Institutions offer to sell 48% stake in Modi Rubber to promoters
The financial institutions have drawn up a plan to sever their links with the beleaguered Modi group in a bid to cap the raging, year-long controversy over the governments policy on divesting state-owned institutions holdings in companies that have an abysmal record on loan repayments.
Under the plan, the FIs have decided to recall their loans to the Modi Group and, at the same time, offer their combined holdings of almost 48 per cent to the promoters of the Rs 1,000 crore Modi Rubber Ltd, provided the deal is struck at an acceptable price.
The FIs offer to sell the shares in BK Modi-headed Modi Rubber to the promoters marks a major climbdown from their earlier hardline stand that they would sell their holdings in the market.
The recall of the loans to the Modi group clearly indicates that the intense lobbying by the Modis to pressure the FIs to abandon the use of the group approach policy (on fresh loans) against them had failed. Under the group approach formula, the financial institutions stop advances to companies belonging to an industrial group if other sister companies have defaulted on loans.
The bulk of the 48 per cent stake in MRL is with Life Insurance Corporation and Unit Trust of India. The other institutions which have a stake are Industrial Finance Corporation of India (IFCI) and the Industrial Credit and Investment Corporation of India (ICICI).
In the case of the Modis, the FIs had refused to pump in fresh funds into the group as a whole till outstanding debts and loans amounting to about Rs 1000 crore (in terms of principal and accumulated interest) had been settled.
FI sources said the decision was taken at a recent meeting of the heads of institutions. The decision is significant because until now the FIs had been threatening to make an example of Modi Rubber to discipline all chronic loan defaulters. The institutions were planning to send out warning signals to the industry by divesting their combined holdings in Modi Rubber through open bids.
It is not clear how the cash-strapped promoters propose to raise funds to buy back the stake held by the FIs.
If the promoters fail to raise the requisite funds, then we may have no option but to offload stake in the market to recover our monies, institutional sources said.
The buyback operations should cost the two brothers BK Modi and VK Modi (who are MD and vice-chairman of MRL respectively) about Rs 63 crore. The share is quoting on the bourses at around Rs 52 crore.
The issued capital of the company stands at 2.50 crore shares of Rs 10 each, of which the institutions together hold about 1.20 crore shares.
The Modis have been hard pressed for funds particularly after the FIs put the group on the chronic defaulters list and adopted the group approach towards all Modi group companies.
Recently, the FIs further turned the screws on the Modis when they refused to stand guarantee for loans raised from other sources. When Modi Rubber recently raised Rs 300 crore from non-institutional sources, it was left to fend for itself as the FIs refused to provide the requisite guarantees.
The FIs have built a position in MRL over the years both through conversion of unpaid loans into equity and market purchases.
The promoters of Modi Rubber had been arguing till now that the right of first refusal should rest with the promoters. They contended that the FIs would be playing a partisan role if they offered the shares to any other party without first offering it to them. MRL posted its worst-ever financial performance during the year ended June 30. As per the unaudited results it posted a net loss of about Rs 15 crore.
The loan default by the Modis dates back to the late eighties. After a formal split in the family in 1989, the Modis refused to repay the monies they owed the institution on the ground that the crossholdings of the various family factions in Modi companies were so complex that the liability of each of the brothers could not be fixed .
till the division of property was effected.
However, since the Modi brothers could not arrive at an equitable division of assets, the government appointed an arbitrator who recently made the awards. However, the Modis have neither been willing to abide by these awards nor have they devised their own method to divide the assets.
As a result, the institutions have not been able to recover their funds, leading to the present impasse.
