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