In the wake of the ongoing bank-led restructuring plan of Jet Airways, the success rate of similar debt-equity swaps has come into sharp focus. Experts believe banks shouldn’t pursue the process as they lack expertise to turnaround sick firms. In fact, there have been precedents where banks, after converting debt into equity in troubled companies, got board seats, but several of those companies either were wounded or are in the process of heading for the scrap heap.
Data compiled by Bloomberg last week showed that Indian banks were rapidly losing value of its shares in companies having equity holdings. For instance, the market value of SBI’s equity holdings crashed to about $104 million last quarter from $480 million a year earlier, while its stakes remained largely unchanged. Even private banks like ICICI Bank seem to be having less luck with debt-equity swaps.
It all started with RBI’s asset quality review in late 2015 and when several companies couldn’t service their debt and were knocking on the doors of lenders for further evergreening of loans, the then Governor Dr Raghuram Rajan introduced another variant of debt-equity deals titled Strategic Debt Restructuring (SDR). Under this scheme, banks were allowed to convert debt into equity shares at a price below the current market value or the average of closing prices during the 10 trading days before the joint lenders’ forum decision. Banks were allowed to own up to 51 per cent of the equity in debt-strapped companies. Following the swap, companies had up to 18 months to look for a new buyer.
A bevy of debt-equity deals followed, the prominent being Electrosteel Steels, Jyoti Structures, Lanco Teesta Hydro Power, Monnet Ispat, Lanco Infra and IVRCL.The thinking behind these swaps was that either companies will find buyers or get equity or improve cash flows. Unfortunately, nothing of that sort happened and banks were forced to take these companies to NCLT either for resolution or outright liquidation. In some others, banks are taking deep haircuts as time is running out to clean-up their books. Take for instance, SBI, which took a 60 per cent haircut last year on Bombay Rayon Fashions by selling its Rs 2,261 crore exposure to an ARC for Rs 900 crore. It, however, continues to have 29 per cent equity stake in the company, which it hopes will fetch a decent dime at a later stage.
