 "Little success for SDR as banks scout for promoters")
Electrosteel Steels, based in this city, is the first company for which lenders invoked the fairly new strategic debt restructuring (SDR) mechanism. It will end positively for us, is all promoter Umang Kejriwal will say.
Introduced by the Reserve Bank of India (RBI) in June, SDR aims to tackle the issue of burgeoning debt-going-sour, by allowing banks to acquire control of a defaulting company, converting loans into equity, partially or fully. Then, they are to bring in new promoters, after which sticky assets can be upgraded to standard ones, hopefully, in the account books.
That process for Electrosteel is on. A sector observer says, “There could be a change in management where a strategic investor is hostile to the existing promoters. Or a friendly investor willing to engage with the current ones could also come in.”
In September, RBI came out with another circular, on a non-SDR mechanism. This allows banks to upgrade credit facilities for borrowers whose ownership had been changed outside an SDR to the standard category, provided the stress was due to operational or managerial inefficiencies. Companies like to think multiple challenges in implementation of SDR prompted the central bank to issue that latest circular.
Lenders have invoked SDR for Gammon India, Lanco Teesta Hydro Power, VISA Steel, Jyoti Structures and Monnet Ispat & Energy. By ICRA estimates, the loans under SDR could be about Rs 35,000 crore. However, the banks have been unable to find a strategic partner for any of the firms in question.
There are stipulated milestones. First, the joint lenders’ forum (JLF) must approve the debt to equity conversion, within 90 days of SDR invocation. The JLF has a further 90 days to convert the loans into shares; the lenders are required to hold at least 51 per cent.
One big issue is finding a new promoter, especially in stressed sectors. “The companies are in the doldrums not because of operational inefficiencies but external factors. What do you do if coal blocks are de-allocated and the captive raw material linkages promised don’t come through? A special dispensation should be given or the debt should be restructured,” a steel producer says.
P K Malhotra, deputy managing director (stressed asset management), State Bank of India (SBI), says the issue is how to turn such a company around. “For an effective SDR, it is necessary that public sector undertakings come together to sort out issues like iron ore prices and the anti-dumping duty. We have to make the domestic sector competitive,” he adds.
Another challenge in a stressed sector is to agree on a fair valuation. And, banks might not be the best entities to decide on new promoters for a company.
“There has to be a process for price discovery and this will happen if more than one party shows interest. The price should be acceptable to seller, buyer and lender. One cannot invoke SDR indiscriminately. In the steel sector, once we have two or three cases, we will have pointers for future direction. One of the parties will have to take a haircut,” says Rajnish Kumar, managing director (compliance and risk), SBI.
In the 18-month period after invocation of SDR, the equity is not subject to mark-to-market losses (writing down to reflect current values), which could compound these problems. Also, there is apprehension about under-provisioning of non-performing assets. The problems do not end there. Says UCO Bank executive director Charan Singh, “Transferring equity from an existing promoter to the bank is not a problem but running the company is.”
Is the non-SDR route, then, more feasible? At least, some SDR companies seem to think so.
