Contact Your Financial Adviser Money Making MC
8
November 2016
 |
Ruia Brothers (The Total Investment & Insurance
Solutions)
A week ago, an industrialist told us
that the entire family of a very large, first-generation industry house is
making plans to move abroad permanently. The only hiccup was a court order that
bars two members of the family from going abroad. His own family too is
planning to migrate, he says. While global investors consider India in a ‘very
sweet spot’ (Mark Mobius), offering a variety of investment opportunities, why
are several industrialists looking outward? The answer is interesting. The Total Investment
& Insurance Solutions
None of them has plans to abandon
the business opportunity presented by India. In fact, many have aggressive
growth plans in retail business and are eyeing defence contracts as a big
opportunity. They just want to be foreign citizens, which, they believe, offers
some protection from the draconian provisions of statutes such as the
Prevention of Money Laundering Act (PMLA) and even the Companies Act,
especially if they have to make a Vijay Mallya-type exit.
There is some merit in this
strategy. Despite the prime minister’s intention to improve ease of doing
business rules, some things haven’t changed. Indian investigation and
enforcement agencies, armed with draconian powers, follow the practice of
arrest and imprisonment first, before issuing a basic show-cause notice. A
foreign citizenship in such situations ensures some protection from deportation
until a proper case is made out. On the other hand, since scores of countries
offer citizenship to those who make substantial investments (the investment
threshold differs for each country), this also indicates how much of Indian
money stashed overseas has not returned, despite the tough provisions of the
PMLA.
The second big nudge has come from
court orders. The Supreme Court, which is hearing a public interest litigation
(PIL) on gargantuan bad loans of PSBs, is being increasingly tough on business.
It is important to remember that these sales are happening even before the new
bankruptcy law actually kicks into action. The Total Investment
& Insurance Solutions
After Subrata Roy of Sahara spent
over a year in jail, the flamboyant Vijay Mallya, literally, escaped overseas
to avoid a similar fate, promoters of Unitech were arrested before they agreed
to redeem their commitment to flat-buyers and Ravi Ruia of Essar, one of
India’s largest groups, has been barred from going abroad. Like the Unitech
group, Jaiprakash Associates (which sold its cement business to the Aditya
Birla group for Rs15,900 crore and two hydro power plants for Rs9,200 crore),
which has not even repaid investors in their fixed deposit programme, has also
been shedding assets, under intense pressure from lenders. Several others in
the realty business have sold assets to complete delayed projects and deliver
on their promise to flat-buyers. Many of these decisions were hastened after
cases wound their way to the Supreme Court leaving little room anymore to game
the slow judicial system. The Total Investment & Insurance Solutions
All this has been labelled as
India’s biggest ‘fire-sale’ of assets and, although it has been on for two
years, it was earlier restricted to smaller companies or minor businesses of
large conglomerates. Early this year, the economic research wing of State Bank
of India estimated that nearly Rs2 lakh crore of assets would be sold by
companies, in addition to a paring of Rs47,813 crore of debt by 270 companies
in 2015. Essar and the Anil Ambani group that constitute half this estimate
were not even part of the study. Many politically powerful groups continued to
wait and watch while the government was embarrassed before the courts on the
bad loans issue. That powerful conglomerates are feeling the pressure to sell
large assets to effect substantial reduction in their debt is the big change in
2016.
Essar Oil’s sale of 98% of its oil
assets to a Russian consortium led by the State-owned Rosneft (includes United
Capital Partners and Trafigura) for Rs83,000 crore is expected to help settle a
slew of global and Indian debts and payments. We learn that this debt had
become an international embarrassment for India with payments to a neighbouring
country having stalled. Essar’s full-page advertisements and media interviews
after the transaction do not reveal that the sale would not have happened
without some tough, backroom negotiations and enormous pressure on the group to
sell.
The Total Investment & Insurance Solutions
Essar had originally planned to sell
only 49% of Essar Oil to Rosneft but has sold off nearly its entire stake and
also added assets, including a port, to sweeten the deal. StanChart Bank, which
took a haircut on its payments, is a big beneficiary, followed by ICICI and
Axis Bank. Essar Steel, where PSBs have a bigger exposure would probably be the
next Essar company on the radar. The Total Investment & Insurance
Solutions
The Anil Ambani group has been on a
big selling spree too. Most recently, it sold 51% of the telecom tower business
of Reliance Communications to Brookfield Infrastructure Group of Canada, for
Rs11,000 crore. This is in addition to significant stake sales in electricity,
mutual funds, insurance and cement. Talks are also on to sell infrastructure,
media and entertainment assets as well to cut borrowings that were in excess of
Rs1,21,000 crore.
The notorious GTL group (formerly
Global Tele, which was deeply involved with Ketan Parekh in the 2000-01 scam)
belonging to Manoj Tirodkar is, finally, feeling some heat after bouncing back
in different avatars and with different names. The
Economic Times reports that the company, and its assets, are likely to
be auctioned by February 2017. The Total Investment & Insurance
Solutions
Apart from the Essar group and Anil
Ambani’s Reliance, among the most indebted corporate groups already facing
repayment problems are: Lanco (headed by a Congress MP notorious for the
pepper-spray episode in parliament) and Videocon. Many of India’s largest
companies, including Tata Steel, GVK, GMR, Bharti Airtel, Jindal Steel and
Power, and others, like Lanco and Suzlon, have all sold off some assets, but a
lot more is needed from them.
Several others have been
forced to convert loans to equity and the lenders are seeking to auction
controlling stakes. ABG Shipyard is an example. In another case, that of Hotel
Leelaventure, the entire loan was sold by State Bank of India to an asset
reconstruction company, which has forced the chairman Vivek Nair and
co-chairman Dinesh Nair (his brother) to accept a 93% cut in salary (from
Rs2.42 crore to Rs17.12 lakh in Vivek Nair’s case), reports Business
Standard. Hopefully, banks will force this on other severely indebted
companies that are struggling to service interest costs. The Total Investment
& Insurance Solutions
This multi-pronged action by lenders
could not have happened without India’s crony capitalists being told, in no
uncertain terms, that they will have to pay up and the bankers being assured
that there will be no interference in their recovery efforts. It is a pity that
PSBs have not taken advantage of this new environment as yet but they could be
pushed into action soon. The Total Investment & Insurance
Solutions
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