Investors lose faith, firms lose face

Due to poor corporate performance, industries like paper, textiles, steel, pharmaceuticals, chemicals & dyes and man-made fibres and flexible packaging are facing problems. This is in addition to the adverse developments in acquaculture, real estate, construction and the non-banking finance sector. While the textiles and man-made fibres industries are facing a demand glut coupled with overcapacity, paper, chemicals and dyes industries have been hit by cheaper imports which, in turn, has affected demand. "Demand recession and liquidity problems seem to have caught up with companies. You can’t blame rating agencies. Downgrading reflects the industrial scenario in the country. But it’s also true that a downgraded company loses its charm," said a fund manager.

Even strong public sector units like SAIL and National Fertilisers Ltd (NFL) have been downgraded: Rs 1700 crore commercial programme (structured deal) of SAIL, Rs 1000 crore STD of NFL have been downgraded. Even the Rs 47.91 crore partially convertible debentures of Voltas from the Tata stable have been downgraded by ICRA and placed on rating watch due to the crisis in the white goods sector. Some other names included PAL-Peugeot, Mukand, Sterling Holiday Resorts, Punjab Wireless Systems, Lupin Laboratories, Ballarpur Industries and JK Corp.

While all downgrading may not lead to default of payment, it is a clear indication of future repayment problems. "Investors can’t do anything after the company is downgraded and the money will be blocked," said Prakash Subramanyan K V, ANZ Investment Bank. Individual investors relied on rating agencies after they lost faith in the primary segment of the stock market. However, even weak companies have entered the debt market with bonds, debentures and commercial papers. Now the situation in the debt market appears to be worse than the stock market.

"I have invested in the debenture programme of Raasi Fertilisers at Rs 50 seeing its rating a few years ago. The company was recently downgraded, debenture price has come down to Rs 30 and there is no buyer for it. I have lost heavily by investing in bonds and debentures of various companies," said B K Shrivastava, who put his entire post-retirement benefits in such companies, adding, "The credibility of rating agencies is also at stake after the CRB scam." One can find several such investors all over the country.

There was also huge investment made by institutional investors through private placement route to circumvent the mandatory rating norm of RBI. Private companies raised Rs 8,871 crore in 1994-95, Rs 3970.1 crore in 1995-96 and Rs 4,233.2 crore in 1996-97 through debenture issues based on good rating. The total outstanding commercial paper issued by private companies (including NBFCs) at face value as on July 15, 1997 was Rs 1923.25 crore compared to only Rs 76.25 crore on March 31, 1996.

After rating of debt instruments above 18 months was made mandatory, banks, institutions and other investors have been taking their investment decisions on the basis of credit rating. However, once the rating is downgraded, investors are in the dark about the future of the company. "Downgrading is only a signal that we sent to the market based on which individual investors can take decisions. After the downgrading investors do flock to the company to find out the safety of their investment," said a Crisil official.

The manufacturing sector has been affected by the recessionary trend in the economy. While most of these companies had drawn up ambitious expansion plan with borrowed money at high rate of interest, there is no demand for the additional capacity generated and the export market is also elusive. The case of Flex Industries of the Flex group – market leader in flexible packaging business – is a typical example. It borrowed heavily to finance its mega expansion plan. But FIL, severely crippled by recession in the economy, is facing liquidity problem due to demand recession for packaging products and large debt repayment obligation. The Flex group’s repayment obligations include Rs 180 crore worth of debentures in three group firms.

Moreover, 14 leading NBFCs downgraded recently due to inherent risks and declining profit levels in the business included Kotak Mahindra Finance (KMFL), Anagram Finance, 20th Century Finance, Alpic Finance, Srei International Finance, Ashok Leyland Finance and Gujarat Lease Financing. Out of the rating of CPs, ICDs and short term debts of 24 major NBFCS worth Rs 1718.2 crore, only a few ratings are left intact. Investors in CPs of leading companies are a worried lot. Even genuine NBFCs are facing problems in recovering their loans given to the corporate borrowers.

The NPA of the NBFC sector is estimated to be a whopping Rs 10,000 crore. "Those who have purely relied on rating for taking investment decisions will be stuck with junk papers after the company is downgraded. We do not depend on the rating given by rating agencies alone " says D A Gadgil, MD, Shriram Investment Services Ltd, adding, "I don’t believe in rating agencies. For the agencies, rating is a profit making proposition."

While retail investors are running from pillar to post to get back their fixed deposit from downgraded companies, the plight of banks, financial institutions, mutual funds and debt specific investment funds which invested in debentures and CPs is equally pathetic. As many of the corporate debentures and bond issues did not get good response from retail investors, they were bailed out by institutional investors. "You cannot do anything if the company is downgraded till the redemption period," said Ashish Sen, chairman and managing director, Centurian Bank Ltd.

After the company was downgraded these institutions are in a tight position. Now these institutions will have to make provision for the downgraded debt investments also. Already the NPA level of banks have reached a record high in the current year — crossing the Rs 42,000 crore in 1996-97 itself. A number of corporate failures — like United Western, Real Value, CRB group, Prudential, the Parasrampurias and the Lok group — will push up the NPA level. This means more downgrading in the future. A fact which investors will dislike.