Development finance company IFCI Ltd has offered 30 public sector banks and financial institutions an opportunity to convert their debentures in the company into equity shares. This could increase the cost of acquiring the 26% stake the company wants to sell to strategic investors—a stake companies such as General Electric Corp. and The Blackstone Group LP are interested in acquiring.
Offering clarity? Atul Kumar Rai, chief executive officer, IFCI
IFCI’s managing director and CEO Atul Kumar Rai said that the decision to offer the banks and financial institutions the opportunity to convert their debentures into shares was prompted by some potential strategic investors wanting clarity on the company’s capital structure.
Investors interested in the 26% strategic stake would have to bid for shares on a “diluted basis” if the 30 institutions respond to IFCI’s offer within a reasonable amount of time, said Rai. “The (bidding) process will not be undermined,” by the conversion option, he added.
The conversion option gives the 30 banks and financial institutions an opportunity to acquire shares with a maximum market value of Rs740 crore. The conversion would boost IFCI’s equity base of 638 million shares by about 13% if it were to be done at Rs88.15 per share, the closing price of the company’s shares on 15 October on the Bombay Stock Exchange.
The 30 banks and financial institutions hold zero coupon optionally convertible debentures amounting to Rs1,479.20 crore which do not carry an interest rate and do not have specific terms of conversion during the tenure. The debentures, which are redeemable in 2022, were part of a package implemented in 2001-02 to bail out IFCI after it was hit by a spurt in bad loans.
The company has since turned around.
IFCI expects to complete its strategic sale by the end of the first or second week of December, said Rai. The company, the first national development financial institution that was set up by the government in 1948, started a process to offer fresh equity of 26% to a strategic investor on 14 August.
“My understanding is something well below 50% (of the Rs1,479.2 crore) will be acceptable everyone,” said Rai, on the conversion offer IFCI has in mind for the banks and financial institutions. These institutions had lost out on the rally in IFCI’s share price this year, he added.
IFCI’s share price has risen a little over six-fold since 1 January to close at Rs88.15 on 15 October. The rise in share price came on the back of a Rs873.71 crore net profit the company recorded in 2006-07 primarily on the sale of its equity stake in National Stock Exchange and Icra Ltd. In the preceding year, the company recorded a net loss of Rs266.21 crore. It ended the July-September quarter with a net profit of Rs497.3 crore as compared with Rs115.83 crore in the same period last year. Total income grew 81% to Rs595.6 crore.
Rai said the company would continue to improve its performance, although it couldn’t expect to grow at the same rate (as it did in the quarter to September).
Rai said the company had a “valid reason” for offering the 30 banks and financial institutions an opportunity to convert their debt to equity. He added that the company’s significant net profit in 2006-07 had triggered a “recompense” clause in the debentures.
Bidders for the 26% strategic stake in the company include a consortium of Sterlite Industries Ltd and Morgan Stanley & Co., IDFC Ltd, Cargill Financial Services Corp., Natixis, a consortium of Shinsei Bank, JC Flowers & Co. Llc. and Punjab National Bank, a consortium of WL Ross & Co. Llc., GS Capital Partners VI Fund, Standard Chartered Bank and HDFC, General Electric, and Blackstone.
The bidders may face the prospect of even more equity dilution in the company because the Central government holds debentures in IFCI with a recompense option. The government holds debentures worth Rs923 crore in the company. It would not be offered the conversion option along with the 30 other banks and financial institutions, said Rai.
PTI contributed to this story.