Against an issue price of Rs 50 the current price of the stock is just Rs 14 which has stopped shareholders from making the balance payments on call. Being an existing, profit making and dividend paying bank, a strong option would have been to forfeit and reissue these shares.

However, it is quite likely that atleast 75 per cent of the issue amount has already been recieved by the bank, while shareholders have refrained from paying up the rest, which is quite understandable. The step to forfeit shares under these circumstances would have been rather harsh. Instead the bank management has proposed to convert thepartly paid up shares into fully paid up shares by merging an equivalent amount of shares. This technique would also serve the additional purpose of reducing outstanding share capital and improving valuations to that extent, thus further reducing shareholder losses. For example, assume a holder of four shares with an issue price of Rs 200 has paid up Rs 150, then the four shares will be merged into three shares with a paid value of the full Rs 50 per share. The other option of capitalising reserves to convert partly paid shares into fully paid shares would not have the added advantage of a reduced outstanding share capital.

The bank has a strong balance sheet though off-late its high cost of deposits (estimated to be the highest in the industry) has been hurting profitability. It also has a large proportion of its liabilities in the form of term deposits, which is unlikely to change given the nature of its despositors. When interest rates fall banks like this tend to lose the most.

So far in the currentfinancial year the bank has been reporting lower profits both year-on-year (y-o-y) as well as on a quarter-to-quarter basis. The stock suffered a sharp fall after the announcement of the second quarter results, which saw profits fall by 80 per cent y-o-y. For the third quarter y-o-y profits are lower by around 25 per cent. It paid out a dividend of 25 per cent in the last financial year.

SIEL, poor returns

When SIEL Ltd opted to exit from its two join ventures with Honda of Japan, the first one in Honda SIEL cars in 1996-97 and the second one in Shriram Honda Power in 1997-98, it was appreciated as a sensible decision. There was a huge inflow of cash into the company which, it was hoped, would be utilised in restructuring its core businesses and repaying loans. Besides the divestments the spin-off of its engineering businesses also was viewed positively.

When the company exited from Honda SIEL cars it had done so with a condition that it could buyback the 30 per cent stake in that company withintwo years. The company has gone back to its shareholders for permission to re-invest in the passenger car joint venture in the current year. But given the present state of finances of SIEL this proposal makes little sense.

First of all SIEL had decided to exit from these various joint ventures owing to liquidity problems and the need to restructure its unprofitable operations especially the chlor-alkalies business. The company has only been earning a profit in the last two years, thanks to the profit from the sale of assets. In 1996-97 other income was Rs 72 crore while net profit was Rs 36.87 crore.

In 1997-98, other income earned was Rs 89.3 crore against a net profit of Rs 34.81 crore. Now it has proposed to deploy some of these extra-ordinary profits in expanding the chlor-alkalies capacities. Deploying precious funds in unprofitable businesses or elsewhere is not going to help its earnings or its shareholders in any way.

The competitive nature of the passenger car industry in India means that itwill take a long time for the venture to break even and even longer for SIEL to earn any return on its investments. Instead of wasting these resources on expanding unprofitable businesses or investing shareholders funds in investments with long gestation periods perhaps shareholders will be better off if these funds are returned to them in the form of cash dividend or through a buyback of shares. If the market had even a little bit of faith in SIEL's restructuring moves the stock would not be trading at an all time low at Rs 13.