‘Fire-sale’ has a nice ring to it as it evocatively brings out what it is all about-- a company, often a part of an over-ambitious conglomerate that has spread itself too thin, reeling under unmanageable debts and hence over-leveraged is driven to selling its assets to pay off the debtors. It is a course correction exercise for the company and a huge relief for the harried lenders.
The deal inked recently on the sidelines, as it were, of the recent Brics conclave in Goa in the presence of the Russian president Putin and prime minister Narender Modi to sell 98 percent of the assets to a consortium led by the Russian oil major Rosneft has already rekindled hopes in the hearts of the beleaguered Indian banks having a huge exposure to the Ruia brothers-promoted Essar group. The group thanks to its tendency to have finger in every pie has piled up a massive debt of over Rs 1,00,000 crore. The sale proceeds of Rs 86,000 crore should come handy in wiping out this gargantuan debt to a large extent.
The Essar Oil fire sale might have happened through political connections but the deal is good for the nation even though there are experts who question the wisdom of allowing a foreign company into the strategic oil sector. For Russians, it gives control of a 27 million refinery and some 2,700 petrol pumps and a major buyer for its crude oil. It is a win-win deal. Ruias unctuously and condescendingly say that Essar Oil was nurtured by them for eventual sale. This is pure hogwash. Far from playing the role of venture capitalists, Ruias were driven to resort to fire-sale. Be that as it may.
The Essar oil deal come in the wake of a similar deal struck by the Anil Ambani controlled Reliance Communications to sell 51 percent of its tower business to Brookfield for Rs 11,000 crore. The idea was to pare down the group’s humungous debts.
These two are not the only instances. Controversial entrepreneur Vijay Mallya had to resort to fire sale of his flagship companies United Spirits and United Breweries to the UK’s Diageo and to Germany’s Heineken, respectively, when his group was reeling under the debt burden thanks to its foray into airline business he had no clue about running. And in July 2016, Jaiprakash group had to sell off its cement business to the Aditya Vikram Birla group that has been pining to be the numero uno of the industry.
So far we have been focussing on the buyer and seller. What does fire-sale portend for the NPA-infested Indian banking sector? Plenty. The RBI has been at its wits end trying to find a solution but without much success, with both Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR) not even scratching the surface of the festering problem.
CDR became a byword for repeated reprieves for the defaulters who laughed up their sleeves at the gullibility of the lending banks. And SDR virtually has foundered with there being no takers by and large for the equity of the defaulting companies.
Asset sales were what the doctor had ordered. Seizure of assets as permitted by the Securitization Act, 2002 did not produce any dramatic improvement because banks had perforce to nurse the seized assets idly with them being out of their depths in running the undertaking. Setting up of Asset Reconstruction Companies, euphemistically called bad banks, hasn’t produced any results either to write home about. Fire-sale in the event has come as manna from the heaven. It took some conscientious promoters to sell their group undertaking despite the fact that they constituted their crown jewels.
The banks should proactively look for potential suitors in situations where promoters smugly do not bestir. After having identified the suitors, banks must force the hands of the defaulting promoters. This approach would be much better than SDR under which the banks are supposed to convert their outstandings into equity and sell the equity to potential suitors. SDR fails singularly in making the defaulting promoters feel the heat of the fire erupting out of piled up debts. In fact, it puts the cart before the horse.