The race for IFCI

Some of the biggest names in business want a piece of it.

For India’s oldest (and until recently ailing) financial institution, it’s a problem of plenty. New Delhi-based IFCI’s plans of offering at least 26 per cent stake in itself to large investors has attracted a bevy of suitors. Last fortnight, 10 bidders, Indian and foreign, queued up for a piece of an institution that until recently was saddled with gargantuan bad loans. Just two years ago, the figure stood at Rs 2,688 crore. “We are looking for a strategic fit,” says Atul Kumar Rai, CEO of IFCI.

IFCI plans to transform itself into a corporate finance specialist and expects that the investors that come in will help in the transition. The race for the stake (and it is still a race despite IFCI’s beleaguered image) will terminate in January. So what has led to this surge of interest? The fluctuating fortunes of the oldest financial institution in the country saw another turnaround in the last few quarters. Economic recovery, some sharp restructuring and aggressive provisioning reduced that mountain of bad loans to zero. In fact the company has accumulated almost Rs 1,500 crore as cash.

Why then the sale? Well, its past problems eroded its capital adequacy to such an extent that it is now negative. Though IFCI’s information memorandum claims a capital adequacy ratio of over 14 percent, it does so by including deferred tax assets as Tier I capital. “The stake sale is happening mainly for equity infusion so that IFCI’s capital adequacy improves. It certainly does not need cash,” says a person close to the deal.

That is reason enough for most bidders to come calling. Added to it are a host of other benefits like its long-term asset book and its ability to raise long-term resources from provident funds and others. This could be useful if bidders are interested in funding the $475 billion that are expected to be spent on infrastructure over the next five years.

Any recovery of the fully provisioned bad loans adds straight to the bottom line. As a public financial institution, IFCI has asset sale rights to recover loans. Though the government has made clear that asset strippers are not welcome, sizeable real estate in key Indian cities is another attraction. However, there are some uncertainties including whether the finance ministry will still disburse the Rs 1,300-odd crore (as part of a bailout package) and over a longer term whether the benefits of being a PFI will continue.

However, these are no deal breakers. The crucial issue, as in all such transactions, is price. Company officials believe that the current market capitalisation of over $1 billion provides a good indication of the water level. After all, IFCI only needs Rs 2,000-2,500 crore to drive back into the capital adequacy safe region.