The promoter has little skin in the game: Macquarie Securities

Bankers say account is viable, infra in place to carry out large orders

The Rs 7,500-crore debt recast of Anil Ambani-controlled Pipavav Defence and Offshore Engineering Company has come under the scanner of Macquarie Securities, with the agency pointing out that bankers might have got a raw deal as promoters got away with a paltry equity contribution of Rs 163 crore.

A group of 23 banks, led by IDBI Bank, has decided to restructure the loan, with an increase in the repayment schedule of eight years, after a two-year moratorium. Banks have also provided additional funding of Rs 4,500 crore. The rate of interest will be reduced from 14 per cent to 11 per cent.

"The same old problem -more debt and less equity during restructuring," Macquarie said in a report. It added the main issue in debt restructuring cases in India was that debt was restructured by giving more debt by banks and a long repayment schedule with moratorium, while promoters contributed very little.

The reduced debt servicing cost will allow Pipavav Defence to save nearly Rs 2,900 crore in interest burden over the next 10 years.

The total promoter contribution to the corporate debt restructuring (CDR) deal is Rs 163 crore, or 1.3 per cent of the total debt restructured, and 5.5 per cent of Pipavav Defence's expected savings on interest.

The amount is around 50 per cent higher than what Reliance Infrastructure plans to spend on acquiring management control in Pipavav Defence. Early this month, Reliance Infrastructure had acquired an 18 per cent stake in the company from its promoters for Rs 819 crore. It also announced an open offer to acquire an additional 26 per cent stake for a consideration of Rs 1,240 crore, assuming the open offer gets fully subscribed. In all, the Anil Ambani group would spend Rs 2,059 crore to take over control of Pipavav Defence.

According to Macquarie, of the total cases live under CDR, 62 per cent have been restructured in the past two years, and could result in a default. Most banks, both government and private, have seen a jump in defaults from the restructured assets' category, and that is likely to continue into FY16.

"The promoter eventually has little skin in the game and banks ultimately get saddled with bad debts. The problem in India is also that currently, only good quality companies are able to raise large equity and highly geared companies are still finding it difficult to raise money," it said.

Raghuram Rajan, the Reserve Bank of India (RBI) governor, has often highlighted the issue of promoters having 'skin in the game' and that banks should not be taken for a ride.

"In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money," Rajan had said in a speech the previous year. The RBI has issued a revised framework for managing stressed assets, in which the focus is on identifying stress at an early stage. The new norms also stipulate that debt should be restructured only if the unit is a viable one. The norms mandate that shareholders bear the first loss rather than the debt holders. The new norms also emphasise on promoters infusing more equity in the company.

According to bankers, as a principle, promoters are asked to bring 20 per cent of the sacrifice made by banks (due to lower interest rate, longer repayment schedule, etc), while the remaining is borne by banks in terms of provisioning.

"The unit (Pipavav Defence) is viable. It has the required infrastructure to carry out large orders," said an official from a public-sector lender, which has an exposure to Pipavav Defence.

This is the second-largest CDR deal in the shipbuilding industry. In the past, banks have approved debt restructuring of ABG Shipyard worth Rs 11,000 crore. The deal included fresh-equity infusion from the promoters, a reduction in interest rates and a two-year moratorium on interest/principal repayment. ABG's promoters brought in Rs 230 crore as fresh equity.