State Bank of India (SBI), the quintessential public sector bank, has decided to convert a part of its Rs 8,000 crore loan by a syndicate of banks led by it to the beleaguered Jet Airways into equity thus acquiring a 15 percent controlling stake in it.
Jet defaulted in servicing its loan obligations on 31 December 2018 and the 90-day window before its loans are dubbed non-performing assets (NPA) ends on 31 March 2019. Hence this feverish activity at window-dressing lest it is dragged to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).
SBI seems to have forgotten the bitter lessons it learnt from a similar conversion of debt into equity with another airline company—Kingfisher Airlines Limited. History has repeated itself but it is not going to result in a farce but another tragedy for the SBI. Or has it forgotten history thus condemning itself to repeating it? Either way it should have known all along that equity stake is not a great honour nor is it a means to recouping its outstanding by sale of the shares in the market or to a strategic investor.
In 2011, SBI and ICICI Bank among others paid a whopping 60 percent premium over the then-prevailing market price of Kingfisher Airlines’ shares---about Rs 64 per share when the market quotation was about Rs 39. The group of banks thus came to control 23 percent equity in Kingfisher with SBI coming to own 5.6 percent and ICICI 5.3 percent on conversion of debt into equity but all have vaporized as future events have shown—Kingfisher has ceased to be a going-concern and its aircraft have been grounded.
Shares aren’t an elixir as they are mistakenly believed to be in some innocent quarters. The premium was justified as being necessary under the SBI preferential allotment route. Touché!
In 2005, Jet Airways made its initial public offering (IPO) at a whopping price of Rs 1,100 per Rs 10 share, i.e. at a mind-boggling premium of Rs 1,090 per share thanks to the licentious 100 percent book-building regime that permits even loss making companies to issue shares on IPO at a premium determined through the book-building process.
Its shares have been on the downhill path since then now quoting at around Rs 236. Even this is on the higher side given the accumulated losses and none-too-imminent prospect of recovery.
To be sure, loan agreements do contain two clauses among others—nominee directors and conversion. Nominee directors are appointed by a big lender at the first hint of trouble. The idea is to watch over its interest.
This is a harmless exercise for the lender though the borrower feels being snapped at the heels. But conversion is fraught. It is one thing for a small investor to exercise his conversion option under the terms of the issue of convertible debenture.
To wit, let us say a company with great promise issues convertible debentures of Rs 1,000 each with the option to convert 50 percent of it into equity at a predetermined price of Rs 20 per share of Rs 10 face value within three years.
It would make sense for investors to exercise this option if the share is steadily on the ascendant. So much so, if he exercises this option after two years when the market quotation is Rs 50 per share that should be hailed as a sensible decision even though it is entirely possible that in hindsight he may regret this decision should the fortunes of the company reverse for a variety of reasons.
But what SBI is doing is counterintuitive—it is plunging headlong into a crisis-ridden company. SBI is not an investment company. It is a commercial bank. It neither has domain expertise in managing an airline nor the patience to wait endlessly for its shares to zoom in a distant future and sell them so as to recover its outstanding loans indirectly. Etihad, Jet’s strategic partner, might ratchet up its stakes from 24 percent to 40 percent as reported but the two are not comparable.
Unlike SBI, Etihad is itself an airline company with tremendous financial muscle. It has a vital interest in Jet by way of filling its international flights emanating from its hub Abu Dhabi. Simply put, those flying to the US from India would have to first fly Jet to Abu Dhabi and from there Etihad to the US. SBI has no such business or strategic interest in Jet. In the event, the shares it is going to get might well turn into dud sooner than later as it happened with Kingfisher’s.
SBI should have dragged Jet to NCLT under IBC where Jet’s promoters would have been ousted from their smug perch by selling its equity to the highest bidder, may be Ethiad, and SBI paid-off partially. To be sure, it would entail heavy haircuts but isn’t it better than sitting on dud shares in the vain hope of them bearing fruits someday?
(The author is a senior columnist and tweets @smurlidharan)
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Updated Date: Jan 30, 2019 11:50:09 IST