IFCI may stay put in long-term financing

IFCI may stay put in long-term financing

IFCI Ltd, which has kicked off a process to offload a 26% stake to a strategic investor, is not likely to apply for a banking licence and will instead remain a financial services firm focusing on long-term financing.

The decision to stay put in long-term financing came about after the company asked itself “where do we fit in," said a member of IFCI’s board of directors, who did not wish to be identified.

The board member maintained that IFCI’s strategy would be to take greater exposure in equity and quasi-equity investments in long-gestation projects such as infrastructure. Banks and other institutions generally hold long-term assets in the form of debt. IFCI would not be able to compete in lending long-term as it cannot hope to raise funds at the cost that banks do.

“We are a long-term financing institution, pure debt doesn’t help us in attaining the required degree of commercial viability," said the director.

IFCI, the country’s first national development financial institution—set up by the government in 1948—is trying to recover from more than five years of poor financial performance and liquidity crisis.

The company recorded a net profit of Rs809.34 crore in 2006-07, after a loss of Rs266.21 crore in the preceding year, primarily on the back of profits made from sale of its equity holdings in National Stock Exchange and ICRA Ltd.

With traditional boundaries between banks and other entities in financial services disappearing, banks have emerged as the most competitive players as they access the cheapest funds.

Finance ministry officials had earlier told Mint that the banking regulator, the Reserve Bank of India, is disinclined to give IFCI and other seemingly redundant government financial institutions such as Small Industries Development Bank of India (Sidbi) banking licenses. Sidbi, too, has been adversely impacted by having to source resources at a higher cost compared to banks, and having to compete with banks in lending.

In this scenario, IFCI has decided to turn its traditional model of largely debt financing of companies on its head, and look at equity instruments. Profits from equity, especially those in infrastructure projects, are likely to take long to accrue. Banks seldom get into equity financing as a significant part of their resources are made up of demand deposits or fixed deposits up to five years.

To put the elements of its plan in place, the company recently inducted Vinayak Chatterjee, chairman of infrastructure consulting firm Feedback Ventures, as an independent director. He is expected to provide strategic inputs in its infrastructure financing plans.

IFCI, which made a public issue in 1993, “is still largely perceived to be occupying public space," said the director.

The government bailed out IFCI in 2002 through grants when it found itself unable to meet its repayment obligations. In December 2002 and July 2003, the government sanctioned a restructuring package of Rs5,220 crore as a grant. Banks also rolled over preference shares that came up for repayment.

The upshot of the measures is that IFCI has no retail liabilities on its books and preference shares that were rolled over need to be repaid between 2017 and 2021, said a company executive, who did not wanted to be identified. On its books, IFCI reports an asset base of Rs14,866.1 crore (31 March 2007).

In this backdrop, IFCI has begun the hunt for a strategic partner for a 26% stake, through a fresh issue of equity. The strategic partner will become the principal shareholder of the company as the combined holding of public sector banks and institutions such as Life Insurance Corp. of India is less than 23%, said the executive.

IFCI has put out a document called expression of interest (EoI) for potential strategic investors, which will have to be sent in by interested parties before 14 September.

IFCI has hired consultants Ernst & Young to help it draw up a shortlist of bidders. Though no one associated with the company admits it, given IFCI’s long-term financing plans, the shortlist is likely to be restricted to bidders who are likely to accept the existing strategic plan.