Hard choice for promoters of stressed businesses: Sell stake or cash out

Call it the great Indian promoter sell-off, one where a number of Indian industrialists are under pressure to either dilute their stakes or simply cash out. They know the consequences of hanging on in their current situations could be disastrous. Lenders could go to the National Company Law Appellate Tribunal (NCLAT), in which case the promoters would lose everything — money, equity, and control. 
 
Or, lenders could panic and sell the shares pledged to them by the promoter (as in the case of Zee). This would not only lead to a drastic fall in the company’s market cap, but also make it difficult to raise funds in the future as its ability to pay back loans would be in in question. 
 
Analjit Singh sums up the mood when he says that he did not want to become another Ranbaxy or a Vijay Mallya and preferred to cash out when he saw the writing on the wall.  
 
Amit Chandra, managing director of Bain Capital, says that taking companies to the next stage requires a paradigm shift in thinking. “Promoters have to face choices. This could mean cashing out or diluting holdings and becoming a minority shareholder who can still run the business, but with partners.”
 
Investors say that promoters are clearly moving in that direction. According to research platform VCC Edge, in the private equity space in India, the total value of control deals went up from $4.8 billion in 2017 to $5.9 billion in 2018. Data from fund managers also show that while in 2017 the investment in the five biggest control deals was $710 million, in 2018 KKR alone forked out $1.2 billion to buy majority stakes in Ramky Enviro and Max hospitals.
 
“Promoters are assessing potential future areas of stress in their businesses and deciding to give up majority stakes rather than go to the IBC,” says a top executive of a company which has bought over others. 
 
Generational change is another reason for so many promoters diluting their stake. In several cases, the second generation is unwilling to join the same businesses. Analjit Singh admits that part of the reason he is selling his various businesses is that his children are not interested in them. 
 
Historically, Indian promoters have grown their empires by borrowing from banks which have been liberal in giving them loans. Experts say that this is fine as long as promoters can create value which is higher than the cost of funding. However, regulators and lenders need to see that lending does not go out of control, debt to equity ratio does not reach unsustainable levels and debt to Ebitda ratio does not become so convoluted that companies do not not have enough earnings to pay back their loans. 
 
That is precisely what happened in corporate India and promoters had a free for all. But then came the inevitable pullback. Confronted with huge NPAs of banks, Reserve Bank of India put a stop to the easy availability of loans. RBI’s February 12, 2018, circular not only made loan recast difficult, but also identified any loan which was in default for even one day.
 
Also, the IBC process brought numerous companies on the acquisition table with a clear deadline for liquidation.
 
Some companies have found ways to reduce their debt without losing control. For example, GMR Group is in talks with financial investors (Singapore’s GIC and Mitsubishi Corporation) to sell up to 30 per cent stake in GMR Airports, a subsidiary of GMR Infrastructure which has stakes in Delhi, Hyderabad and the Philippines’ Cebu airports, among others. This will allow GMR to retain management control over the airports as the financial investors are only interested in getting an attractive return on investment (ROI) and not in control. 
 
Zee’s Subhash Chandra could have used the same ploy, but he is running against time to pay back his loans by September. Says a senior analyst who tracks entertainment stocks, “Chandra could have identified some financial investors and continued to control the company, for Zee is profitable and financial investors are merely looking at ROI. But he has no time.”
 
In the e-commerce space the challenge for promoters has been to finance cash losses and continue to build size through equity infusion. US retail giant Walmart made a $16 billion investment in Flipkart last May for an initial stake of about 77 per cent, which led founders Sachin Bansal and Binny Bansal to sell their stakes. 
 
The other challenge for e-commerce firms is that they don’t have access to the IPO route. “All of them are by and large loss-making for a long time. The money is coming from private equity funds which are looking for exits. Since IPOs are not feasible, strategic sale is the only option,” says Devangshu Dutta CEO of retail consultancy Third Eyesight.  
 
But for smart Indian promoters, this is a good time to pick up companies from the IBC and consolidate their position in the business. For example, Tata Steel, has bought Bhushan Steel, and JSW has acquired Monnet Ispat jointly with AION Capital. In some deals strategic investors have bought the company by getting a substantial haircut in the loans.
 
However, some fear the trend could throw up adverse consequences as well. “Soon you will have 8-10 conglomerates and the mid-sized companies will vanish,” says a CEO whose company is under the IBC process.
 

Some recent sell-off announcements

• Reliance Capital is planning to sell 42.88% in Reliance Nippon Life Asset Management  
• Wadhawan Global-owned Aadhar Housing Finance sells its business to Blackstone 
• DHFL is willing to sell up to 10% in the flagship company to PE funds
• Subhash Chandra to sell up to 25% stake in Zee
• GMR group is in talks to sell up to 30% in GMR Airports to investors for Rs 6,000-7,000 crore