On Thursday, Goldman Sachs and Merrill Lynch unloaded 86 lakh IFCI stocks worth approximately Rs 66 crore in the market. The stock that was flying high in the last six months crashed by over 23 per cent to Rs 76.75 on that day as sellers swamped the stock exchanges after the term lending institution announced the cancellation of strategic equity sale process.It was a fiasco waiting to happen. The plan of term lending institution, IFCI Ltd — the oldest in business but struggling with huge bad loans — went haywire in the last lap, leaving banks and institutions in the lurch. Banks and institutions — major stakeholders in IFCI — are now sitting on a notional loss of Rs 350 crore as they converted their loans into equity at the rate of Rs 107 per share, only days ahead of the announcement.IFCI, which had seen a bailout earlier, was pinning hopes on a major comeback after the stake sale. Its peers like IDBI and ICICI have already become commercial banks and moved forward in the financial sector. Although, IFCI cannot afford to wait any longer it will now have to, atleast for a while.Why the stake sale failed?Sterlite-Morgan, the frontrunner, is believed to have offered Rs 107 per share for a 26 per cent stake. This is also the price at which banks and financial institutions (FIs) are converting their loans into equity. However, IFCI was not willing to give management control and lower the price. If accepted, the consortium’s stake would have gone up to 46 per cent after the mandatory 20 per cent open offer to other shareholder as per the Sebi guidelines.Said D R Dogra, executive director, CARE, “the Government might have felt it’s not prudent to hand over management of a key financial institution to a private-foreign consortium at this stage.” But an official of a firm that originally showed interest in IFCI indicated that the Government and the company should have made it clear what they were looking for and spelt out the modalities much in advance. “With a 46 per cent stake (including the open offer), any bidder would have asked for management control. It doesn’t make much sense to remain a passive financial investor with a big stake,” he said. The process of inducting a strategic partner started with the appointment of Ernst & Young as consultant to identify a strategic partner in March-end this year. Though 10 suitors had expressed preliminary interest in buying the stake, only eight were shortlisted by the IFCI board with suitors like Kotak Mahindra Bank, Newbridge Capital and HDFC exiting the race. Of the eight, only four undertook due diligence process. Many bidders pulled out from the race saying the share is overpriced.“There’s some merit in the argument about the high share price. The stock had surged by almost 900 per cent from just Rs 12 to Rs 120 in the last six or seven months. This is purely based on the stake sale plan,” said a stock dealer.The way aheadNow that the earlier plan has been aborted, there could be significant changes in the stake sale plan as the Government and IFCI cannot go wrong for a second time. One way could be a reduction in the stake on sale from 26 per cent to 10-15 per cent, without giving up the management control.The Government had earlier taken an initiative of merging IFCI with a public sector bank or institution but dropped the plan as no bank came forward to bail out the non-performing assets (NPA) laden institution. Since then the institution has improved its bottom line — thanks to its stake sale in the NSE and ICRA and NPA recoveries. Now the IFCI’s status is likely to be retained, as it’s the only one development financial institution left out.IFCI chairman and managing director Atul Rai last week told the media in New Delhi that there was no possibility of starting the process again in the “same format”. “There is no possibility of a rebid in this format,” he had said.The financials of the company have also improved. From Rs 3,229-crore losses borne in 2004, it has made a profit of Rs 873 crore during the year ended March 2007. The financial institution has been going after defaulters for recovery of bad loans.The Government had announced a Rs 5,000-crore plus package for IFCI in the 1990s, half of which has already been given through several tranches. IFCI can seek the next tranche of Rs 1,300 crore if the situation becomes unmanageable. “By 2009, Indian financial sector will be opened up and foreign banks will come in directly. All Indian banks and institutions should gear up,” said Dogra.There’s a lesson for banks and FIs: The Government made a wise move by not converting its loans into equity.From red to black• From Rs 3,229 cr losses borne in 2004, IFCI made a profit of Rs 873 cr in 2007• Accumulated losses down from Rs 4,772 cr in 2006 to Rs 836 cr in 2007 • More than halved its NPAs to Rs 6,000 cr in 2 yrs; now plans to sell stake in 100 unlisted cos• Share price rose from Rs 12 to over Rs 100 in the last a few months, but crashed 23% on last Thursday
