Business standard updates

Govtchecks into IFCI through backdoor

NSUNDARESHASUBRAMANIAN Mumbai, 17 October In an unprecedented move that is in contradiction with its drive towards divesting stakes in companies it owns, the central government today turned acquirer, gaining control over publicly listed institutional lender IFCI Ltd. The government used an option to convert debentures it had issued 11 years ago when IFCI was in financial trouble to acquire control over the lender. IFCI Ltd has issued 400 million shares worth ~400 crore to the Government of India, making it the largest shareholder in the company. “The Committee of Directors (constituted for the purpose of issue and allotment of equity shares on conversion of optionally convertible debentures held by the Government of India), at the meeting held on October 17 has allotted 400 million (40 crore) equity shares of the company at par i.e ~10 each to the Government of India,” the company said in a statement to the exchanges. The shares were issued on conversion of optionally convertible debentures totalling the same amount held by the government. Following this, the central government has become the largest shareholder in the company, with a holding of 35.15 per cent. The issue has expanded the equity base of the company, as total shares increased to 1.13 billion from 737 million earlier. This is likely to bring down the holdings of other shareholders substantially. For example, Life Insurance Corporation, which held 8.4 per cent before the issue, will see its holding down to 5.44 per cent. Similarly, PSU banks which held 5.97 per cent before the issue will now hold just 3.87 per cent. The dilution does not end here. In the second tranche, the government is likely to convert another ~523 crore worth of debentures into equity. “The second tranche of debentures worth ~523 crore will be converted as soon as the government gets the debenture certificates,” said an official familiar with the development. In August, the Union Cabinet approved conversion of ~923 crore of debentures held by it in IFCI into equity. The decision came after the privileges committee of the Rajya Sabha found irregularities in the appointment of chief executive Atul Rai and recommended a CBI inquiry. The committee also had expressed concern over the government’s apparent lack of control over an institution in which it had invested a substantial amount of money in the form of debt and grants. Some insiders also point out that Rais closeness to Comptroller and Auditor General of India Vinod Rai made him a soft target for vested interests. When the second tranche gets converted, the government holding will be 55.57 per cent. About 761,605 small investors own 33. 29 per cent. Some of them had resisted the move. Some even moved the Calcutta High Court, challenging the government decision. The court dismissed the petition yesterday. In the normal course, such acquisition of voting rights would have attracted provisions of the takeover code, which requires the acquirer to provide an exit option to minority shareholders in the form of an open offer. However, the government was spared even this burden after the market regulator granted a special exemption from making an open offer. On August 29, the management of IFCI had written to the Sebi expressing concern over the deal affecting the interests of minority investors. But Sebi brushed aside these concerns saying, “Since a substantial amount of public funds have been pumped into IFCI by Gol, the enhanced accountability will provide additional safeguard to the investment of public funds.” The takeover also puts a question mark over the future of the company’s mercurial CEO, Rai. The love-hate relationship between Rai, aformer Indian Economic Services officer and North Block was a trigger that led to this forced acquisition, say observers. Though, Rai was given a second term in office by the board earlier this year, it is not clear if the new owner would like to continue with him. Rai declined comment. IFCI shares gained 0.3 per cent to close at ~30 on the BSE. Aftergovernment As of June 2012 acquisition No. of % of No. of % of Name Shares* Holding Shares* Holding LICof India 61.9 8.40 61.9 5.44 PSU Bank 44.1 5.97 44.1 3.87 Nippon InvestmentAnd Finance Company 18.8 2.55 18.8 1.65 GICof India 16.5 2.24 16.5 1.45 Tourism Finance Corporation of India 15.6 2.12 15.6 1.37 Macquarie Bank 14.3 1.94 14.3 1.26 Oriental Insurance Company 10.2 1.39 10.2 0.90 Barclays Capital Mauritius 9.9 1.34 9.9 0.87 The Royal Bankof Scotland NV (London) Branch 9.7 1.31 9.7 0.85 Bakulesh Trambaklal 8.7 1.18 8.7 0.76 NewIndia Assurance Company 8.5 1.16 8.5 0.75 Total Outstanding shares 737.8 100.00 -GovernmentHolding - 400 35.15 Postissue total outstanding shares - 1,137.8 100.00 *in million; Data compiled by BS Research Bureau Source: Capitaline ABUYBACK? IFCI’s shareholders before and after the issue to government Centre is largest shareholder by converting first tranche of debentures

Minimum land need forSEZto be lowered

NIVEDITAMOOKERJI & SHARMISTHAMUKHERJEE New Delhi, 17 October Many key changes are in the works to change the contours of the Special Economic Zone (SEZ) policy and boost growth across these units. Following a discussion paper last November, the commerce ministry has prepared a draft SEZ policy, detailing revision in the minimum land requirement for these zones, easier contiguity norms, clarity in land sale and transfer, relocation of the zones, development of infrastructure, extending focus market schemes to these units and exit policy for developers and units, among others. Commerce Secretary S R Rao is slated to meet his counterpart in the Revenue Department, Sumit Bose, later this month to firm up the changes in the SEZ policy, it is learnt. The minimum land requirement for multi-product SEZs may be brought down to 250 hectares from 1,000 hectares now, while the maximum area would remain capped at 5,000 hectares, according to the draft policy that Business Standard has reviewed. For multi-services units, SEZ for a specific sector, port or airport, the ministry has proposed reducing the minimum size to 40 hectares from 100 now. In the case of north-eastern states, union territories and some hilly states, the minimum area requirement may be brought down to 50 hectares from the current 200. Reduction in the SEZ land requirement will come as a significant relief to developers. For IT SEZs, the minimum land requirement criterion of 10 hectares may be dropped, while enforcing the minimum built up area criteria. Also providing an exit route to developers, they could be allowed to sell after developing an IT SEZ. “Towards this end, sale of built up space to units by the developer may be permitted. To ensure that the incentive is utilized in the right earnest, such sale would be permitted only after the minimum built up area requirement is fulfilled by the developer.” Other changes may include those on the contiguity norms. For example, the contiguity between the processing and nonprocessing area may not be insisted upon. And national or state highways, railway lines, natural water bodies falling within an SEZ area may be addressed through suitable mechanisms, according to the draft policy. “Regulatory concerns from lack of physical contiguity could be addressed by way of additional entry/exit gates manned by SEZ personnel.” Also, the Board of Approval (BoA) will have the discretion to allow the developer to suitably address lack of contiguity and relax the strict contiguity requirements through innovations implemented at the expense of the developer, while not compromising the regulatory concerns, it says. The revised policy also aims to give clarity on sale and transfer of land in SEZs, besides pointing at the need for focus market scheme and infrastructure development funds for these units. In addition, the draft policy talks of popularizing SEZs among the Indian diaspora through embassies, consulates and road shows abroad to attract FDI. SEZ rules allow 100 per cent FDI through the automatic route. Vikram Bapat, executive director at PricewaterhouseCoopers (PwC), told Business Standard that there were some practical problems in the SEZ policy and that changes were required. WHAT THE NEW SEZPOLICYMAY PROPOSE |Lower minimum area of land required for multi-product SEZs to 250 hectares from 1,000; multi-service, sectorspecific units, airports and ports to 40 hectares from 100 |Define contiguity as land connected without a break, within a common boundary |Divisions due to highways, railway lines, natural water bodies falling within an SEZ area, which can be addressed through suitable mechanisms, should not constitute a break in land contiguity |Permit sale of built-up space to units after the minimum area requirement is fulfilled |Permit no transaction that is merely a sale of land or even amounts to a sale of land

RBI tweaks priority sector lending norms

BS REPORTER, Mumbai, 17 October Heeding the demand of bankers, the Reserve Bank of India today revised priority sector lending norms. Loans up to ~2 crore to companies involved in farming and allied activities will be treated as lending for direct agriculture under priority sector lending (PSL) status. Also, credit to housing finance companies for onward lending for rehabilitation of slum dwellers and economically weaker sections will enjoy PSL status. The cap on such loans will be ~10 lakh per borrower. The limit on loans to SMEs in services sector under PSL stands doubled to ~2 crore. RBI said the eligibility under PSL (for HFC exposure) is capped at five per cent of total priority sector lending. The maturity of bank loans should be coterminous with average maturity of loans given by housing finance companies. Banks should maintain necessary borrowerwise details of underlying portfolio. In July, bankers had raised certain concerns over revised PSL guidelines. Later, RBI had discussions with CMD/CEOs of select banks and officers in-charge of PSL. In the earlier guidelines issued in July, the central bank had completely taken out loans to HFCs from priority sector lending. The decision was criticised by the stakeholders, including the chairman of India’s largest HFC, HDFC, and Deepak Parekh. RV Verma, chairman, National Housing Bank, said, “The relaxed norms gives enough space to HFCs to borrow from banks, and the five per cent cap on loans to HFCs is reasonable. HFCs resource position would be improved. They can get more funds from banks at lesser costs, as it will be classified as priority sector loans.” Referring to funding to companies for agriculture operations, the banking regulator said the short-term loans for raising crops and for pre and post-harvest would be eligible for PSL status. Earlier, loans given only to individual farmers up to ~25 lakh were classified as priority sector lending. RBI has also doubled the limit of bank loans to ~10 lakh per dwelling unit for any government agency which would constructs the houses under slum rehabilitation. PSLGAINS |Loans to HFCs for low-cost housing to get PSL status |Loans up to ~2 cr to companies in farming will amount to lending to direct agriculture |Entire agri loan with limit above ~2 crore to be indirect finance to farming |Credit to services sector SMEs for PSL status doubled to ~2 cr Corporate agri loans up to ~2 cr to be treated as direct exposure; PSL status for low-cost housing credit to HFCs

‘Avoid litigation with creditrating agencies’

BS REPORTER Mumbai, 17 October Securities and Exchange Board of India (Sebi) Chairman U K Sinha today asked companies raising capital from the public to be transparent, adhere to norms and avoid litigation with credit rating agencies. “My message to corporates is they should be willing to follow the rules if they are raising money from the public or any institution, rather than be upset if something has been changed,” Sinha said on the sidelines of the India Securitisation Summit. When asked about companies dragging credit rating agencies to court, he said, “I think good sense will prevail upon the companies. I am also sure all courts in the country are aware if Sebi is regulating a particular industry or particular instrument is being looked at by Sebi…they will let the due process prevail, rather than come in the way of this.” Yesterday, Sebi officials held ameeting with officials from credit rating agencies. At the meeting, various issues, including litigation from some companies, were discussed. While Sebi asked the agencies to ensure their rating methodology was “sacrosanct”, the agencies expressed concern on litigation and the fact that some companies didn’t share complete information with them. Recently, Kolkata-based Srei Infrastructure Finance had moved the Calcutta High Court after rating agency India Ratings & Research, formerly Fitch Ratings India, cut its rating. Srei also terminated its contract with the rating agency. “It is for regulators to protect the interests of investors and ensure rating agencies are able to express their opinion in a free manner,” said Atul Joshi, managing director and chief executive, India Ratings. Sinha said after wide consultations, Sebi might look at revising the guidelines for credit rating agencies. “After yesterday’s dialogue with rating agencies, Sebi would engage all entities in the chain and try to improve the system,” he said, adding, “Our aim will not only be to help the industry, but also ensure investors’ interest is taken care of.” The Sebi chief also highlighted a few procedural hurdles regarding rating companies’ financial instruments, such as bank loans. “There are issues. For example, how does one recognise and ensure information flow when a company has defaulted to a bank, even for a single day?” he asked. “As a rating agency, it is their duty to inform the public about a change in the status of a company or an instrument they have rated.” Sebi chief tells India Inc to be transparent, adhere to norms >“Mymessage to corporates is theyshould be willing to follow the rules if theyare raising moneyfrom the public orany institution, ratherthan being upset if something has been changed” >“Sebi would engage all entities in the chain and tryto improve the system…Ouraim will not onlybe to help the industry, but also ensure investors’ interest is taken care of” UKSINHA, Chairman, Sebi

Don’tpanic when a firm defaults TANIAKISHORE JALEEL Shareholders of Suzlon would be a worried lot after the wind-turbine maker announced it was to default on redemption of $200 million of foreign currency convertible bonds (FCCBs). But is the concern unwarranted? In the past, companies like Wockhardt have faced similar situations but recovered sharply. When companies issued FCCBs during the 2006-08 boom, it seemed a good idea. The rupee was at 40-to-thedollar levels and the Sensex around 20,000. The steep drop in the value of the rupee against the dollar over the past two years has exacerbated the problem. “The result is many FCCB issuers may have trouble finding funds to repay bondholders. Those who can’t will face payment default,” said a Standard & Poor’s (S&P) report. Some of the companies, which have their FCCBs up for conversion in the remainder of 2012, include Pidilite Industries, Prime Focus, GTL Infrastructure and GV Films. Marketmen are of the view that investors should not press the panic button yet. Arun Kejriwal of Kejriwal Research and Investment Services says one should look at the difference between the conversion price and the current share price. “If the conversion price is higher by 30-50 per cent, then the chances of a turnaround of the shares could be less. One should exit such companies completely,” he says. If the conversion price is slightly higher or is the same as the current market price, then one need not worry. However, new investors should avoid companies with FCCBs coming up for conversion any time soon, says Kejriwal. Financial advisors say even if one were to exit, there could be opportunities to re-enter the scrip later. V K Sharma, business head, private broking and wealth management, HDFC Securities, says, “Once there are signs of a turnaround by these companies and there is more clarity with regard to the FCCB situation, one can enter the scrip again. Entering these stocks at a lower level can help make profits in the long run.” There are other companies likely to default as well. According to a research report issued by S&P in June, of the 48 companies which have their FCCBs coming up for conversion in the rest of 2012, half could default. The report says investors do not want to convert the $5 billion in FCCBs into stock worth 20-90 per cent less than the conversion price. Companies such as Zenith Infotech and Sterling Biotech have defaulted on payments to bondholders. In such a case, bondholders have the option to take the company to court if they fail to pay and request that it be wound up. FCCBs could burden some companies, but that will depend on the company, its rating and the industry it belongs to. For example, Wockhardt defaulted on FCCB payments in 2009, following which the bondholders filed a windingup plea in court. At that point its share traded at ~67. But now, the company is almost done paying off the bondholders, is planning to repay its bank loans and has seen an improvement in its profits. Its shares are trading at ~1,470 as of today. JSW Steel redeemed its FCCBs at a much higher price. The conversion price of ~953.4 was almost 30 per cent higher than the price as on the date of conversion, which was ~669. But its shares are trading higher now. Its current market price is ~724.8. Though the company’s balance sheet did take a hit, it is not a big concern, say analysts. One should also look at performance. “Look at the top line and the profit over the last year. Also, check the company’s ability to refinance,” says Sharma. Ideally, one should start analysing the scrip a year before the date of conversion and not wait for the eventuality to happen and then decide whether to sell. You should keep track of the date when the FCCB would be up for conversion, Sharma adds. In the case of Suzlon, brokerages have a ‘hold’ view, as there are chances of a turnaround if the company comes up with a plan to get itself out of its financial mess. Manish Sonthalia, vice-president and fund manager, Motilal Oswal AMC, says in the long run things could turn around for the company, though it will still be a risky proposition for most small investors. In cases like Suzlon, the decision to exit should depend on whether you are sitting on profits or losses Price setfor conversion Price on *Current attime of date of market Company issuance (~) conversion (~) price (~) JSWSteel 953.4 669 746.85 Tata Motors 181.4 236.65 262.30 Suzlon Energy 97.3 16.20 15.70 GTLInfrastructure 53 - 8.58 Karuturi Global 19 - 4.46 Easun Reyrolle 315 - 73.75 Sterling Biotech 163 8.10 6.12 *FCCBs already reached maturity Source: S&P Report & BS Research Bureau DON’T FORGET THE REALITYCHECK Good credit score doesn’t mean cheaper loans PRIYANAIR If you have a good credit score from a credit bureau, don’t think you might get a loan at a lower rate. But you could get it faster and with fewer checks. Process differentiation is the first advantage customers can look forward to as a result of their good credit scores. Next could be the rate differential, which might take some time, says Mohan Jayaraman managing director (MD), Experian Credit Information Company of India. A credit score is a number indicating the borrower’s potential to repay and chances of default. It indicates creditworthiness of the person. Banks and lenders now increasingly rely on credit scores to decide if a loan should be approved. Usually, the higher your score, the better the chances of your application getting approved. Explaining why banks are not yet offering lower rates for customers with good credit scores, Jayaraman says for Indian banks, consumer lending segment is a fairly low-margin business. So, their aim would be to keep margins steady. But several banks have simplified the process for customers with better scores. For example, for a customer with a good score, the bank might do away with multiple field investigations. If normally, a bank conducts two field investigations before approving a loan, in this case it could be just one. Also, the turnaround for approving the loan could be faster. For instance, a day or two. For others, it might take up to a week. Unsecured loans, such as personal loans, is where the differential, especially the rate differential is likely to be seen before other segments, since the margins are higher. In personal loans, some banks offer better deals for customers of a particular profile, such as those working in a particular company and who could have their salary accounts with the bank. Or customers who already have a relationship with the bank. Eventually, the credit score will be a new segment for banks to approve the loan. “For instance, banks will say that borrowers in certain bands will get better scores, says Jayaraman. According to Prashant Joshi, MD and head of private business clients, India, Deutsche Bank, a good credit score does help reduce the turnaround for approving a loan, more so in the case of unsecured loans. In the case of secured loans, such as home loan, a bank will need to conduct property verification, which might take time. For a customer to get the benefit of a better rate in line with a superior credit score, the score needs to stabilise over a period, say three to five years. Only then will it be possible for banks to offer risk-based pricing, he says. Shyamal Saxena, general manager, retail banking products, Standard Chartered Bank, says the market will eventually evolve to pricing differential based on credit scores. As of now, for a customer with a good score, banks might do fewer verification. "The retail credit penetration in India is still very low and there are a large number of customers for whom banks will conduct extra verification, he says. Customers can know their individual scores by accessing their individual credit report from bureaus. Most charge between ~100-150 for this.