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2. Why is it important to give early notification to the Club of an outstanding debt?
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Subscribe to Independent Minds to bookmark this article Want to bookmark your favourite articles and stories to read or reference later? Article bookmarked Find your bookmarks in your Independent Minds section, under my profile Don't show me this message again. During the same period, Sesa Sterlite's debt moved up from Rs 1, crore to Rs 80, crore as the Vedanta group's holding company for Indian assets went on an acquisition spree.
Adani Enterprises also saw its total debt rise from Rs 17, crore to Rs 71, crore as it embarked on an expansion overdrive in power, ports and edible oil refining, and bought coal mines in Indonesia and Australia. Essar Steel, JSW Steel, Tata Power, Idea Cellular and many other big companies were also raising big sums as debt during this time, either for project expansions or for acquisitions. Corporate debt - telling figures Click here to Enlarge.
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It was not just the big boys with big balance sheets who were raising debt. Small and mid-rung companies with ambitions to get into the big league also went on a borrowing binge. Even companies with sales below Rs crore nearly doubled their debt in the four-year period.
Argentine debt restructuring
Call it irrational exuberance, herd mentality or anything else. Even as signs of the economy slowing down became clearer, corporate India continued borrowing merrily - and banks were lending easily - to get into hot sectors and projects and to finance their gargantuan ambitions. Promoters had little option but to turn to debt because equity markets had scared off investors and were already in the bear phase. Financials in a nutshell Click here to Enlarge.
Wrecked by Debt
Revenue growth had turned anemic but the debt size kept growing. An analysis of 18, companies in the CMIE Prowess database shows that in the past four years, while aggregate revenues grew merely 77 per cent, their debt doubled and interest payout went up per cent.
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Little wonder, net profits decreased by 32 per cent in the four years. In the final days of the UPA-II government, as the economy slowed, companies like Reliance Industries and Sesa with their strong balance sheets and healthy cash flows continued to service their debt. But a vast majority of companies - both big and small - ended up in a debt trap. What's worse, while a fair amount of debt was taken to build long-gestation projects that would yield results only later, there was also a lot of debt taken which did not go into building commensurate assets.
And their debt burden is today not only putting enormous pressure on the banking system, it is also threatening the nascent economic recovery. In many cases the debt is very high but the assets created are very low. I don't know how the banking system gets into that. There are no inventories, no working capital available but there is debt," says Siby Antony, MD and CEO, Edelweiss Asset Reconstruction Company, who has been picking up assets being hawked by banks in distress sales. Nobody is more worried than the banks which lent heavily - and investors in bank stocks.
Banks will now have to provision 15 per cent for bad loans as against 5 per cent allowed till March 31, Given the growing pile of bad loans and about-to-turn-bad loans, the banks would be hit hard. They were hoping that the RBI would extend the forbearance but that was not to be. Investors have been hammering down bank stocks. In the two months since their lifetime highs in the run-up to Budget , bank stocks have been on a steady decline.
Bad or doubtful loans - or stressed assets as bankers like to call them - are everybody's worst nightmare. Luckily, in the last years further deterioration has been arrested" R. There's another that can slip off into non-performing," says Gandhi. It would be worse if companies hadn't made a beeline for the corporate debt restructuring cell for relief.
Of this, Rs 3,80, crore had been approved for action. Others such as Essar Oil Rs 9, crore and Wockhardt Rs 3, crore made a dramatic recovery after debt restructuring. Suzlon Energy Rs 9, crore is on the verge of exiting. In debt restructuring you have to be very selective; that the cause of restructuring is genuine; that there is no case of diversion of funds; that it is not a case where even if you give a lease of life, the project does not provide the cash flows," says Ashwani Kumar, Chairman and Managing Director, Dena Bank.
India Inc's debt woes in the midst of a slowing domestic economy and a global recession have far-reaching consequences. For one, high corporate debt combined with a slowdown acts like poison. At a time when the top line is reporting near-zero growth in real terms excluding inflation , just the cost of servicing debt is pulling down companies' profit and loss accounts, affecting their ability to invest in future growth. Two, debt-laden companies will find it tough to ride any uptick in the economy whenever the slowdown relents.
While most sectors are experiencing capacity under-utilisation, the level of under-utilisation between per cent will get bridged within a year of GDP growth returning to healthier levels. But companies typically need between 24 and 60 months to set up new capacities, provided their balance sheets can still absorb more debt.
Argentine debt restructuring - Wikipedia
Three, an unintended consequence of high debt is the sacrifice of new economic activity. In many ways, high debt sets off a vicious self-perpetuating cycle. For instance, distress sale of many assets in economic slowdown merely amounts to a change of hands from cash-strapped companies to cash-rich companies. This often leads to a transfer of debt from one company to another.
That's fiscal prudence but bad for economic activity. In better times, cash-rich companies would be creating new assets triggering economic growth and employment across all downstream industries. The big problem confronting corporate India is that many companies took on enormous debt and couldn't service interest payouts with cash flows. For instance, Essar Steel's debt grew by more than Rs 20, crore in the past four years to Rs 38, crore.
Power and infrastructure firm Lanco Infratech's interest payout shot up from Rs crore to Rs 2, crore in the four-year period, dragging it down from a healthy net profit to a net loss of Rs 1, crore. Some companies are trying to swap high-cost debt for lower-cost ones, but that is generally offered only to those with strong balance sheets like Vedanta. The focus of the group is to de-leverage and the debt is largely obtained for refinancing for cost reduction or extending the debt maturity profile," says Tarun Jain, Whole Time Director, Vedanta Resources, whose holding company for India businesses - Sesa Sterlite - has total debt of Rs 80, crore.
It was the exuberance of corporate India that got them to this state as it ignored the global economic crises post and continued to raise debt as if there was no tomorrow. India Inc's debt grew by 27 per cent a year for three years after the Lehman crisis, when the global economy had come to a standstill. In telecom, for instance, a project is in losses for 10 years. They face charges related to bribery, securities and wire fraud and money laundering. Boustani negotiated on behalf of Abu Dhabi-based holding company Privinvest. The IMF suspended hundreds of millions of dollars in much-needed aid and investors were spooked.
The investigation, led by the US, reveals a blueprint for how desperately needed development could be exploited by unscrupulous international bankers and greedy politicians. The indictment also fingers three Mozambicans in addition to Chang, one a senior official in the finance ministry and the other a relative of a senior official. The head of state at the time was former president Armando Guebuza, who stepped down in after serving two terms. In yet another, they created fake competing bids to convince their colleagues.
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