Sucheta Dalal :FIs should desist from making counter-offers (10 June 2001)
Sucheta Dalal

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FIs should desist from making counter-offers (10 June 2001)  

Exactly five years ago the financial institutions (FIs) were making headlines by threatening to sell off the Modi Rubber stake to a new buyer. Between them, the institutions held a 51 per cent stake in Modi Rubber and their public rhetoric seemed to spell a sort of glasnost in the manner in which they would deal with recalcitrant industrialists and willful defaulters. But instead of making history, the nascent burst of activism subsided without a whimper and the Modis remained firmly ensconced at the helm.

One learnt only later that one of the institutions had broken rank and sold three per cent of its holding, reducing the combined FI stake to 49 per cent and since then down to 44 per cent. Last week, the FIs made news again by rejecting the Modi’s open offer to buy their shares at Rs 81.50 and they went a step ahead and threatened a counter offer. Their big grouse was that the Modis had indicated an offer price of Rs 100 to 125 but were trying to push through the buy back at a significantly lower price. FI’s also grumbled about ‘serious lapses of management and corporate governance practices’ by the company, but that is irrelevant.

The saga of the Modi family disputes and bad governance goes back much to far to be on much significance to the present case. The FI threat of a counter-offer is just that — a good threat, but they would be utterly foolish to go through with it.

FIs should not be in the business of running companies, but they should be willing to be tough enough to force a change management when the situation demands it. Also given their past inability to stand up to political pressure, the FIs could well end up owning over 60 per cent of the company while the Modis retain management control. A couple of year ago the FIs had mandated SBI capital markets to find a buyer for their stake in MRL. There were a few inquiries from global tyre companies but there was no deal, mainly because international companies were in no mood to partner with the Modis. This time, the FIs have to assure potential buyers that they would help them acquire management control, if the acquirer is willing to pay a higher price and acquire over 51 per cent of the equity as a combination of their holding and that of the public investors. It is important that the FIs get together and make an example out of the Modis and send a message to the corporate sector, but it is difficult to see them going through with tough action.

Let us look at some examples provided by the steel industry and others. Inability to follow through on threats: The Essar Power case is a striking example of this malaise. The FIs declared the profit making company a willful defaulter in February 2001, but are unable to set the process in motion even today. In fact, it is not even clear if the FIs have translated their decision into action and issued a recall notice to the company. Inconsistent policies: While the FIs allege that Essar Power has defaulted on its loans in spite of making profits for two years, they have reportedly no qualms in going ahead with a Rs 2,500 crore loan package to fund the Vadinar refinery project of the same group. If Essar is a willful defaulter in one company, what is the assurance that it will be repay regularly in another outfit of the same group? Lack of unanimity: The major restructuring package worked out for Lloyds Steel Ltd. would be a good example of this problem. All the financial institutions and other lenders had agreed to a generous restructuring package for the company. The generosity was balanced by some tough talk, which threatened to change management if Lloyd Steel did not pull through and turn profitable as envisaged. But the State Bank of India’s refusal to participate in the process has kept the entire restructuring deal in limbo and the fate of the FI loans recover is also uncertain.

Unclear policies: It is now fairly well documented by the regulators as well as FIs that their large exposure to the steel industry is a huge problem. They have been forced into agreeing to repeated restructuring and waivers for all the major steel groups and others as part of their evergreening exercise to hide non-performing assets. Yet, ICICI is going ahead with plans to finance a large project by Bhushan Steel in Maharashtra, merely on the grounds that it is not a problem company as yet.

Discontinuous strategies: The FI reaction to Gujarat companies seeking shelter under the antiquated Bombay Relief Undertakings act is a good example. Of the three companies that I know which have sought shelter under the Act, the FI’s have had different standards in dealing with them. In Gujarat Telephone Cables and Baroda Rayon the FIs have challenged the BRU notification in the Gujarat High Court.

However, with respect to the controversial Arvind Mills case, they have maintained a thundering silence and may even have encouraged the company to buy time so that they can push through a restructuring proposal which has been opposed by 14 lenders. The double standards have led to universal suspicion that the soft approach to Arvind Mills is because of the close relationship of the lead institution ICICI with the company. It may be recalled that ICICI bought over a beleaguered Anagram Finance from Arvind Mills and its managing director Sanjay Lalbhai was until recently on the board of ICICI. Given this background, one can only feel heartened that the FIs actually summon up the courage to talk tough from time to time as in the Modi Rubber case. It is only when the follow through with their threat that one can begin to take the FIs recover plans seriously.

-- Sucheta Dalal