Gammon India lenders to take control of company

Mumbai: A consortium of creditors to Gammon India Ltd has decided to convert part of the engineering and construction company’s ₹ 15,000 crore debt into equity in a prelude to changing its management in a so-called strategic debt restructuring (SDR) exercise.

The move comes at a time when Gammon is in the midst of a corporate debt restructuring (CDR) it embarked on in 2013 after falling into a crisis brought on by slower economic growth and project delays. It has been divesting assets as part of the exercise to repay debt.

“The corporate debt restructuring empowered group (CDR EG) in its meeting held on November 23, 2015 has discussed and noted the invocation of strategic debt restructuring (SDR) in the company by the CDR lenders,” Gammon India said in a statement to the stock exchanges on Monday.

Under the Reserve Bank of India’s (RBI’s) SDR norms, announced on 8 June, banks are allowed to convert their debt into majority equity in a company where they feel the need to change management.

“If lenders had not taken a decision to go for SDR, the account could have turned into default status. Moreover, RBI has given a provision to invoke the norms in cases where CDR is still going on. So the consortium felt that this was the best way forward,” a banker from the CDR cell said on conditions of anonymity.

Gammon India is the sixth company in which bankers have decided to take majority control by converting debt into equity. Previously, lenders to Electrosteel Steels Ltd, Lanco Teesta Hydro Power Pvt. Ltd, VISA Steel Ltd, Jyoti Structures Ltd, and Monnet Ispat and Energy Ltd invoked SDR norms.

“The conversion of debt to equity is only a balance sheet activity. It wouldn’t mean anything if the bankers are not able to find a suitable buyer. The focus of invoking SDR should be to find a buyer who can bring material change in the company and thereby create value, rather than some changes in asset classification,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

Project delays caused by issues related to land acquisition and government clearances in recent years have constrained corporate cash flows and made it difficult for borrowers to repay debt. Energy, commodity and infrastructure companies have borne the brunt, leaving lenders with a large pile of non-performing assets.

Gammon India has been restructuring its nearly ₹ 15,000 crore of debt through the CDR mechanism since September 2013.

As part of the corporate debt restructuring package, Gammon’s 19-lender consortium, led by ICICI Bank Ltd, agreed to divide the company into three parts, a second banker said on conditions of anonymity because he isn’t allowed to speak to the media.

Gammon’s power transmission and distribution (T&D) business would be treated as one entity; the engineering, procurement and construction (EPC) unit as another; and the third would comprise all residual businesses, a second banker said.

Of the company’s total debt, T&D contributed ₹ 3,900 crore, EPC ₹ 7,400 crore and the residual units ₹ 3,500 crore, according to the second banker.

“The T&D and EPC business have been sold to strategic investors already or are in the process of finding strategic investors. The invocation of SDR is only in the residual companies, where the banks are asking for a change in management,” the second banker said.

Last week, Gammon India said it would transfer its civil EPC (engineering, procurement and construction) business to its subsidiary Gammon Retail Infrastructure Pvt. Ltd in order to allow potential equity investors to invest in the civil EPC business.

The civil EPC business includes roads, hydropower and nuclear power projects, tunnels, bridges, buildings and cooling towers. The company has transferred these projects along with all the properties, rights and powers and all debts, liabilities, duties and obligations to Gammon Retail Infrastructure.

In August, Gammon India’s subsidiary Gammon Infrastructure Projects Ltd sold six road and three power projects to BIF India Holdings Pte. Ltd for about ₹ 563 crore. BIF is controlled by Canada-based Brookfield Asset Management Inc. and Core Infrastructure India Fund Pte. Ltd.

On 27 October, Gammon India approved the transfer of part of its T&D unit to Transrail Lighting Ltd by way of a slump sale on a going concern basis. Slump sale involves the transfer of one or more undertakings for a lump-sum consideration without values being assigned to individual assets and liabilities.

The T&D undertaking essentially comprises tower manufacturing and conductor manufacturing businesses carried out by the company through its facilities located in Deoli in Rajasthan and Silvassa in Dadra & Nagar Haveli along with related assets, liabilities and employees.

The transfer of T&D Undertaking by way of slump sale was in line with the company’s strategy to consolidate the entire T&D business of Gammon India to Transrail Lighting to enable investments by strategic investors.

The company has also signed an investment-cum-shareholders agreement with Bilav Software Pvt. Ltd, which shall acquire from the company a 75% stake in Transrail Lighting. Bilav Software will also infuse an amount of ₹ 47.70 crore into Transrail Lighting in two tranches by subscribing to optionally convertible debentures (OCD) for which part payment will be made on consummation of the slump sale.