IFCI share fall: Is govt bothered about retail investors?

Retail investors suffer the most when the government takes rash decisions related to the stock market. The latest instance is the happenings at IFCI, the oldest development finance institution in the country.

On Thursday, the government raised stake in the infrastructure lender by converting optionally convertible debentures (OCDs) worth Rs 923 crore into equity at par, i.e. Rs 10. That was when the stock price was ruling around Rs 35.

No surprise, the share price on Friday crashed about 16 percent to close at Rs 29.25.

[caption id=“attachment_430415” align=“alignleft” width=“380”]  The conversion of these debentures increases the government stake in IFCI to 55.57 percent. AFP[/caption]

The Rs 923 crore loan was given to IFCI as two tranches - Rs 400 crore as unsecured convertible debentures in 2001 and Rs 523 crore as optionally convertible debentures in 2002. The infusion had helped the company overcome a default.

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The conversion of these debentures increases the government stake in IFCI to 55.57 percent. Adding the stakes held by other state-run firms, the government stake hits 68.31 percent.

The Cabinet decision on debenture conversion has to be seen in the light of the long battle between IFCI managing director Atul Kumar Rai, who has been accused of corruption, and the government.

According to an earlier report in The Economic Times a parliamentary panel had sought a CBI probe into his appointment as CEO and MD of the company in 2007, alleging he had suppressed facts regarding his appointment.

This followed a Supreme Court notice to the government in response to a petition challenging Rai’s appointment despite allegations of involvement in “serious corrupt practices”, the ET report said.

In May 2012, he was reappointed as MD for five more years despite all these charges.

True, there is something seriously wrong with the institution. There have been allegations of financial mismanagement at IFCI. This has to be rectified. But, does that justify the conversion of debentures at such low prices? Definitely not.

According to a report on ndtv.com, the conversion will expand the equity base of the company from Rs 787 crore to Rs 1,660 crore, resulting in a dilution of earnings per share for a million shareholders.

“Had the conversion happened at market prices, the impact on the stock would have been less,” Hatim Broachwala, an analyst at Karvy Stock Broking, has been quoted as saying in a Mint report.

He agreed the government move helps clear the uncertainty surrounding the stock, though.

Rai has also indicated that he may resist the bid by paying off the loan from the government. But whether the government will be ready to accept IFCI offer is anybody’s guess, given the corruption allegations the company is embroiled in.