Sucheta Dalal :Investor rip-off (27 April 2003)
Sucheta Dalal

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Investor rip-off (27 April 2003)  

Retail investors of Essar Oil are furious. The company has called a High Court-ordered shareholders’ meeting on May 6 to clear a proposal to either slash their investment in its non-convertible debentures to less than half their value, or have them wait for a staggered redemption over 22 years.

Here is what happened to people’s investment in Essar Oil debentures. The original investment in 12.5 per cent optionally fully convertible debentures of Rs 190 each was made in April 1995. Of this, Rs 85 (split into part A of Rs 40 and part B of Rs 45) was converted into equity shares, whose value is now down to a paltry Rs 4.20 per share.

The remaining Rs 105 became 14 per cent non-convertible debentures in December 1997, to be redeemed in April 2006. Essar Oil began to default on interest payment from July 1998 and has now come up with an outrageous redemption offer. Investors can either get out now with just Rs 55 per debenture, which is less half the face value of their investment (of which Rs 5 will be paid within 15 days and Rs 50 over 90 days) as a one-time settlement, and forget all about interest dues.

Or, they can opt for a scheme where redemption and interest will be staggered over 22 years (yes, until 2025) starting from the year 2009. Desperate investors have written to the SEBI chairman and investor activists for help.

BJP MP Kirit Somaiya says he has taken up the matter with the Department of Company Affairs. Since the meeting is at Jamnagar, many investors will not be able to attend it and the Gujarat High Court has not specified that company should conduct a postal ballot to seek investor consent. Essar Oil’s debt has already been restructured once, and investors suspect that this time too institutional investors will support its move to pay less then half their due. Meanwhile, retail investors will be dealt another demoralising blow.

No interference

SEBI chairman G.N. Bajpai went to the Bombay Stock Exchange (BSE) last week for an informal address to the BSE governing board, but those who attended the meeting say that he actually read them the riot act. The chairman made it clear that SEBI would not tolerate any interference from the board of directors in the day-to-day functioning of the bourse, and indicated that the regulator would not hesitate to supersede the board if such interference continued.

The chairman said that directors are expected to limit their role to policy-making and the fact that the board had met almost every week suggested that it was doing more than framing policy. SEBI also seems to have indicated to the BSE that public representatives and BSE chairman, whose term has already expired, will not be getting another extension.

Freeing IA

Among the many reasons why Indian Airlines (IA) has been losing passengers to private carriers is that its frequent flyer benefits have not kept up with the competition. But the airline is now ready for change.

After two years of lobbying, the airline has finally broken free from a tie-up with Air-India, which used to jointly manage its frequent flyer programme since 1994. Under a month from now the airline is set to announce ‘a dynamic, customer driven programme’ that will offer many of the basic services, facilities and incentives as its competition.

While IA has been improving its service over the years, the lack of incentives was a major damper for frequent flying domestic travellers. The new package should give IA a fighting chance to prevent a further switch in loyalties, if not to bring back customers. Will IA’s forthcoming announcements trigger an incentive war?

Good borrowers

With interest rates dropping dramatically, banks are finding new ways to lend at higher rates to their constituency of safe borrowers, namely individuals. As a policy, most banks avoid lending to small businesses without a 100 per cent collateral and a couple of guarantees. But personal loans to individuals, with repayments in equated monthly installments are another matter. All banks have lists of good individual customers and the loans are made even safer by directly debiting borrowers’ bank accounts without worrying about bounced cheques. Banks such as HongKong and Shanghai Banking Corporation are attracting borrowers by sending them ‘certificates’ sanctioning ‘pre-approved’ loans for Rs 2 lakh and above to be cleared with minimal formalities and no questions asked about the use of funds. Apparently, there are already plenty of takers for such loans, even when the bank charges a hefty 15 per cent interest
-- Sucheta Dalal