IFCI seeks to rope in strategic investor

IFCI, the erstwhile development financial institution that has turned into a non-banking finance company, is exploring options to rope in a strategic investor by issuing convertible instruments or by facilitating the acquisition of shares from existing partners.

Sources close to the development said that IFCI was considering three options, which included issuing convertible warrants, or allowing a strategic investor to buy 26 per cent stake from the existing shareholders.

The third option was akin to its aborted attempt in 2007, under which it proposed to divest 26 per cent stake through the preferential issue of shares to a strategic partner.

“Our priority is to get a strategic partner and build a strong financial institution. The immediate need of capital is not very high as our capital adequacy ratio is above 18 per cent,” a senior IFCI official said on the condition of anonymity.

IFCI was looking to complete the transaction by the end of the current financial year and had sought requisite permission from the government, which has no direct shareholding.

But the timing would depend on the government’s decision to covert its loans worth Rs 523 crore, which was in the form of convertible debentures, into non-convertible debentures. IFCI had requested the government to covert these zero interest rate bonds into interest-bearing instruments and remove the conversion clause.

In 2007, majority of bidders had withdrew due to conversion of bonds into equity shares by banks and insurance firms. Due to the uncertainty over conversion, some of the bidders may join the race as they fear the government could interfere in the management of the company.

LIC, which, among public sector financial institutions, had provided the largest assistance to the IFCI in 2000, has converted zero coupon convertible debentures into non-convertible debentures that would earn 25 basis points less than 10-year government securities during the first three years. In the subsequent years, the interest rate would be 25 basis points above 10 year G-sec.

IFCI management has requested the government to convert its debentures along similar lines. The government is likely to agree to IFCI’s request shortly. At present, the company has a paid-up capital base of Rs 740 crore.

IFCI, which has resumed lending and made fresh disbursements of around Rs 3,000 crore in 2008-09, is looking at a strategic partner to improve its product portfolio in an environment where development financial institutions have lost relevance.

In 2007, IFCI was primarily engaged in recovery business and normal lending operations were negligible. “Since it has started lending, its valuation would improve,” a source said.

The average yield on loans extended by IFCI was 15.9 per cent, which was above the industry average of around 12 per cent.