Cautious bankers to 'investigate' construction firms before debt recast

A forensic audit will help the lenders get a clearer picture about the firms and reduce chances of any 'package failure' in CDR

Turning wiser from their chequered experience in dealing with debt-ridden construction companies, banks have started insisting on investigative audits for engineering, procurement and construction (EPC) units that seek to recast their loans.

A forensic audit will help the lenders get a clearer picture about the companies and, thereby, reduce the chances of any ‘package failure’ in corporate debt restructuring (CDR).

“There have been hard lessons for us from restructuring a large number of cases during the current downturn. We often stumbled on gaps and material developments after implementing package,” said a top executive of a public sector bank.

Going forward, banks want to be more cautious about related-party transactions that promoters engage in, and the relationship between holding companies and special purpose vehicles. According to bankers, the information disclosures made by companies are often found to be inadequate and so they would have to dig deep into the books and background, through investigative audits.

Banks will also take calls on the list of receivables provided by construction companies. Many EPC companies, especially those which are in trouble, have a lot of funds stuck in pending receivables from their clients. “That may be true but we have to examine the ability of companies to realise such dues from their clients,” said the senior official of IDBI Bank.

Over the past few years, a number of infrastructure projects have been stalled, as they have either become unviable or the company which has given the contract has a cash-flow problem. These include government projects as well.

“There are cases where a project has been delivered and customers have got into contractual issues and demand is not what they had predicted like in road projects. One should look at the primary reasons why the project was stalled,” said Umesh Agarwal, head of infrastructure practice at PWC, a professional services firm.

When EPC companies do not receive payments on time, it extends the working capital cycle of companies, inflating their debt. This debt turns bad and more payments get blocked for longer periods of time. Bankers say they will get critical information on the nature of blocked payments before they go in for restructuring.

A number of EPC companies such as Gammon India, Hindustan Construction Company (HCC), Soma Enterprises and the EPC business of Lanco Infratech, went in for CDR.

Construction companies have a very complicated money trail. So, bankers also look into the structure of each project. “Many EPC units structure their operations in such a way that it acts as a holding company and they float project-specific companies or special purpose vehicles. For the benefit of getting a clear picture on these arrangements as well as the information on related-party transactions, we want in-depth examination of their books. This perhaps can be done through investigative audits,” said a top banker with a Mumbai-based public sector financier.

Most infrastructure developers have in-house construction companies where the parent company gives the project as a contract to its subsidiary. Such transactions, too, will be thoroughly examined by banks, through their auditors.

During CDR, banks relax interest payments schedules and also extend extra funding so that the company can tide over its current difficulties. However, bankers are now weary of the misuse of such funds provided by them.

“Our forensic audit team is working overtime now, thanks to all the requests that we are getting from banks,” said the official of an auditing firm.