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Get the right price

Sankar Ray

Sankar Ray on why deals in distressed assets have to be fair to the sellers too

WITH the formation of a seven-member Board for Reconstruction of Public Sector Enterprises, the market for distressed assets (DA) is set to become buoyant. The panel's task should not be confined merely to payment of all legitimate dues, compensation to workers and settling other costs involved in closure. The new panel has to suggest, among other things, ways of selling the surplus assets of non-viable public sector units (PSUs) so as to get the optimum price.

Between 1999-2004, there was no effort to sell off unviable PSUs. The sale of majority stakes in PSUs, such as VSNL, Jessop & Co, Modern Foods and Balco, are cases of national assets being sold off much below their true worth. For instance, Modern Foods, acquired by HLL for Rs 105 crore in 2000-01, was initially valued at Rs 1,100 crore by the Union Government. With 34 acres of real estate in and around the national capital region (16 acres in New Delhi and 18 acres in Gurgaon), high-value land in Chandigarh, Kanpur and other cities worth over Rs 500 crore, 14 bakery units, 20 franchisees, seven ancillaries and residential apartments, the aggregate assets ought to have been estimated at over Rs 1,900 crore.

And in the case of Balco, it had fixed deposits totalling Rs 350 crore on the day of sale of 51 per cent of its paid-up capital at Rs 551.5 crore — this excludes saleable materials of Rs 90 crore, scrap of Rs 70 crore and raw materials of Rs 100 crore, let alone real estate and other assests of over Rs 800 crore.

DA transactions, distinctively different from hiving off shares in profitable companies, are fashionable for buyers with specialised negotiating skills. Mr Manmohan Singh, economist in the international capital markets department of the International Monetary Fund, defines DA as "a sub-performing asset". The asset-holder or lender "is not getting the income stream he was supposed to get. Either the corporation or the country has defaulted outright or some payment is being made, but below the agreed rate." But he agrees that DAs benefit "high net worth individuals," whom, sceptics among financial analysts, call vultures feeding off workers' distress. "Where you and I may see a wreck, these specialists (reconstruction experts retained by the buyers who take over PSUs for a song) might see some recovery dues," Mr Singh observes.

Yet, in countries such as Brazil, there are instance of many cash-rich dealers offering floor prices for DAs by risking their liquid assets. But India's experience has not been that good.

For instance, in the early 1970s, a Calcutta-based jute baron felled a few dozen Mahogany trees in five tea estates he bought and sold them off at high premium without caring for bushes that require the shade of trees for agronomic beneficiation.

The new panel must prevent asset-stripping, which unfortunately is becoming a common corporate practice. If experience in the West is anything to go by, the access of credit-rating firms in DA transactions need to be restrained.

A critical review of the WorldCom scandal which appeared in the November 22 issue of the Washington Post highlight the manipulative powers of credit-raters.. The raters normally have their directors on the boards of their clients. But when financial disaster strikes, these agencies conveniently disown their share of blame. According to the review, in the WorldCom case, Moody's did "their ratings largely on statistical calculations of a borrower's likelihood of default... but many argue that the big rating firms have become too powerful and insulated. In the past decade, the industry has been scrutinised by regulators and policymakers, but no action has been taken to strengthen oversight." n China, Ernst & Young does the rating for turning distressed real estate and other viable assets through the Yangtze Special Situations Fund. The Asian Development Bank approved an investment limit of $45 million as loan. One need not emulate China by letting in credit-rating agencies. Beijing, of course, deserves praise for clamping a condition prohibiting exploitative labour practices, including child labour, or engaging in illegal or environmentally harmful activities.

Fund mangers the world over are eying DA shopping in India. The seven-member body is to see how best the seller's deal is struck. PSU banks which are gradually getting rid of the NPA burden, may not be major players in DA deals. The provisioning for NPAs and sticky loans has reduced the net profits of the 27 PSU banks by Rs 7,926 crore, Rs 9,476 crore and Rs 13,611 crore in 1999-2000, 2000-01 and 2001-02 respectively.

Vultures will be around, but the point is to take care of gasping entities.

(The author is a Kolkata-based freelance writer.)

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