It seems that former liquor baron Vijay Mallya is not the only one to take Indian banks for a ride. Despite Alok Industries having assets totalling Rs 20,276 crore as on September 30, 2015, the State Bank of India (SBI) — the lead banker in the joint lenders forum invoking Strategic Debt Restructuring (SDR) — has chosen not to monetise these assets. This seems strange given that the total gross debt is Rs 24,344 crore on a consolidated basis and Rs 23,422 crore on a standalone basis.
Before invoking SDR on November 27, 2015, attempts at asset monetisation were not progressing as per plans. Under the proposal, banks would convert Rs 2,557.86 crore of debt into equity, for a 65 per cent stake by issuing new shares at Rs 10 face value. Debt was taken from over 20 lenders with SBI and its associate banks at the vanguard with Rs 5,500 crore exposure.
Other major lenders include Axis Bank (Rs 1,000 crore plus), PNB and CBI among others. Showing how the entire system is fraught with multiple risks, on March 22, the Bombay High Court ordered that no action can be taken against textile giant Alok Industries until a winding up petition filed by HSBC against it is settled, a ruling that will prevent the company from selling its assets or changing its equity structure. A detailed questionnaire to lead banker SBI chairperson Arundhati Bhattacharya went unanswered at the time of writing this story.
Faced with this imponderable, the next hearing is scheduled for April 6 which will only decelerate the process of recovering the dues and
throwing into stark relief how the entire process of SDR is porous and penetrable. litigation in India is the best way to derail a process.
TPG Capital, storied private equity player KKR, Vardhaman, Trident and Ajay Piramal Group are reported to be bidders for Alok Industries, but unsecured lenders despite being excluded from the SDR process have shown that they have a say in the system.
HSBC, on behalf of a consortium of unsecured lenders led by VTB Capital, had filed a winding up petition to liquidate Alok Industries and settle outstanding dues worth $55 million from a loan of $125 million that the company had taken. While the RBI came up with the SDR scheme to help recover outstanding dues for Indian banks, both the RBI and the SBI-led consortium have been bushwhacked.
If the said process, which has an 18 month window opportunity, fails to sell the stressed company in that time period, then the lenders have to recognise the debt as non-performing assets ad provision for them. With HSBC bunging in a monkey wrench, SBI, BoB, BoI, Andhra Bank, Syndicate Bank et al will take a hit and render the scheme infructuous. Foreign currency debt of Alok Industries is close to $650 million while Indian Rupee debt is Rs 19,300 crore. The Indian Rupee debt is reportedly at 13-14 per cent interest rate while foreign currency debt is at an average of 4 per cent (2.5 per cent for export performance bank guarantee (EPBG) debt and 5.5 per cent for other debt).
The company has failed to meet its export commitment for the first tranche of a $475 EPBG debt (which required a shipment of $23.5 million at 5 per cent of the debt amount) due to which the same got reconverted to INR debt. It is not clear why the SARFAESI Act which allows lenders to start selling residential and commercial premises owned by the company in question was not implemented. However, it is not clear why SDR was invoked as a first option and why the asset monetisation programme has not made any significant progress.
Indian banks grappling with cronyism which has resulted in them being saddled with excessive stressed assets and mountains of debt are not making any progress at all in their quest to recover outstanding dues.
The Ashok Jiwrajka promoted Alok Industries’ fortunes have gone into a tailspin as its debt-fuelled expansion has come unstuck with source markets debilitated. Exports accounted for 25-30 per cent of Alok Industries’ revenue. The company then tried to bump up its export revenues to 50 per cent of the total revenue over the next two financial years. The strategic imperative of the company was to tap into replacement demand as China yielded its position as the biggest exporter of textiles.
At that point in time, CARE Ratings analyst Pulkit Agarwal had rightly prognosticated that while increasing export share was definitely a move in the right direction, since Alok Industries was well integrated in its product range and also had the capacity to deliver, he had cautioned that the company’s share in exports could not go above 50 per cent, as its presence in fabrics was high and fabrics did not have much export demand. He was vindicated.
SBI Capital Markets was mandated to run a formal auction process to sell the core businesses as a whole or in parts and had called an extraordinary general meeting in early March. The bank consortium which has lent Rs 13,000 crore, put the company on the block last November because of Alok’s supposed inherent strengths as India’s largest vertically-integrated textile company with overseas and domestic customers ranging from Walmart, Target, Kohl’s, JC Penny Carrefour, M&S, Gap, Pantaloons, Zodiac, Wills lifestyle, Raymond’s Madura Garments etc.
But the best laid plans of mice and men often go awry and the Bombay High Court has left the SDR mechanism and the SBI-led Joint lenders Forum high and dry. Once again litigation has tripped and circumvented the system easily. What is baffling is that the Joint lenders Forum was blindsided by the unsecured lenders so easily. All SDR schemes in future will have to re-examine the exposure of unsecured lenders and ring fence their requirements equally into the equation. Or everything will go down in flames.