Mumbai, New Delhi: Mumbai-based engineering, procurement and construction firm Zoom Developers Pvt. Ltd, which is set to create a Rs2,650 crore hole in the balance sheets of 26 banks, may hit the government-owned Export Credit Guarantee Corp. of India Ltd (ECGC) hard.
ECGC has insured most of the Rs2,650 crore worth of guarantees that Indian banks extended to the ailing company, according to two persons familiar with the development.
ECGC has an exposure of Rs2,000 crore to Zoom, they said. Indian banks have already started making claims as their exposures have turned bad even as they have embarked on a large-scale restructuring activity to put the company back on its feet. Punjab National Bank, the lead bank overseeing the restructuring activity, has appointed SBI Capital Markets Ltd (SBI Caps)—the investment banking arm of State Bank of India—and Lazard India Pvt. Ltd to revive the company.
Under such restructuring plans, a company is normally given more time to clear debt, interest rates are cut and even fresh loans are given by banks.
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ECGC was established in 1957 by the Indian government to cover the risk of exporting on credit. It is the fifth largest credit insurer in the world in terms of coverage of national exports, its website said.
According to a banker familiar with the development, banks are asking for their dues from ECGC, but the insurer is not in a hurry to oblige them. “ECGC has asked all banks to form a unit and put up their claims together. It is buying time,” said the banker.
ECGC chairman and managing director A.V. Muralidharan did not respond to email and phone calls from Mint. According to his office, ECGC executive director Geetha Muralidharan is the concerned person who could speak on the issue. She was not available for comment.
According to the banker, ECGC is insisting that the restructuring be done and Zoom be given time to clear its debts. ECGC will step in only if Zoom fails to do so. This process may take a few years, but bankers are insisting on an early settlement of their claims. If indeed ECGC is forced to do this, the government may have to chip in with fresh funds and replenish the corpus of ECGC, said another banker.
According to this person, ECGC can extend guarantees more than its corpus because the claims and write-offs are “very, very less”, as banks keep a collateral with them before extending loans to exporters.
Interestingly, in case of Zoom, collaterals do not match the guarantees extended.
SBI Caps has apparently asked for an additional Rs1,100 crore guarantee from banks to Zoom as part of its restructuring plan.
“Who will give further guarantees? Nobody is willing to come forward now without getting their dues from ECGC,” said one banker who has exposure to Zoom.
Zoom’s company secretary S.K. Kabra said restructuring involves Rs900 crore of new guarantees.
“Besides, a short-term loan of Rs100 crore is suggested to meet immediate requirement of unpaid employees and statutory liability,” Kabra said in an emailed response to queries from Mint. “The repayment of this loan will be done in 24 months starting from September 2011.”
While the mandate of SBI Caps is to restructure Zoom, Mott MacDonald, a management engineering and development consultancy firm, has been appointed to do a survey of the sites the company was working on and find a case for recovering dues. Lazard has worked on the business plan for the company.
SBI Caps did not respond to an email sent by Mint on Wednesday.
According to Kabra, the restructuring package envisages a standstill agreement to bring the situation back to 1 January 2009 and reinstate all invoked guarantees.
In the corporate debt restructuring (CDR) package, the promoters of the company have to pledge 100% of equity with the banks.
“... clients will refund the corresponding funds. In this way all the outstanding of the banks will be adjusted. With this adjustment, the NPA (non-performing assets) status will immediately become standard. The clients will adjust these guarantees in a predetermined ratio for new contracts. All the guarantees will, therefore, be released over a period of three-four years,” Kabra said.
According to the restructuring deal, Zoom’s clients will offer new contracts on a “continued basis building the order book position for Zoom” and will provide financial support for the execution of new contracts.
The CDR package prepared by SBI Caps has proposed for “independent monitoring agency, concurrent auditor, board recast with bank’s nominees, and continuous operational and functional due diligence”.
The clients, who are holding the guarantees of banks through stand-alone letters of credit, “will only release the old guarantee in the predetermined ratio...” within a period of four years if banks extend the fresh guarantees.
Under ECGC norms, even if it settles banks’ claims, the lenders have to repay ECGC within 30 days if they are able to recover the money from the borrower.
According to Kabra, there has not been a single occasion of default or invocation of guarantees in the past 15 years.
“During this period, the company’s own earnings got accumulated with the banks to the extent of Rs850 crore. These funds were available with the banks as margin money even during the present phase,” he said. “Zoom’s problem is not the result of non-performance or default in execution, but external factors like (the) global economic downturn and the banks not releasing the sanctioned limits on time”, which led to cash flow drain and discontinuity of business.
“For the last eight months, we are fighting against time and within the bureaucratic set-up of our banks. If the timely help is not forthcoming, the remaining core group, who are very critical for revival and who have not been paid for seven months, will disintegrate,” he added.
According to Kabra, with the acceptance of the CDR package and the standstill agreement, the situation will become normal and claims on ECGC will stand withdrawn. “...if there is a consensus amongst the banks and if they accept CDR package, they (ECGC) will also consider supporting it as it relieves them of their claims,” he said.