CDR - THE NEW PAIN KILLER FOR INDIA INC's INDULGENCES?
By Ruma Dubey
Debt has become a bad word, taboo on Dalal Street. The moment any company starts showing signs of stress due to high debt, it is dumped like stinking garbage in the dustbin! Companies with high debts always existed and one would have thought that with interest rate cycle now turning downwards, it should actually stop being such a big issue. But in this current environment of bear cartels, margin money pressures and pledged shares becoming a big worry, high debt companies are causing a lot of anxiety.
For such companies, Corporate Debt Restructuring (CDR) was like the perfect antidote, a cure for all. The moment any company announced a CDR plan, the stock would shoot through the roof on hopes that things will now improve for the company. Like getting into rehab – the company will emerge lean and clean after getting into CDR.
Earlier CDR meant the company was close to being declared sick but today, everyone knows the company is in trouble but CDR is like a magic pill that will get the company back into health. This positive perception towards CDR is on account of various past success stories – India Cements, Essar Oil, Nagarjuna Fertilisers and the most recent and ‘big’ being Wockhardt. At that time, when Wockhardt got ‘hospitalised’ investors and traders dumped the stock, saying it was on death bed. But experience now shows that it was more like a hospital bed from which the company has recovered back to the pink of health. Post CDR, Wockhardt is now recommended as a good long term buy. Hotel Leela is working on the CDR plans and trying its level best to reduce debt through sale of non-core assets and is also going slow on its various expansion plans.
In 2012, a record 126 companies approached the CDR cell for a collective amount of over Rs.84,000 crore. In Q3 alone, 25 cases came under the CDR care for an aggregate amount of Rs.20,000 crore. And in 2012, of the 126 cases referred, 86 cases were approved for CDR, for restructuring of debt worth about Rs 70,000 crore. And currently 50 cases involving Rs.23,000 crore remains pending for consideration. And if one compares fiscal to fiscal, in FY13, till date, 99 cases have been referred to CDR cell for an aggregate amount of about Rs 60,000 crore, the highest ever referred to any fiscal.
The biggest beneficiary of CDR is the iron and steel sector, which accounts for the largest share of total restructured debt at 26%, followed by infrastructure at 11%, textiles at 8%, telecom at 6% and fertilisers at 5.6%.
When there is such a big surge in the number of cases being referred to CDR, is that a good thing? Well, its good because it at least means that those who are sick and ailing have recognised they need help but at the same time, it is worrying because CDR seems to have become the preferred route to get out all the mindless spending promoters did on ambitious plans. They jeopardized the future of the company and its shareholders big time but they now seem to be getting an easy way out for their follies.
In simple parlance, CDR is given to companies reeling under debt which has been borrowed from a consortium of bankers and institutions. Companies are not able to repay debt and banks, to protect their interest too, reduce rates or sometimes extend repayment schedules. So promoters borrow mindlessly and then banks bail them out. Sometimes, the bailout is right but sometimes, unscrupulous companies take advantage and get away. To help someone when in distress is humane and when companies cry out for help, naturally, they need a helping hand. So to question whether CDR is required or not is futile but more relevant is why so many companies are opting for CDR? Is it because of a general downturn in the economy or is it gross misuse of the CDR mechanism?
Undoubtedly, excessive leveraging by companies when the times were good is a prime reason and that in turn means, banks, through CDRs are being punished for the follies of the companies. But banks also, when lending, had probably gone overboard, allowing logic to take a back seat.
Restructuring for banks is a big drain. Data shows that at end of FY12, of the total gross advances at Rs.46,55,271 crore, restructured standard advances were to the tune of Rs.2,18,068 crore. In terms of growth, all banks at end of FY12, had shown a growth of 16.88% in gross advances but restructured advances grew 58.48%. Private sector banks showed the maximum growth in restructured advances at 67.35% compared to 58.48% by public sector banks. Foreign banks were much smarter, showing a fall of 23.76%. But in terms of ratio of restructured standard advances to gross advances, public sector banks were at 5.73% while private sector at 1.61%.
There is no debate on whether CDR is required but banks need to get more vigilant and CDR should not become a norm but a special helping hand only under special circumstances which are beyond management control but not due to mistakes made by the management. Examining the viability of the project should become a prerequisite for sanctioning any CDR for which project appraisal methods and ways need to get more efficient. And yes, banks need to be more concerned with leveraging and not with the fact that they are getting business. Even a man on the street will tell you that a high leveraged project is high risk and banks, somewhere, in their need to enhance their own balance sheets have forgotten that.
CDR as a process, on moral grounds needs to get tightened. Money in the banking sector is precious and it cannot be squandered away just because a few bankers and promoters got carried away by their ambitions.
Cancer requires treatment first, much more than those under self-inflicted substance abuse. The former is a victim of circumstance while the latter has created circumstances to become a victim.