other companies likely to default as well.
According to a research report issued by S&P in June, of the 48
companies which have their FCCBs coming up for conversion in the rest
of 2012, half could default. The report says investors do not want to
convert the $5 billion in FCCBs into stock worth 20-90 per cent less
than the conversion price.
Companies such as Zenith Infotech and Sterling Biotech have defaulted
on payments to bondholders. In such a case, bondholders have the
option to take the company to court if they fail to pay and request
that it be wound up.
FCCBs could burden some companies, but that will depend on the
company, its rating and the industry it belongs to.
For example, Wockhardt defaulted on FCCB payments in 2009, following
which the bondholders filed a windingup plea in court. At that point
its share traded at ~67. But now, the company is almost done paying
off the bondholders, is planning to repay its bank loans and has seen
an improvement in its profits. Its shares are trading at ~1,470 as of
today.
JSW Steel redeemed its FCCBs at a much higher price.
The conversion price of ~953.4 was almost 30 per cent higher than the
price as on the date of conversion, which was ~669. But its shares are
trading higher now. Its current market price is ~724.8. Though the
company's balance sheet did take a hit, it is not a big concern, say
analysts.
One should also look at performance. "Look at the top line and the
profit over the last year. Also, check the company's ability to
refinance," says Sharma.
Ideally, one should start analysing the scrip a year before the date
of conversion and not wait for the eventuality to happen and then
decide whether to sell. You should keep track of the date when the
FCCB would be up for conversion, Sharma adds.
In the case of Suzlon, brokerages have a 'hold' view, as there are
chances of a turnaround if the company comes up with a plan to get
itself out of its financial mess. Manish Sonthalia, vice-president and
fund manager, Motilal Oswal AMC, says in the long run things could
turn around for the company, though it will still be a risky
proposition for most small investors.
In cases like Suzlon, the decision to exit should depend on whether
you are sitting on profits or losses
Price setfor conversion Price on *Current attime of date of market
Company issuance (~) conversion (~) price (~)
JSWSteel 953.4 669 746.85
Tata Motors 181.4 236.65 262.30
Suzlon Energy 97.3 16.20 15.70
GTLInfrastructure 53 - 8.58
Karuturi Global 19 - 4.46
Easun Reyrolle 315 - 73.75
Sterling Biotech 163 8.10 6.12
*FCCBs already reached maturity Source: S&P Report & BS Research
Bureau DON'T FORGET THE REALITYCHECK
Good credit score doesn't mean cheaper loans
PRIYANAIR
If you have a good credit score from a credit bureau, don't think you
might get a loan at a lower rate. But you could get it faster and with
fewer checks.
Process differentiation is the first advantage customers can look
forward to as a result of their good credit scores. Next could be the
rate differential, which might take some time, says Mohan Jayaraman
managing director (MD), Experian Credit Information Company of India.
A credit score is a number indicating the borrower's potential to
repay and chances of default. It indicates creditworthiness of the
person. Banks and lenders now increasingly rely on credit scores to
decide if a loan should be approved. Usually, the higher your score,
the better the chances of your application getting approved.
Explaining why banks are not yet offering lower rates for customers
with good credit scores, Jayaraman says for Indian banks, consumer
lending segment is a fairly low-margin business. So, their aim would
be to keep margins steady. But several banks have simplified the
process for customers with better scores.
For example, for a customer with a good score, the bank might do away
with multiple field investigations. If normally, a bank conducts two
field investigations before approving a loan, in this case it could be
just one. Also, the turnaround for approving the loan could be faster.
For instance, a day or two. For others, it might take up to a week.
Unsecured loans, such as personal loans, is where the differential,
especially the rate differential is likely to be seen before other
segments, since the margins are higher.
In personal loans, some banks offer better deals for customers of a
particular profile, such as those working in a particular company and
who could have their salary accounts with the bank. Or customers who
already have a relationship with the bank.
Eventually, the credit score will be a new segment for banks to
approve the loan. "For instance, banks will say that borrowers in
certain bands will get better scores, says Jayaraman.
According to Prashant Joshi, MD and head of private business clients,
India, Deutsche Bank, a good credit score does help reduce the
turnaround for approving a loan, more so in the case of unsecured
loans. In the case of secured loans, such as home loan, a bank will
need to conduct property verification, which might take time.
For a customer to get the benefit of a better rate in line with a
superior credit score, the score needs to stabilise over a period, say
three to five years.
Only then will it be possible for banks to offer risk-based pricing, he says.
Shyamal Saxena, general manager, retail banking products, Standard
Chartered Bank, says the market will eventually evolve to pricing
differential based on credit scores. As of now, for a customer with a
good score, banks might do fewer verification.
"The retail credit penetration in India is still very low and there
are a large number of customers for whom banks will conduct extra
verification, he says. Customers can know their individual scores by
accessing their individual credit report from bureaus. Most charge
between ~100-150 for this.
--
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
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