U.K. Sinha urges merchant bankers to help firms raise equity, cut debt

Joining the debate over increasing bad loans in domestic firms, U.K. Sinha, chairman of the Securities and Exchange Board of India, or Sebi, on Tuesday urged merchant bankers to help firms raise equity in order to reduce the level of debt on their books. Sinha was addressing the annual gathering of the Association of Investment Bankers of India in Mumbai.

“For these (top 500) corporate, the leverage ratio, which is net debt divided by Ebitda (earnings before interest, taxes, depreciation and amortization), is 4.7 times, while the average sustainable number in the Indian context is presumed to be maximum 3.5 times. And, one third of these companies cannot even generate enough cash to meet their interest obligation,” said Sinha.

“... the top 500 firms in the country will need to generate a whopping ₹ 7 trillion worth of cash to bring down their leverage ratio to sustainable limits,” said Sinha. “This is a huge number, not even half of this amount has been raised in the past 3-4 years. The bankers need to think about ways to address this challenge,” he added.

In a report in December 2014, India Ratings had estimated that an equity infusion of ₹ 7.04 trillion would be needed for 262 of the top 500 companies to help bring down their debt ratios to more comfortable levels.

“However, raising this amount of equity would be a significant challenge given that between 2008 and 2014 fiscal, less than half of this amount was infused as equity across these 500 corporates,” the report said.

While a series of measures taken by Sebi and a stable secondary market have led to a pick-up in the primary markets, Sinha said that firms from conventional sectors such as infrastructure have not been able to raise much equity.

In fiscal year 2014-15, ₹ 9,700 crore was raised through the primary markets, according to Sebi. This fiscal year (2015-16), till 13 November, a total of ₹ 18,300 crore has been raised.

“The number has doubled. However, the interesting fact in this number is that of this total, ₹ 16,150 crore came from sectors such as healthcare, education, Internet-based activities, hotels, restaurants and so on. I was surprised that there was not a single initial public offering (IPO) in the power sector. Similarly, there was no IPO in the banking sector; in the financial services sector there was only one IPO worth ₹ 42 crore; in the chemicals sector there was only one IPO of ₹ 70 crore; in the electronics sector it was zero,” Sinha said.

“So my first message to the bankers is that please look at the challenges those 500 or 1,000 corporates are facing,” Sinha said.

According to Prithvi Haldea, chairman and managing director of PRIME Database, a primary market tracker, bankers should work more closely with companies to help them raise capital either through primary market issuances or by bringing in strategic and financial investors.

“For the companies that are in stress due to debt, bankers should either pitch for conventional primary market routes such as QIPs (qualified institutional placements), FPOs (follow on public offers) and rights issues or come up with appropriate restructuring plans, including mergers or acquisitions or sell-off of certain promoter assets or subsidiaries to improve the debt to equity ratio,” said Haldea.

Sinha reiterated that the market regulator, over the past few years, has taken a number of steps to encourage primary market issuances.

“The time taken by Sebi in issuing observations has come down by half. I want to remind you that if you look at the data for the three years prior to fiscal year 2014, more than two-third of the IPOs (initial public offerings) were trading below the issue price on a continuous basis. Obviously it had an impact not only on the retail investor’s mind but also on the institutional investors. I am happy that, of the IPOs that have come up during fiscal 2016, 56% are trading above their issue price,” Sinha said.