Sucheta Dalal :Failing guarantee (2 February 2003)
Sucheta Dalal

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Failing guarantee (2 February 2003)  

While the steel companies have had their loans restructured without personal guarantees from any of the promoters, ICICI Bank has been less lucky with the guarantees that it extended on behalf of Essar Steel. The bank has recently paid up $108 million to Bank of America (BankAm) on loans guaranteed on behalf of Essar. Banking sources say that when the steel restructuring was around the corner, ICICI tried very hard to persuade BankAm not to invoke the guarantee; but foreign lenders are rarely willing to take chances.

While ICICI Bank paid up BankAm’s dues, documents relating to the restructuring deal show that ICICI had guaranteed of Rs 489 crore against export advances to the tune of Rs 1115.68 crore availed by Essar Steel.

Another bailout

The Securitisation Act has given lenders more teeth, but Indian financial institutions seem keener on bailing out loss-making Indian companies rather than recovering their loans. After the mega-bailout of steel companies it was Ficci president A.C. Muthiah’s Spic Ltd that was bailed out.

Another favourite, IG Petrochemicals is now awaiting a third bailout structured by KPMG. IG Petro’s stated debt is Rs 712.80 crore (Rs 512 Crore of principal plus Rs 200.80 crore of interest) as on March 31, 2002. But the interest component does not include Rs 60 crore of interest for 1997-2002, not provided in anticipation of a bailout.

There is also a significant gap between existing debt and sustainable debt, while fixed asset cover is only Rs 366 crore. The company needs to collect Rs 75 crore as export dues and another Rs 12 crore from a sister company Mysore Petrochemicals, which is already sick.

The restructuring plan hopes that it will be able to collect a little of that money every year. As part of the bailout, the company hopes that lenders will waive the entire overdue interest of Rs 200 crore. Of the principal, it expects Rs 10 crore to be converted into equity, another Rs 10 crore to zero interest convertible debentures that will swap into equity between 2008 and 2010. The remaining Rs 345 crore-term loan will have its repayment stretched over 15 years with interest down to seven per cent. Finally, Rs 102 crore of tier B debt also at zero interest may be repaid over an indeterminate period.

And we are not sure what happens to another Rs 45 crore of working capital. What is clear is that the lenders seem desperately keen on bailing out IG Petrochemcials once again.

Action taken

The only serious investigation into the stock market scam of 2001 is happening at Kolkata. Not only have the Kolkata police managed to get Ketan Parekh in their custody, despite his many ingenious attempts to dodge them, but have also made considerable headway in their investigation. One instance is the Sanjay Khemani case.

This low profile broker, along with two other Kolkata stockbrokers received a whopping Rs 3,191 crore from Ketan Parekh in 2001 for dealing on the Calcutta Stock Exchange (CSE) and in the illegal trading that was rampant on the bourse. Khemani has been absconding ever since the Kolkata police stepped up their investigation, but with Ketan in custody, they have obtained enough information seal Khemani’s many offices in Kolkata. Coincidentally or otherwise, Sebi’s investigation department in Mumbai, which has been moving very slowly indeed, suddenly debarred Sanjay Khemani and N. Khemani from associating with securities market almost at the same time. The market regulator says that Khemani ran up a phenomenal trading volume of Rs 12,640 crore, which amounted to creating a parallel market outside the official bourse.

Why then was Sebi so slow in debarring the broker, especially when there are several instances when it has initiated action without even giving market intermediaries a hearing?

Tailpiece: One of the many jamborees that Sebi planned to hold at New Delhi in the first week of February has been indefinitely postponed because of poor response from potential participants.

This one was for Foreign Institutional Investors (FIIs). Unfortunately for the regulator, those FII representatives who chose to make the annual winter escape to warmer climes were already in India at the end of January to attend another conclave organised for them at Jodhpur. Obviously, none of them wanted to wait another week to hear what the regulator and sundry bureaucrats had to say about the Indian economy and its capital markets. They have been hearing a lot about it for a decade now, during which Sensex has gone nowhere

-- Sucheta Dalal