Opinion Fight for the money

In what must be an unprecedented development,the Bombay high court admitted a winding-up plea against Wockhardt last month. This was in response to a lawsuit moved by a few of the company’s unsecured creditors who hold $74 million worth of convertible bonds and haven’t been paid back. The move must have come as a rude shock to the near-bankrupt drug firm which reported losses of Rs 1,000 crore in the year up to March 2010,partly the result of mishaps with cross currency derivatives. After all,Indian promoters are not used to being pulled up by their lenders; not even banks who have the most money at stake and who have a stronger case because their assets are secured. So the fact that a pack of unsecured lenders was determined to get its money back must surely have jolted the Wockhardt management. Wockhardt won a small reprieve,with the court conditionally staying the winding up till May 3. But it is good news that a group of foreign creditors,led by Singapore-based hedge fund QVT,has decided to fight for its money.

For nearly two years now,Workhardt has been trying to negotiate a bailout with bankers for the debt on its books of approximately Rs 3,500 crore. Had Wockhardt not rushed to acquire half a dozen companies in the space of a few years,it would not have piled up so much debt. But then the money was there for the taking and Wockhardt succumbed to the temptation and now the banks have been left carrying the can. The story at Kingfisher Airlines,which has a debt on its books of over Rs 7,000 crore,is not too different. Recently,a consortium of 13 bankers,led by the State Bank of India,converted a part of these loans into shares at Rs 64.48 apiece when the market price was around Rs 48. It’s hard to understand why the conversion price is at a premium to the market price. Even before Kingfisher,there have been several instances of loans of real-estate developers being restructured by banks — in other words,banks do not need to classify these loans as bad and doubtful. Strangely enough,the Reserve Bank of India (RBI) doesn’t seem to be objecting to such treatment,behaving as though these assets are not dodgy; all it has done is raise the risk weights on restructured loans. While there must no doubt have been a fair amount of political pressure on the banks,perhaps even at the time when the loans were sanctioned,they need to take far greater care of their money.

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Indeed,Indian companies need to be shaken up; for far too long have they been pampered by banks and got away with excesses because the regulations aren’t effective enough. Bankers somehow seem reluctant to let them go bankrupt. The Essar Group was bailed out by IDBI in 2000 when Essar Steel needed to pay back holders of $250 million worth of floating rate notes. ICICI Bank,which had lent Arvind Mills around Rs 500 crore,took a big haircut of about 40 per cent,to help out the firm which ran up a debt of close to Rs 3,000 crore. Other banks in the consortium too took bigger haircuts of over 50 per cent while some settled for a five- or a ten-year rollover.

Although there are regulations in the form of the Sick Industrial Companies Act (SICA),they aren’t effective enough. The cases drag on for years unlike in the US where Chapter Eleven,under which a company files for bankruptcy,ensures that a solution is found quickly. Banks in India,for some reason,are reluctant to penalise the promoters; it’s also a fact that companies take advantage of the excruciatingly slow progress that is made in the courts. Once the case is in court,they are rest assured that it will drag on for years. Understandably,banks would like to avoid a situation where their money is blocked indefinitely. However,it is wonderful that the bond-holders who went to court don’t seem to have been deterred by the prospect of delayed justice.

It’s a pity that shareholder activism in this country is virtually non-existent. Even institutional investors don’t seem to be perturbed when managements don’t make adequate disclosures; it could be because some of them have prior information. It was only when the Satyam scam broke that the funds suddenly found their voice. But it was the initiative of a foreign fund that forced the Vedanta Group’s management to roll back its restructuring plan — the demerger of the energy and aluminium businesses from Sterlite. If shareholders and banks become even a tad more assertive,a lot of the taxpayer’s money will be saved.

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The writer is resident editor,‘The Financial Express’,Mumbai,shobhana.subramanian@expressindia.com