Will Corporate India Be Up For Sale?

Last week, the share price of Essel group companies fell sharply on worries about the process of stake sale by the group being delayed – something the lenders needed yesterday. The share price of Zee Entertainment Enterprises Ltd, the flagship company of the group, crashed after Reliance Mutual Fund reportedly sold its entire holding, worth around Rs 400 crore, in the market. 

If the promoters are not able to pay back the bank loan by September, the lenders may sell the shares of the group, pledged to them. However, the fund houses that have exposure to the group are fast losing their patience.

A May 7 statement of the group said, “The stake sale process of Zee Entertainment… undertaken… is in steady progress and at an advanced stage.” Earlier in April, it had said, “As per the arrangement with the lenders, a resolution for the repayment will be achieved by September 2019. Essel Group is confident to complete the repayment towards each and every lender." 

he Khaitans of the B M Khaitan Group are also in search of a new owner for Eveready Industries Ltd, its flagship entity, even as shares of the battery maker as well as McLeod Russel Ltd, its tea plantation company, are being hammered. 

In February, the Agarwal and Goenka families, promoters of Emami Ltd, sold 10 per cent of their stakes for Rs 1,600 crore to pare the debts of group companies  such as Emami Cement Ltd and Emami Power Ltd, among others. The sale pared the promoters’ holding in Emami by 10 percentage points from 72.74 per cent. As the group brings down its debt, its ability to release the shares of holding company pledged with the lenders will get a boost. 

Reportedly, the promoters had pledged at least 47 per cent of their stakes to raise money for funding the capital-guzzler cement and power projects. At a conference call with its investors after its third quarter earnings, the promoters had said that the group would look at a reduction in the pledged shares to around 30-35 per cent.

These incidents illustrate a new malaise of corporate India that might change the rules of the game forever. Many groups are under severe stress and looking for ways to sell or win back their pledged shares. Going by BSE data, the value of shares pledged by promoters was to the tune of Rs 2.25 trillion in the last week of April. More than 50 per cent of the promoters -- 2,932 out of 5,126 BSE-listed companies -- have raised money, pledging their shares; during the March quarter alone, the promoters of at least 125 companies had raised the quantum of shares pledged.

Clearly, we need to take a fresh look at the so-called debt to EBITDA or earnings before interest, taxes, depreciation and amortisation – a measure of profitability of a company – as it doesn’t reflect the real health of a company. In addition to the debt of the operating company, we need to take into account the debt of the holding company too, which the promoters raise pledging their shares. Loosely speaking, it’s something like looking at the fiscal deficit of both the federal government as well as the states simultaneously to gauge the strength of an economy.

Typically, the promoters raise debt pledging the shares of the holding company to pump in money in their operating companies, diversify, or any other purpose and seldom they clear the debt to claim back the shares. The average yield of Sensex stocks is around 1.5% and that of the listed universe is around 0.5%. How will they clear their debt? Besides, the lenders are always willing to roll over the debt, one lender replacing another – playing passing the parcel game.

At least 60 per cent of such pledged shares are with non-banking finance companies (NBFCs) and mutual funds (MFs). The banks are not allowed to fund companies against pledged shares but they can ask for such shares as a security to ensure repayment of loans. Of course, individuals can raise money against pledge of shares. Insurance companies and pension funds do not fund against pledge of shares. 

The fund-starved NBFCs want money and debt mutual funds are under redemption pressure as their investors are wary of the health of some of the promoters to which the funds have taken exposure. Typically such loans are given against a hefty margin (for a Rs 100 loan, a promoter may need to pledge shares worth Rs 150 or even Rs 200). When the value of its shares fall, the promoters need to put in more shares on the table to maintain the margin, or else, the lenders (in this case, the NBFCs and MFs) sell the shares to recover their dues. In the process, the promoter's stake in the company goes down; it also puts pressure on the stock price. As the prices fall, more shares are sold, creating a vicious cycle.

Whether the lenders are selling the shares or promoters themselves doing it, the erosion in stake and fear of losing ownership are real for many promoters. That’s the problem of corporate India. How about the NBFCs and MFs? Many feel that the MFs have no business of giving money to the promoters taking shares as collateral and the market regulator should clamp down on them. Similarly, the banking regulator should restrain the NBFCs from lending against promoters’ pledge of shares.

This is a legitimate way of raising money and there is nothing wrong in giving money against pledge of shares as they are as good an asset class as, say, a factory, gold or real estates. Globally, private equity funds play a major role in this segment but they aren’t there in the Indian market. 

While the promoters must stop unrelated diversification or even fund diversion, in some cases, the NBFCs and MFs need to take a fresh look at this segment. For instance, once an investor redeems a debt fund, the money is given the next day, following the so-called T+1 trading system. The redemption pressure can be avoided if MFs find ways how such an exposure can be part of close-ended alternate investment funds (AIFs). Less than 10 per cent of the Rs 23 trillion assets under management of the Indian MF industry consist of AIF. We also need to bring in private equity and patience capital in funding promoters against a pledge of shares. If it’s too late, India Inc may lose its shirt.

This column first appeared in Business Standard / www.business-standard.in

To read the writer’s previous columns, please log onto www.bankerstrust.in

The columnist, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. 

Twitter: @TamalBandyo