Encouraging sign

Dev Chatterjee and Abhijit Lele’s report, “Banks seek more clarity on RCom’s debt recast plan” (November 1) is an encouraging sign that banks are becoming careful about making deals. Banks should realise that the loan they are writing off comes from public funds, that is, shareholders. From the sketchy details available in the public domain, it seems banks will get 51 per cent equity for Rs 7,000 crore of debt, effectively giving a company a Rs 14,000-crore equity valuation. 

It is impossible to judge the fairness of such a valuation without having access to forecasts. Considering the current market cap of Rs 4,200 crore, such a valuation implies a haircut of Rs 4,800 crore, or close to 70 per cent. Bankers should not use the excuse that the valuation has been done by a well-known investment bank. They should consider two things: Are all secured creditors being fairly treated based on the seniority of their debt? Are banks getting a better deal by taking a company to the insolvency court and selling it to the highest bidder? The insolvency process comes only if repeated discussions with promoters under CDR, SDR, S4A etc fail. That represents the worst haircut potential of all options open to a secured creditor.

P Datta, Kolkata

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