What should be the value of a company which had a net worth of Rs1,105 crore on 31 March, a net worth that was positive chiefly because of the creation of a deferred tax asset of Rs2,682 crore, a revaluation reserve of Rs660 crore and grants received from the government to the tune of Rs184 crore?

What should be the value of a financial institution that had, out of total loans of Rs11,524 crore, as much as Rs4,501 crore considered doubtful of recovery?

The answer, as given by the market, is around Rs4,900 crore—that’s the market capitalization of IFCI Ltd.

IFCI’s stock price has appreciated by a multiple of five in 2007, rising from Rs12.60 per share at the beginning of the year to around Rs77 at present. There’s no doubt the company’s financials have improved: it has started making profits, it has cleaned up its balance sheet and made provisions for all its bad loans and it has been recovering some of the them. But the main reason for the rise in the stock has been the proposal to induct a strategic partner and the last date for submission of bids is 14 September. Recent reports indicate that insurance companies, banks and private equity investors have all thrown their hats into the ring.

Just what is it that the bidders hope to get? Analysts point to the reasons for the spurt in the stock. One reason given is that IFCI has substantial hidden assets, by which they mean the difference between the market value of IFCI’s substantial quoted and unquoted investments and their book value. The second is that IFCI and its subsidiaries already have licences for operating in merchant banking, venture capital, asset reconstruction and in areas across the financial spectrum, which will save a prospective buyer a lot of time in getting these permissions and also allow whoever takes a stake in the company to unlock the potential of these businesses. Continuing government support to IFCI, with funds earmarked for the institution in this year’s budget, is also cited as a positive. Foreign players who currently do not have the required licences should be the ones most interested.

There is no doubt that IFCI can make a handsome profit by selling some of its investments. That is precisely what it did last year, selling off part of its stake in the National Stock Exchange and in Icra. The profit on these transactions amounted to Rs794 crore and formed 40% of IFCI’s income from operations in FY2007. The difference between the market value and book value of quoted investments as on 31 March was Rs492 crore. Of course, it could also be argued that selling off such investments is nothing but asset-stripping. Nevertheless, operating profits in the first quarter of FY08 were Rs158 crore, compared with Rs49 crore in the same period of last year.

On the other hand, the banks and financial companies that hold IFCI’s preference shares have had to roll over their holdings because the shares couldn’t be redeemed due to “inadequacy of profits and inability to issue fresh capital." The expression of interest document specifically states that while IFCI’s capital adequacy ratio is 14.04%, that includes the deferred tax assets carried in the balance sheet. “In case the deferred tax assets carried in the balance sheet are deducted from the Tier-1 capital as per RBI guidelines for Bank (sic), the CAR will stand negative," says the document.

But here’s the nub of the issue. Is the attraction of IFCI so potent that it now has a higher market capitalization than well-capitalized, well-run and profitable banks such as Allahabad Bank, Andhra Bank, Corporation Bank and Syndicate Bank, with their large branch networks and massive deposits, not to speak of smaller banks such as Federal Bank, Karnataka Bank, Vijaya Bank, Bank of Maharashtra and several subsidiaries of the State Bank of India? If this is what a proposal to offer 26% of a financial institution that has been hardly doing any business for years does to the stock, it should set the government thinking of the value that can be unlocked if it offers minority stakes to strategic investors in public sector banks.

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