Mumbai: In yet another attempt to revive IFCI Ltd, India’s oldest development financial institution, the government has asked its management to bring in a strategic investor.
The 61-year-old financial institution had in 2007 failed to reach an agreement with Sterlite Industries Ltd and a Morgan Stanley group firm to sell a 26% stake. The sale process was called off as its board could not agree with investors’ demand for some controlling rights in IFCI.
Investor hunt:IFCI chief executive officer Atul Kumar Rai. Harikrishna Katragadda/Mint
The government does not own any stake in IFCI directly, but some government-owned institutions such as Life Insurance Corp. of India, State Bank of India and IDBI Bank Ltd have a substantial holding in IFCI and a government nominee sits on the IFCI board.
“A week ago, we received a communication from the government to induct a strategic investor,” an IFCI board member told Mint last week. “We are open to (inducting a) strategic investor at an appropriate time.” The board member is not the government nominee and he does not want to be identified because the information is confidential.
The government wants IFCI to stir out of a virtual coma and find a strategic investor to infuse capital so it can start lending again. Atul Kumar Rai, chief executive officer and managing director of IFCI, told Mint the management is committed to inducting a strategic investor and “we have not given up on the same”.
“We have to look at the quantum and mode of investment... We will look at all these and decide to move forward,” added Rai, who has been heading IFCI since July 2007.
The management does not seem to be in a hurry to induct a strategic partner. “One looks at a strategic investor for capital infusion,” said the board member cited earlier. IFCI has a capital adequacy ratio (CAR) in excess of 17%, he said.
That’s almost twice the regulatory requirement. Under the Reserve Bank of India’s CAR norms, lenders need to have at least Rs9 worth of capital for every Rs100 they advance. CAR is an indicator of financial strength, expressed as a ratio of capital to risk-weighted assets.
IFCI’s former chairman and managing director P.V. Narasimham knows why it has such a high CAR. “IFCI has not been lending for the last 10 years and so there is less pressure on capital,” he said.
The IFCI stock lost 2.54% on the Bombay Stock Exchange on Tuesday to close at Rs57.65 while the bourse’s benchmark Sensex index rose 0.67%. At this price, IFCI’s market value is Rs4,253.63 crore and the cost of a 26% stake—which, under corporate law, is critical for a shareholder to block any special resolution—would be Rs1,105.94 crore.
The strategic partner will have to shell out more because, under the capital market regulator’s norms, any entity buying more than a 15% stake in any company is required to make an open offer for at least another 20% stake.
IFCI has an equity capital of Rs762 crore.
In the fiscal ended March, IFCI’s income from operations stood at Rs1,402.07 crore, down from Rs1,963 crore in 2008, and its net profit almost halved to Rs657.15 crore, from Rs1,020.57 crore. Its loan asset base, at least Rs17,500 crore in March 2002, shrank to Rs5,355.35 crore in 2008, the last balance sheet available on the IFCI website.
IFCI was corporatized in July 1993 for greater operational flexibility and access to the capital market. Shortly after this, it expanded its assets rapidly and lent money to many new projects. Most of these projects suffered from cost and time over-runs and IFCI, which was using short-term money to lend long, suffered from huge asset-liability mismatches. Since 2001-02, it has been restructuring its liabilities and assets and stopped growing. The other two development financial institutions, the erstwhile ICICI Ltd and IDBI Ltd, converted themselves into commercial banks.
“The question is the future of this business model,” said Saurabh Tripathi, a partner and director at global consultant Boston Consulting Group. Banks, with a large number of branches and retail deposits, are better equipped than development financial institutions to be in the lending business, he added.
IFCI holds stakes in many listed and unlisted firms, including Stock Holding Corp. of India Ltd, Discount and Finance House of India Ltd, and LIC Housing Finance Ltd. Investors buy IFCI shares not because of its profits but for the value of its holdings in other firms.
The government had earlier written off a loan of at least Rs1,573 crore provided to IFCI by converting the 20-year loan carrying 0.1% interest into a grant. It also infused capital to keep it afloat.