IFCI: Hard road ahead
For IFCI, the beleaguered financial institution that over the years has made innumerable attempts to climb back into the reckoning, help seems in sight. As this story went to press, the stage was set for potential investors to place their financial bids by December 14 for a 26 per cent stake in the institution.
When expressions of interest were invited in September, there were 10 parties in the fray. Rising stock market valuations, coupled with several uncertainties led to a reduction in the list of suiters. Those that withdrew included the likes of private equity player, Blackstone Group and French bank Natixis. Others such as GE Capital and IDFC did not turn up for the due diligence.
The remaining four players conducted the due diligence in November. These were the consortia of Sterlite Industries and Morgan Stanley; WL Ross, US Capital Partners VI Fund, Standard Chartered Bank and HDCF; Cargill Financial Services Corporation and Texas Pacific Group, and finally Shinsei Bank, PNB and JC Flowers and Co.
It has been a tough and eventful ride. And not just because IFCI's precarious recovery could easily falter, but also because contentious issues did not receive early clarity.
Take the case of optionally convertible debentures worth Rs 1,479 crore held by banks and financial institutions as part of a bailout package in 2002. These instruments carried with them clauses related to convertibility and recompense, which became relevant for the strategic sale plan.
This issue was resolved in early December via a partial conversion for insurance companies, which retained their stake at existing levels. The banks chose to convert their entire holding into equity. The conversion date for around Rs 1,300 crore debentures was fixed as December 17. A related issue still persists less than a week away from the financial bids- whether the government will convert its loan of Rs 923 crore into equity. Though the bidders have been asked to work on the assumption that the government will not seek conversion, it is an issue that causes significant concern.
The public financial institutions will hold a sizeable chunk of votes on the revamped board after the debenture conversion. "Bidders may not want to contend with the might of the sovereign on top of the already strong shareholding of public institutions. Then the investment will not be commensurate with the risk," says a person close to the deal. Unless clarity emerges, the financial bids may well be a non-starter.
A smaller irritant is the status of the Rs 1,300 crore promised to IFCI in Budget 2007. Since this money, which was to be a grant, could easily add value of almost Rs 20 per share, clarity on whether it will be coming forth or not will certainly refine the price bids. That when the stock has been on a spectacular run on the bourses in the last year. From a low of Rs 10.29 on December 12, 2006, the share price rose to Rs 110.90 on December 6 this year.
The financial institution, meanwhile, is proceeding with the stake sale under the assumption that government support will not be needed following the entry of a strategic investor. "There are no surprises or shocks for the bidders," says Rai, who is betting his career on a successful stake sale. A government officer for almost two decades, Rai recently quit and took charge at IFCI in July. He believes that "there is no future for IFCI unless there is a breakthrough of the kind that can happen with a strategic sale."
And there is reason to be hopeful of the future. After all, IFCI'S sale will provide the successful bidder an entry point into an economy that is growing at over 9 per cent and IFCI freedom from repeated bailouts to the government.
