Pushed to the wall by the tough stance adopted by banks towards steel companies with stressed loans, their promoters, wary of losing control over their firms, are offering to bring in strategic investors by diluting some of their stake.
Their fears are real: Stung by the ongoing Kingfisher Airlines fiasco, banks have been under pressure from the government to get their NPA (non-performing asset, or loans that have turned bad) levels under control. Just recently, banks roped in London-based stressed asset specialist FIG Group to restructure Kolkata-based Electrosteel Castings.
Specialists pick up stressed companies cheap from the creditor banks, restructure the management, iron out wrinkles and make the company functional, which leaves a viable asset that can then be offloaded.
Lenders are learned to be in talks with overseas companies for other steel firms also.
Banks such as State Bank of India, Bank of Baroda, Bank of India and other large public sector banks have been meeting steel companies over the past two weeks to review operations and evaluate cases that are fit to be brought under the Strategic Debt Restructuring (SDR) mechanism.
SDR replaces the existing management with a large investor who takes control of the steel plant at a discount —which would leave large business houses virtually with no business of their own.
{{/usCountry}}SDR replaces the existing management with a large investor who takes control of the steel plant at a discount —which would leave large business houses virtually with no business of their own.
{{/usCountry}}Alarmed at the prospect of losing control, promoters — mostly with operations in resource-rich eastern India — have agreed to offer 25% to 26% of their shareholding, which along with an equal quantum of stake, would ensure joint control.
“This will then result in both trying to address the bad loan situation in cases where external factors are responsible for the losses,” said a Kolkata-based promoter of a steel company.
The companies are arguing that their losses are due to the slowdown in the economy, rather than any defect in management, so taking away management control is neither the solution, nor desirable.
The banks, on the other hand, suspect that the inability to service loans — the steel sector has outstanding loans to the tune of `2 lakh crore — is due to operational factors. Banks are aiming to clean their books by March 2017 via the SDR route, in preparation of the stringent Basel 3 norms on capital requirements that become effective on April 1 2019.
Banks fear that if companies with `20,000-25,000 crore loans default, it could affect their very survival. “It is a serious situation. For the past couple of months, banks have only been trying to resolve this bad loan situation. There has been no other work on table,” said a senior executive of a Mumbai-based public sector bank.
Writing to RBI governor Raghuram Rajan, steel firms have sought guidelines for refinancing loans under the Corrective Action Plan where the stress is due to external factors such as the failure to grant leases to steel companies or cancellation of allotted coal blocks.