Time to discourage reckless borrowing

Too much ambition can be a bad thing. Not that Indian companies don't realise that, but for some reason promoters let their egos get the better of them. So much so that they end up making a complete mess of things.

Look at what has happened to Wockhardt. A perfectly sound business has been brought to its knees.

True, the company wasn't exactly galloping along but a couple of acquisitions would have been good enough to put the company on a faster growth track. But no, it had to go and buy out nearly half a dozen companies. And, in the process, leverage itself to the hilt. When there's easy money for the taking, who wouldn't succumb to the temptation?

What's frightening is that if Wockhardt couldn't manage its finances, where are other smaller businesses going to end up?

There must be nearly a hundred companies out there that could be in trouble because their foreign currency convertible bonds aren't likely to get converted.

In 2008-09, CRISIL downgraded ratings on 84 entities, upgrading only two. In contrast, there were 14 downgrades and 9 upgrades in the previous year. The rating agency says a sharp downturn in the investment environment has affected the credit quality of Indian companies.

Why aren't promoters in India afraid to borrow?

The answer is simple. The chances of them losing their companies is very, very, slim, almost nil. Time and again, companies have been in trouble but the banks have always been there to bail them out.

In the nineties when the Essar group was in big trouble, the banks took a haircut, minority shareholders lost out but nothing happened to the promoters. Today, they are firmly in the saddle and probably have a bigger equity stake in their companies than they ever did. Once the steel cycle turned, they made a killing.

The story was similar for Arvind Mills; there too, it was the banks that made all the sacrifices and, of course, small shareholders were left high and dry. But the promoters remain very much in control even today.

All too often, companies write down the value of the equity and then subscribe to the equity at the written down value.

Now Wockhardt's FCCBs, we learn, are going to be bought by the banks as part of the corporate debt restructuring plan. The CDR is an easy way out for promoters; when things go wrong, they simply throw up their hands and run to the banks.

No one is even asking why Wockhardt or others didn't issue equity instead at whatever premium it was getting at the time? Given that the markets were booming, the premiums would certainly have been handsome.

Why didn't it complete the initial public offering of Wockhardt Hospitals at whatever valuation the issue was fetching?

The problem is promoters want more wealth for themselves, they want their equity to be quoted at astronomical multiples. But if things go wrong, then they need the banks to bail them out.

Most of the companies do not provide for the FCCBs on their balance sheets and many don't even want to acknowledge the mark-to-market losses. Don't minority shareholders have a right to know what amount of debt companies are carrying on their books?

If companies ask the lenders of FCCBs to convert at today's market prices, it's possible many of the lenders would do so. Apparently Wockhardt already has shareholders' approval to raise equity but has not done so because of the weak market conditions.

Why doesn't it do a rights issue like Tata Motors or Hindalco did recently?

But why would promoters want to sell their equity cheap when the banks are ready to bail them out and CDR packages are being delivered at their doorstep? Whether due to political pressures or for other reasons, banks today are helping companies roll over their debt.

Take the case of real estate companies, most of which have managed to postpone the bulk of their repayments to 2010-11 or perhaps beyond that. So instead of trying to generate cash flows by selling assets or bringing down prices of existing inventory, they will use the breather to hold out for as long as possible.

Some are bringing down property prices and are talking of selling assets but not enough of that seems to be happening.

Motilal Oswal points out that too many of them are relying on affordable housing projects to realise cash flows, which might not work out. It adds that under the circumstances, repaying the debt will be a challenge for many.

At the end of March 2009, nearly 14 per cent of CRISIL's long-term ratings had a negative outlook, the highest since it introduced rating outlooks in 2003. And its rated portfolio of 1,600 firms saw as many as 13 defaults in 2008-09.

Obviously no bank rushed to resuscitate these companies. Maybe, that's not such a bad thing. Perhaps it's time to look at a Chapter 11 kind of legislation and let companies file for bankruptcy. That might stop them from borrowing recklessly.