IFCI raises bar for strategic investor

Debt conversion formula will increase govt stake.

IFCI Ltd, the troubled term lender that has started the process of inducting a strategic partner, has agreed to its creditor banks' demands to convert all their debenture holdings into equity shares.

This formula, which is expected to be ratified at a board meeting on December 1, could jeopardise the prospective partner's attempt to gain management control at the New Delhi-based institution.

The short-listed bidders for a stake in IFCI include Blackstone Group, General Electric Capital Corporation, billionaire Wilbur Ross along with Goldman Sachs Group, Standard Chartered and HDFC, Cargill Financial Services Corporation, Natixis and Newbridge Asia.

Their bids will be considered after the conversion issue is resolved.

The government-owned banks, including the country's largest bank State Bank of India, hold 10.17 per cent in IFCI. Conversion of the approximately Rs 900 crore of zero-coupon optionally convertible debentures that they own would give them an additional stake of about 15 per cent. This will take their combined holding to over 25 per cent.

Life Insurance Corporation (LIC) and the public sector general insurance companies hold the remaining zero-coupon debentures of about Rs 579 crore.

The public sector insurers collectively hold 13.97 per cent in IFCI and have been assured that their equity will be retained at current levels after the fresh share issues, a source familiar with the developments told Business Standard.

This means a part of the insurers' debentures will also be converted to maintain their shareholding after the capital expansion.

After the banks' debentures are converted, the shareholding of government-owned entities in IFCI will be around 39 per cent.

This combined government stake will make it difficult for the prospective strategic partner with a 26 per cent stake and after acquiring additional shares through an open offer "" of a minimum 20 per cent as required by regulation "" to gain management control of the term lender.

IFCI had earlier proposed to convert only 30 per cent of the Rs 1,479 crore of debentures and fix an interest of 150 basis points below the 10-year government bond yield on the unconverted debentures.

In a meeting with IFCI on November 8, however, creditor banks had demanded that all the zero-coupon optionally convertible debentures held by them be converted into equity.

The debentures were issued in 2002-03 on conversion of part of the investments by the banks and insurance companies in IFCI, as part of a restructuring package worked out by the government to bail out the term lender that had built up a high proportion of bad loans.

Comments by finance ministry sources, who did not want to be identified, are a telling explanation of the situation that awaits the prospective strategic partner. They said it is unlikely that the investor, who will also make an open offer to buy (at least) another 20 per cent, will gain management control.

IFCI, which was once a public sector entity, now has no clear promotor. The government is exercising control over the term lender through the combined 24 per cent stake of financial intermediaries owned by it.

IFCI Chief Executive Officer Atul Kumar Rai, who took voluntary retirement from government service and was recently appointed to head the term lender for five years, said "All the options are under consideration. The board will take a decision on December 1."

On November 23, IFCI shares closed at Rs 89.75 per share, up 3.88 per cent from its previous close.