Jet Airways crisis: How did the debt-laden airline secure ECB for working capital purposes?

Jet Airways, which has not kept its tryst with Indian banks and its employees, has also not kept its tryst with foreign lenders either under the External Commercial Borrowings (ECB) scheme insofar as part repayment that fell due on 11 March, 2019 is concerned. The default to foreign lenders came to light thanks to the Bombay Stock Exchange (BSE) disclosure requirement to it which is meant for public consumption more particularly investors to enable them to safeguard their investments. The disclosure is cryptic and hence one does not know the extent of default but one can hazard a guess —Naresh Goyal, its chairman, was reportedly making frantic request to its 24 percent equity partner Etihad to pump in Rs 750 crore immediately. [caption id=“attachment_4883531” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] One can surmise that the ECB dues were around this figure even though the dues it has to clear including to the Indian banks before 31 March, 2019 is Rs 1,700 crore. The reason why Goyal was requesting feverishly is not far to seek — foreign lenders do not indulge the defaulters like the Indian financial system does. Indian banks led by the State Bank of India (SBI) are reportedly reconciled to the idea of converting a substantial part of the loan outstandings into equity. Foreign lenders would do no such thing. Instead, they would slap a penalty. Till recently, the ECB was not allowed for meeting working capital requirements. Yet curiously Jet Airways says the default it has committed on meeting its tryst with the ECB was precisely working capital related. It is only in the new ECB policy notified in January 2019 that the bar on raising the ECB for working capital purposes was removed provided such working capital assistance was provided by a foreign equity holder holding not less than 25 percent equity in the assisted company i.e., Jet Airways in this instance. Etihad in any case holds only 24 percent in Jet Airways. But the ECB on which Jet Airways has defaulted was under a much older regime when there was a general clampdown on the ECB being taken for working capital purposes. Therefore, the only possible inference is Jet Airways must have taken a special approval for allowing it to access the ECB for working capital purposes. Why was this special relaxation made by the powers that be in favor of Jet Airways? The ECB was encouraged for import of capital goods mainly. The ECB has several attractions the chief among them being lower rate of interest in the European and US markets vis-à-vis the one prevailing in India. But the flip side is the exchange rate risk — if the exchange rate was Rs 50 per dollar when the ECB was raised but on the date of payment of interest or principal, the exchange rate has deteriorated to Rs 75, the entire advantage is neutralised in one stroke unless this risk was covered at a reasonable cost.

Unhedged exchange rate risk can wreck havoc on the financials of a borrower. In the above example, if the loan is to be repaid by buying the greenback at Rs 75 per dollar, the repayment would be one and half times the borrowings thus wiping out the interest rate advantage. One does not know if Jet Airways runs this risk as well.

After the conversion of debt into equity, the Indian banks would reportedly for the time being overtake Etihad in terms of equity stakes in Jet Airways — 29 percent or so as against 24 percent by Etihad. But that is a cold comfort as the shares of Jet Airways are steadily going downhill. In any case Indian banks do not have the expertise to manage and lift a sinking airline. Interestingly, it also raises questions over the much-vaunted financial skills of foreign lenders and investors vis-à-vis the Indians.

This is not the first time foreign lenders have tasted default by an Indian borrower. It happened with Essar a decade ago. It seems that they are unable to resist the temptation of earning more by way of interest from the Indian borrowers vis-à-vis the interest they can earn from the domestic borrowers.

The ECB then is win-win for both the lender and the borrower. The borrower pays a lower interest and the lender gets a higher interest vis-à-vis the domestic borrowers. The borrower rues when the exchange rate turns adverse and the lender rues when the borrower defaults. (The writer is a senior columnist and tweets @smurlidharan)