Going by the numbers, there hasn’t been much of a let up in the number of companies approaching the Corporate Debt Restructuring (CDR) cell—in the September quarter, over R26,000 crore of proposals were considered by the cell, a huge jump over the R19,000 crore in the same quarter last year. This suggests that despite the norms for restructuring having been tightened—RBI made it more expensive for banks and borrowers to restructure loans—these don’t seem to have deterred either party from going ahead with more recasts. Though it is early days yet, the fact that just R5,000 crore worth of projects were approved for recast in the September quarter suggests banks may just be deciding to get tough—possibly the result of cases like Winsome where large sums were lent with little or no collateral. At a recent meeting, bankers have apparently decided that they will, henceforth, ask for 40% of the equity capital to be pledged with them—the current norm requires promoters to bring in a minimum of 15% of the diminution in fair value or 2% of the restructured debt whichever is higher and also furnish a personal guarantee. Bankers are also understood to be weighing an option by which they will take control of the company if they believe the management is not able to run the business efficiently.
While this sounds good in principle, it is not clear this is the solution. For one, some promoters, the unscrupulous ones, may be encouraged to siphon off funds if they know the company won’t be theirs for long. More important, as the Kingfisher episode has made clear, the value of a company—and its much-touted brand—can very quickly turn worthless. In which case, it is not clear how banks will benefit from taking control of the company—finding a management to run it in the interim will be as tall a task as finding a buyer for a sick company. At the end of the day, banks need to find ways to be more pro-active on the boards of companies they have lent to, to ensure management is doing a good job