Banks should quickly sell off businesses they got via debt conversion. Here's why

Way back in 2001, the income tax department urged the government to scrap the preemptive purchase of immovable properties scheme when it found the scheme counter-productive for the nonce. The scheme was aimed at preempting the role of black money in real estate transactions, so common in India, but it became a millstone around the neck of the department with prices falling below the preemptive purchase price. That was when the department approached the government to revoke it. [caption id=“attachment_2182945” align=“alignleft” width=“380”] State Bank converted Kingfisher Airlines debt at a price higher than the market rate. Reuters[/caption] Then finance minister Yashwant Sinha heeded the department’s plea and scrapped the scheme, thereby throwing the baby with bathwater. Sinha should have known better than to share the panic of the income tax department. For, ups and downs are commonplace in the real estate sector. It should have been advised to bide its time and in the meanwhile advised to rent out the properties to government departments and their employees so that the money locked up earned some income. But there is nothing whimsical about the price behaviour of factories and businesses that are going concerns. It takes a turnaround specialist to revive a business down in the dumps. That is why one tends to be skeptical about the Reserve Bank’s new found love for no-holds-barred conversion of banks’ outstandings into equity from the hitherto 10% stake restriction besides the need to adhere to the last 30 days’ average quotation or last six months’ average quotation whichever is higher straightjacket. An unsold immovable property can be sold given time but a troubled business cannot be sold so easily. A bank might have the sadistic pleasure of ousting a habitual and willful defaulter from his promoter perch but unless it swings into action and replaces him with a new promoter imbued with vision and enthusiasm, it may be left holding the can. Banks, after all, aren’t private equity firms reputed for their no nonsense approach when it comes to furious cost cutting and other measures in order to put the company taken over on the road to prosperity. Banks are in the business of accepting deposits and lending, period. They neither have the time nor the wherewithal to manage companies whose saddles they have mounted by accident in exchange for the loans gone sour. A piece of real estate often doesn’t bristle with problems unless it is beset with bad title or bad location but a going concern is a different kettle of fish. It is animated by people, intimately connected with the government in terms of money owed to it and is affected by the fortunes of its own debtors. All of these call for careful and full time attention. State Bank converted its outstandings from the beleaguered and grounded Kingfisher Airlines at a price that was way above the ruling market quotation for its shares thanks to the omission by the RBI in the formula cited earlier – in no case should the conversion price exceed the ruling market price. Of course, this was trite but somehow our bureaucracy, including bankers stick to the letter of the law when not necessary. If banks do not quickly get rid of the businesses gotten through conversion of debts in adversarial circumstances by finding a strategic suitor or becoming his partner if it feels he has the capabilities to deliver in a reasonable time, then they would well have bought a pig in a poke in hindsight. Equity stakes presage strategic sale ahead. But then banks may do well to cherry pick the assets gotten on conversion and sell those assets separately to various buyers if the aggregate of all such sales would be more than what is on offer from a strategic buyer keen on running the show as going concern. For example, a prime piece of land sold separately may fetch it a fabulous price just as a captive coal mine gotten in the recent coal mine auction and earmarked for electricity generation might get the best price from the one keen on producing thermal power. In other words, on conversion banks may have to settle for the hard grind of piecemeal sale of assets and then perform the last rites of the company taken over when its dues are settled.