Mumbai: Over half-a-dozen companies, mostly from capital intensive sectors such as infrastructure, power generation and construction could face severe financial distress leading to IL&FS like moment, a new report taking note of their high debt has shown.
The list of companies, which includes the who’s who of infra and construction space, have overstretched their balancesheets amid a slowing economy, resulting in a potential situation where these entities face the prospect of a sudden closure of operations.
According to the PCG Research reports with data sourced by Capitaline till March 31, 2019, companies such as Kesoram Ind., JP Associates, Adlabs Entertainment, Ashoka Buildcorn, Bombay Dyeing, Emami Realty and Sadbhav Engineering had a debt to equity ratio (D/E) at unsustainable high levels, in the in the range of 26x to 10x.
Compared to comfort level of debt-equity ratio of around 2:1, these companies seem to have over-leveraged their positions, creating ground for potential default and subsequent failure of operations.
Other prominent names appeared in the list of companies with high net debt (excluding cash) were Jaypee Infrastructure (8.74x), Adani Power (5.52x) and Adani Green (5.34x).
“A D/E ratio of above 2:1 is not good for a company. It might be an indicator that either a company is troubled or it could come under stress in near future,” Deepak Jasani of HDFC Securities told IANS.
Further, among the list of 51 companies above the D/E of 2x were Usha Martin, HCL Infosystem, Network 18 Media, Ansal Properties, Dilip Buildcorn, JK Tyres and Industries, Power Grid Corporation, Hotel Leela Palace, Forbes & Co. This is relevant as India’s GDP growth rate is faltering, slowing for consecutive quarters. IL&FS Transportation Network had a debt to equity ratio of 6.8x in FY18.
Last year, the Central government superseded the management of the beleaguered company via a National National Company Law Tribunal (NCLT) order and appointed a six-member board led by Uday Kotak, MD & CEO of Kotak Mahindra Bank, to restore its financial solvency.
The firm has around Rs 91,000 crore in long-term debt. The credit crunch has led a few of the company’s subsidiaries to default in servicing some of the inter-corporate deposits. Consequent to defaults, a significant impact was felt in the capital market on account of the contagion effect of the IL&FS problem which had prompted the government to replace the Board.
IL&FS Ltd is a core investment company and serves as the holding company of the IL&FS Group, with most business operations domiciled in separate companies which form an ecosystem of expertise across infrastructure, finance and social and environmental services. Sebi said its probe began after receipt of complaints in 2017 from Quantum Securities Pvt Ltd, a shareholder of New Delhi Television Ltd (NDTV), about alleged violation of rules by non-disclosure of material information to the shareholders about loan agreements with VCPL.
The ICICI Bank loan had a clause wherein the three promoters of NDTV had undertaken not to permit any major corporate restructuring, merger etc. without prior written approval of the lender. Investigations found that another loan agreement was signed with VCPL for a loan of Rs 350 crore later, which did not carry any interest rate, to repay the ICICI Bank loan that had an interest rate of 19 per cent.
However, one of the terms of the new loan effectively gave VCPL control over the entire shareholding of RRPR Holdings. The agreement gave further significant powers to VCPL and it was significantly material and price-sensitive in nature, as per the order.
A second loan agreement for Rs 53.85 crore was also signed with VCPL a year later that provided for the promoters of NDTV allowing the lender to indirectly acquire 30 per cent stake in the media company through conversion of their warrants into equity shares of RRPR Holdings.
It was alleged that by concealing such material information from the public shareholders for a period when the promoters were themselves dealing in the company shares, they had committed a fraud on the minority public shareholders.
Noting that the company was bound to intimate such material information to the public shareholders to help them take informed investment decision, Sebi said "the loan agreements were unmistakably structured as a scheme to defraud the investors by camouflaging the information about the adversarial terms and conditions impinging upon the interest of NDTV's shareholders."
Sebi said Roys have been the face of NDTV and the prime movers of all its activities, while they were also actively running the day-to-day management as Chairman and Managing Director (MD).
Under the circumstances, they had "avowed duty to act in a fair and transparent manner to protect the interest of their minority shareholders and not to indulge in any fraudulent activity or any activity detrimental to the interest of the shareholders of NDTV".
"However, contrary to the same, in the present case, the noticees -- the promoters and directors of NDTV -- have been found to have indulged in fraudulent acts wherein they have bartered away the interests of NDTV by making them subject to prior written consent of ICICI/VCPL without disclosing the same to the company (NDTV)," Sebi said. The regulator also accused them of having violated the Code of Conduct of NDTV, which they were supposed to abide by as Chairman and MD.
"Any fraudulent act directly designed to defraud such investors cannot be treated as good for the securities market and for the interest of investors. Such acts, if not dealt with adequately and sternly, will send a wrong signal to the violators having same or similar propensity and will not be good for the securities market," the regulator said in its order.
