Leveraged promoters rush for money to save ownership

Leveraged promoters rush for money to save ownership

Mumbai: Many promoters of Indian companies who borrowed against their personal equity holdings during the five-year bull rally are frantically searching for cash as lenders threaten to liquidate the collateral or take possession of their assets. The Bombay Stock Exchange’s key sensitive index, the Sensex, has fallen 57% this year.

At least a dozen promoters of publicly listed companies, many of them real estate developers, are facing forced liquidation of their shares after the sharp slump in the value of their holdings, according to investment bankers, and executives at companies, banks, brokerages and non-banking financial companies (NBFCs).

None of the executives whom Mint spoke to over the past two weeks for this story wanted to be identified, given the sensitivity of the subject.

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Because lenders and promoters sign a non-disclosure agreement on loan transactions, Mint couldn’t independently verify with both parties (the lenders and the borrowers) in each individual case. The names of the companies where promoters were involved in such transactions were independently verified with at least three different investment bankers.

Some borrowers have repaid a part of their loans, including developers Unitech Ltd, Omaxe Ltd and Akruti Nirman Ltd, these people said. Others who raised loans during the bull run on the stock market include promoters of Great Offshore Ltd and Parsvnath Developers Ltd.

Indian company owners borrowed heavily during the boom years, pledging their personal equity as collateral, using the proceeds to acquire both personal and corporate assets and increase their shareholding through open-market purchases of stock. The Sensex saw a sevenfold increase between 2003 and the start of 2008.

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“Loans to promoters run low risk of defaults as no promoter wants to lose control of his company," said Rashesh Shah, chairman, chief executive officer and founder of Edelweiss Capital Ltd.

Garment maker Bombay Rayon Ltd had to sell some assets to repay a loan from Barclays Bank Plc. to get back the shares its promoters pledged with the bank, according to one person familiar with the development.

On 17 November, Mint first reported that the promoter of Great Offshore, Vijay Kantilal Sheth, risked losing management control as lenders Motilal Oswal Financial Services Ltd and Infrastructure Leasing and Financial Services Ltd were threatening to sell collateral pledged with them.

Prachi Deshpande, company secretary at Bombay Rayon, said she couldn’t comment on the development. She said she would revert after speaking to the finance director, but hadn’t called as of the time this edition went to press.

Vimal Shah, managing director at Akruti Nirman, would call back, his office said when reached for comment; Shah didn’t call either.

The promoters of Omaxe borrowed from Indiabulls Financial Services Ltd, but recently paid back part of the dues.

Promoters of Unitech and Akruti have also paid back such loans raised from Indiabulls, which still has Rs600 crore of outstanding loans against shares.

Vipin Agarwal, director of Omaxe, the Delhi-based real estate developer, confirmed to Mint that promoters’ equity amounting to a 14.5% stake had been pledged with Indiabulls Financial Services for a Rs300 crore loan. “We have repaid Rs200 crore with outstanding dues of Rs100 crore," he said.

Since the share price has fallen sharply from the time the shares were pledged, the promoters had to offer additional collateral of Rs50-60 crore in the form of property that is being developed for both commercial and residential purposes, Agarwal said. Omaxe shares have declined 92% this year.

Parsvnath’s promoters had borrowed from Edelweiss, which has about Rs800 crore worth of loans against shares. GE Money is among other large financiers that lends against shares.

“If there is an active risk management in place, then this is a good product," said Gagan Banga, chief executive of Indiabulls.

R. Nagaraju, a senior executive at India’s second largest realtor by market value, Unitech, said in a recent interview with Mint that the company planned to monetize some assets to meet short-term debt obligations.

One banker who did not want to be identified said lenders to Unitech, including IDBI Bank Ltd, Standard Chartered Bank Ltd and others, had been planning to sell some of the developer’s properties in the National Capital Region around New Delhi.

Unitech shares have lost more than 94% this year.

When asked if the Securities and Exchange Board of India (Sebi) was studying such promoter-level transactions that affect publicly traded companies and their investors, an official at Sebi said the market regulator had not yet taken up the issue. The official didn’t want to be named.

The lenders, primarily NBFCs, typically keep collateral worth 2.5-3 times the value of the loans they give. As the value of the shares drop, lenders demand a top-up of shares or ask promoters to square off the loan.

Early in April, Religare Enterprises Ltd sold shares pledged by Orchid Chemicals and Pharmaceuticals Ltd promoter K. Raghavendra Rao.

The head of a large foreign corporate advisory firm said that the Orchid case was an exception rather than the rule. Some promoters had leveraged their strong relationships with lenders to avoid recovery actions even as their collateral has lost almost 75% of market value.

Such loan deals between NBFCs and promoters were an extension of the business relationships between the lending or broking entities with the companies and their promoters. But as the cash crunch deepened following the mid-September collapse of US investment bank Lehman Brothers Holdings Inc., the threat of liquidation of collateral became more real.

Some stock liquidation has been happening in the market, say brokers and bankers, although there is no public data available to verify this.