Security check

The success in finding buyers for a stressed asset depends on the reasons for the distress and the external environment

The divergence in views on the role of promoters in bidding for their stressed assets means the Insolvency and Bankruptcy Code, 2016, remains a work in progress. The noisy differences over whether owners should be allowed or debarred from the exercise should not hide the welcome consensus that some companies might be beyond repair in their present form. The change in mood is a significant departure from the earlier practice of consigning sick companies to various boards and bureaus to nurse them back to health. The process went on for years. Financial institutions continued to carry on the bad loans in the books in the hope of revival. Eventually, the government would bail them out without fixing any responsibility for their shoddy supervision. The borrowers carried on merrily, flitting to the next opportunity without any accountability. No more. To avoid making hefty provisions over a fixed time-frame and take steep haircuts thereafter, financial institutions have to undertake careful due diligence and constant monitoring of accounts. Companies have to hedge by broadening fund-raising activities. The judicious mix might comprise private placement with institutional investors and domestic and overseas bond markets. To get good valuations and fine rates, issuers have to open up their books and submit to credit appraisal. Even small subscribers stand to gain. They will have better access to information.

For all the good intentions, the polarizing positions over who should participate in the liquidation of non-performing assets have brought to the fore the practical problems in implementing IBC. The most buzzing of these is scouting for the right fit. Any discussion has to take into account the track record of PSU divestment. Except for Navratnas, the route of pushing small lots of shares into the market has not met with the desired response. Whiff of an impending offer for sale results in a bear assault on the stock. Second, big-ticket investors’ skepticism stems from the reality that the government remains in a controlling position. The alternative devised was strategic sale to get a fair discounting. The approach eventually turned controversial as doubts were about pricing. There was suspicion of dummy candidates fronting those who might not want the spotlight or not qualified to bid. The lock-in, being proposed by the present dispensation, was flouted in one case. Keeping out defaulting risk-takers might prove counterproductive in industries undergoing stress merely because of miscalculations of the potential or cyclical headwinds. The wireless space is a glaring example. The rush of players in the initial stages intensified competition, forcing many departures. The predatory pricing of Reliance Jio is now testing the patience of the remaining survivors. Reliance Communications, fighting insolvency, belongs to a group that can muster up the financial resources to keep the venture afloat. Group companies in the financial space have renowned partners and investors. The question is if ADAG wants to do so or move on.

The success or failure to find a buyer hinges on industry dynamics. Private equity is interested in the towers of RCom. Peers are more likely to acquire its spectrum, a tell-tale sign of consolidation and asset-light model. Efforts to monetize fugitive industrialist Vijay Mallya’s properties have been fruitless. Airline operators lease planes. Human resources and aviation turbine fuel are the major overheads. Even a successful sale of immovable assets might not be sufficient to recover all the dues if the brand is sullied. Extradition and jail time will be symbolism for the lenders and the Indian government unless there is evidence of fraud. In contrast, getting the Sahara owner to compensate the depositors appears to be an easier task as most of the unaccounted wealth has been funneled into businesses that have ground-level visibility such as real estate and hotels. Here, too, getting a good bargain is proving difficult due to the worldwide slowdown till last year. The collapse and resurrection of Satyam Computer Services hinged on its position as one of the top five tech exporters. M&M bought the firm not for its physical presence. Rather it was the roster of clients that was the attraction for the group with a nascent presence in the sector. The uneven enthusiasm for distressed steel assets comes at a time when Tata Steel is deleveraging. The NDA government’s policy to buy local steel offers a temporary respite for the enhanced capacity of domestic players, who still lag behind China on volumes. Therefore, the chances of finding a suitor increases if a company is going down due to corporate governance missteps rather due to sector disruptions.

Mohan Sule

An uneven field

The heat over different tax slabs in a uniform tax regime is just one of the asymmetric situations that investors face

Does a uniform tax imply a single rate on all goods and services across the country or different rates for different groups that are the same everywhere? The answer to the question is at the center of the debate if the roll-out of the goods and services tax has simplified the indirect tax regime. Five slabs replaced various Central and state government levies from 1 July. The unfairness of applying the same rate on wheat flour and luxurious cars are noted in support. The counter-argument is that, even at the same rate, the absolute tax revenue generated will depend on the cost. Categorization leads to arbitrariness and disputes. The finance minister has hinted that eventually the 12% and 18% tax rates will be merged and there will be three groups comprising the poor man’s basic necessities at zero tax, demerit goods in the highest slab of 28% and the rest in between. A few items still remain at the discrimination of states. There is a consensus that mass consumption items require moderate rates. Yet, along with alcohol, fuels are heavily taxed both by the Central and state governments. Despite unanimity on the need for one rate on the same product, the disagreement on whether there should be a single rate has underscored the fact that tax payers and investors have to contend with a field that is not leveled. If it were so, there would be one income tax rate. 

The market assigns higher valuations to mid and small caps due to their potential despite the downside of these companies requiring to sacrifice the quality of their earnings in the quest for growth. At the same time, companies belonging to the same industry get different treatment after taking into account tangibles such as promoter holding, the margins, deployment of cash, capital expenditure and dividend payout as well as intangibles such as corporate governance and brand image. Algo trading gives big-ticket investors advantage in placing orders. Despite proportionate share allotment, the primary market is rife with instances of favoritism. The book is run through big investors to determine the price range. Nearly two-thirds of the issue is assigned to institutional investors. Though the quota for small bidders has increased over the years and a discount is offered on the cut-off price, those opting for the lowest band and minimum quantity often return empty-handed. Steps have been taken to correct the perception. Information that might have an impact on share prices has to be immediately disseminated to stock exchanges. Still, issuers prefer qualified institutional placement to raise capital. Obviously, these fat cats have access to the top managers and better insights about the company’s operations and outlook. The voice of the ordinary stakeholders is frequently ignored at AGMs. To rectify the situation, companies have been directed to get a majority of the small shareholders on board for passing resolutions. The problem is not all the members of this category hold equal number of shares. How a dominant section can subvert the process has been displayed during the reverse book-building exercise for de-listing. Several companies prefer to stay put than agree to the exorbitant demands. To get even, ordinary investors are directed to mutual funds in spite of absence of mechanism to demand accountability from the fund managers for their performance even as the asset management company continues to enjoy a fixed fee.

      

Amalgamations, too, create an unfair situation though the apparent aim is to create synergies, enlarge the product basket and market reach and cut costs. Mergers are never between equals. A sluggish leader often takes over a smaller but efficient peer with better growth prospects. A group might want to combine a capital-guzzler with another with plenty of cash or hive off a division weighing on the discounting of the flagship. The immediate problem from the asymmetry is valuations. Should the transaction price take into account debt, sales, operating profit or market cap? Discontent over the share-swap ratio has resulted in the dissolution of several merger proposals. Succession planning has forcefully brought investors face to face with market distortion. In an ideal world, the heirs would get a share of the empire that is equal in value. In an unfair world, some businesses might be doing well, while a few might be mediocre performers. Obviously the patriarch cannot slice and dice the conglomerate so that a portion of each business is grouped and parceled off to each of his children. The small shareholder who has spread his investment across the group to de-risk or with faith that the new businesses too will get the promoter’s magical touch feels short-changed at the division that creates uncertainty as not all the  siblings will have inherited the good businesses or their father’s acumen.