Economic Highlights

New Delhi, 15 April 2011

Corrupt Bail-out

AT PUBLIC COST

By Shivaji Sarkar

 As the nation joins the anti-corruption tirade of Anna Hazare, a dozen public sector banks “converted” their lending to huge debt-ridden loss-making Kingfisher Airlines of billionaire MP Vijaya Mallya into equity at a heavily inflated price.

The decision was taken as the stir was gaining momentum on 7 April in Delhi. The banks were under no compulsion to do that. The Jan Lokpal Bill would have little jurisdiction over such corporate manoeuvres. Corporate debt structuring has cost the public sector banks over Rs 1 lakh crore in 230 cases till December 2010. The nation needs to look beyond what they are agitating for.

The banks agreed to pay a whopping 60 per cent premium to current stock price of Kingfisher Airlines. In other words, 60 per cent of the debt was literally waived off. The banks have lost Rs 750 crore of public money in the process. The company has a loss of at least Rs 1500 crore. The consortium of banks agreed to convert 7.5 crore compulsorily convertible preference shares to equity shares at Rs 64.48 per share. The closing price of Kingfisher shares on March 31 was Rs 39.90.

Thus, banks have suffered a loss to enable Kingfisher deleverage its balance sheet, according to financial analysts. The banks now own 23.4 per cent equity of Kingfisher Airlines.

To put it simply, the banks owned up the losses. It is a mystery why they did this particularly at a time when their deposits are shrinking, they have less funds to lend out and the non-performing assets (NPAs) are rising. In the past too, the banks have incurred Rs 600 crore net present value (NPV) losses on Kingfisher Airlines’ debt recasting plan.

The present virtual waiver was allowed, as per official statement, “as part of debt structuring plan sanctioned by the Reserve Bank of India”. It is believed the RBI takes such a decision with the approval of the Finance Ministry of at least what is technically described as “consultations”.

Importantly, a loophole in the Securities and Exchange Board of India (SEBI) regulations helped the RBI facilitate the process. However, its legality and ethics is questionable

The UB Group Chief Financial Officer R Negungadi said, “The banks will benefit from the equity, though there was no compulsion on them to turn debt into equity.” The Kingfisher’s debt recast was worked out by SBI Caps. The airline told the Mumbai Stock Exchange that post-allotment of fresh equity, the paid up equity rose to Rs 498 crore from Rs 266 crore.

The banks that have lost in the process are SBI, IDBI Bank, ICICI, Bank of India, UCO Bank, Punjab National Bank, United Bank of India, Vijaya Bank, State Bank of Mysore, J&K Bank and Corporation Bank.

Pertinently, Kingfisher reportedly leveraged it in many ways and operated at various levels. The company had even indirectly told the banks that if they did not do it they might lose all their money in case the company was declared sick.

While banks work on cases with the hope of recovery, rating agencies consider cases referred for re-structuring as weak assets. There are analyses of previous cases that show many re-structured cases turning into bad assets over a period.

Kingfisher has been picked up by RBI only to set a process of waiving of losses of many corporates at public cost, including Air India, which has a huge debt of Rs 40,000 crore. The RBI has been going on increasing interest rates and various bank charges on the sly. It has allowed the banks to put a double charge in case a bank draft is not utilised and is credited back to one’s account. The RBI is approving many unethical practices in the banking sector.

As RBI cleared the fields, the day after the Kingfisher decision was taken, the Air India board discussed its financial re-structuring plan with bankers. Air India is burdened with a debt of Rs 40,000 crore, out of which Rs 18,000 crore is Air India’s short term capital loans, while its foreign currency loans stand at Rs 24,000 crore. Lenders would convert short term loans to the long term loans, while approximately 25-30 per cent short term loans would be converted to equity. Moreover, the Government will need to bring in more money.

The debt recast will mean extending the loans over a longer term, which will result in losses to the tune of Rs 3000 crore for the banking system. Bank of Baroda, SBI and IDBI Bank are among major lenders to Air India. Once again, the costs would be transferred to common bank users. This is how the US banking system collapsed with Lehman Brothers and the AIG scandal.

Corporate debt re-structuring (CDR) is a voluntary, non-statutory system that allows a financially troubled company with multiple lenders and loans of more than Rs 20 crores, to restructure those loans to a plan approved by 75 per cent or more lenders. As on December, 2010, of the total 285 cases worth Rs. 1.26 lakh crores referred to the CDR Cell of RBI, 230 have been approved or resolved. That’s over Rs 1 lakh crore of debt re-structured.

In 2008, bad currency bets and a string of acquisitions left pharmaceutical company Wockhardt struggling to service outstanding loans of about Rs 4000 crores. Its CDR was approved in July 2009. But, last year, investors holding about Rs 500 crores ($110mn) in Wockhardt FCCBs (Foreign Currency Convertible Bonds) blocked the sale of its nutrition business. And just a few weeks ago, a winding up petition filed by bond holders was admitted by the Bombay High Court. Though that has now been conditionally stayed.

After falling upon hard times post the global financial crisis and the drying up of liquidity, Vishal Retail approached lenders to restructure its more than Rs 700 crores in debt. The majority of lenders agreed and also backed the move to sell out. But minority lenders, including some foreign ones, opposed the move and filed a winding up petition in court early last year. It took much litigation, some negotiation and a year’s delay for Vishal to sell its businesses; a deal that it finally closed in March 2011.

Thus, CDR has evolved as a convenient tool for corporate prosperity at the cost of small depositors. The money lost by banks is finally shown as NPA, euphemism for bad recovery or losses. Anna Hazare’s agitation is genuine but it needs to go beyond the orientation around politicians. ---- INFA

(Copyright, India News and Feature Alliance)