Some food for thought
"Saddle your dreams before you ride 'em.
—Mary Webb (English Novelist, 1881-1927)
Word for the day
Skimble-scamble (adj)
Rambling; confused; nonsensical, e.g., a skimble-scamble
explanation
First thought this morning
Many state governors, judicial officers, and bureaucrats have
recently defied the protocol and openly supported ruling party and its
leadership. It is constitutionally and ethically wrong and calls for action by
the President of India.
However, if we put the constitutional and ethical problem aside,
and try to analyze why would a governor or a bureaucrat go all the way out of
his domain to defend and/or promote a political party or its leaders, we may
get some interesting (for the lack of a better word) insights.
I have observed that every occurrence of this phenomenon does
momentarily agitate a certain class of citizens, but no one finds it
disturbing. Mostly, all such occurrences are forgotten by dinner time and not considered
worth losing one's sleep over.
Perhaps, because such occurrences have been frequent in past 4-5
decades, and fully assimilated in our consciousness; or may be our moral
compass is not designed to identify such behavior as moral turpitude. We either
dismiss it as routine or accept it as inevitability. "What could we
do?"; "All are alike"; "Chalta hai" are some
common refrains.
I am not a student of psychology. But I do understand that this
kind of behavior is usually impelled, inter alia, by (a) internal
insecurities arising from incompetence; (b) feeling obligated to return some
favor; (c) getting swayed by a wave of sentiments; (d) failing to assimilate
the promotion in stature; (e) lack of dedication to the rule book (in this
case); etc.
Nepotism, favoritism and convenience overriding the merit is the
primary force that works behind all such occurrences. The Constitutional Oath
of Office administered to all elected representatives and people holding
constitutional posts — "....I shall perform my duties without fear or
favor and without affection and ill will towards anyone..." has literally
no sanctity.
Chart of the day
Ignore the chimp at your own risk
The Indian financial markets seems to have put behind the
concerns over promoters' pledge, NBFCs' asset liability mismatch, rising
delinquencies in small and personal loans, etc and decided to move on.
Blinded by some questionable understanding between the lenders
and stressed promoters, the markets for the time being have decided to ignore
the chimpanzee in the room.
Indubitably there are many positive trends have emerged in past
one year. The IBC process has instilled a sense of urgency in the stressed promoters
to repair their balance sheet, even by selling core assets, if needed. In past
few days only, companies like DLF, GMR, HCC etc. have taken steps to materially
lower their debt levels.
Promoters of beleaguered airline Jet Airways have given up their
control to save the company from slipping into IBC process. Promoters of media
company Zee Entertainment have also offered to sell controlling stake in the
company to pare the debt in their unlisted entities. Similarly, many power
companies have sought to resolve their delinquencies outside the IBC process.
As per a research report of Edelweiss, though the progress on
the original 12 large stressed accounts put under IBC process is very slow, by
end of 2018 "of the 34 stressed power projects identified with debt of
INR1.8tn, eight projects (INR363bn) were resolved, two projects (INR164bn) have
successfully changed hands, six projects (INR509bn) are in advanced stages of
resolution (outside of NCLT), only seven cases (INR244bn) are referred to NCLT
and 11 projects (INR494bn) have no significant developments in them".
This is very encouraging and augurs well for the health of
Indian industries and financial system. Even more encouraging is the strong
interest of global PE players in Indian stressed assets, which vouches for the
good quality of assets. However, there are some areas of concern that need to
be urgently addressed. The debt against promoter shares is one such area.
In a recent report, rating agency CRISIL has highlighted the
extent of gravity of this issue. As per the mentioned report—
- "An estimated Rs 38,000 crore of rated debt (accounting for 30-40% of total pledge debt of promoters), backed by pledge of shares, has been raised from the market to date. More than 60% of this is rated in the ‘AA’ category or above, and almost 90% is in the ‘A’ category or above
- ~90% of the rated pledge debt has transaction cover of less than 2 times. This is in sharp contrast to the Reserve Bank of India’s (RBI’s) prescription of a minimum collateral cover of 2 times for lending against shares by banks and non-banking financial companies (NBFCs)
- ~10% has transaction cover of 1.3 times or lower, and provides for additional illiquid collateral (unlisted shares, real estate mortgage) to compensate for the lower cover
- For ~30% of the rated pledge debt, the pledged shares have to be liquidated within 10 days in order to recover debt and avoid a payment default following invocation
- The rated pledge debt transactions are backed by shares of 32 listed companies, of which, 13 are rated in the ‘A’ category or below, or are unrated."
As the following chart shows, during 2005-18, 90% of NSE500
companies with promoters pledge witnessed market cap declines of more than 23%
within a month. A 23% price drop implies that if a shares-backed transaction
had an overall cover3 (includes both pledge and
unencumbered shares) of 1.3 times4 to start with, in 9 out 10
cases, the market value of the shares could have dropped below the debt
contracted within a month, leading to losses for debt holders. During the same
period, half of companies having such transactions witnessed market capitalization
fall of more than 45%, i.e., even a cover of 1.8 times could have been fully
depleted within a month in the case of 50% of companies.
As per CRISIL analysis, "in case the promoters do not have
the ability to top up, the structures envisage certain timelines to avoid a
payment default through sale of shares in the market. The typical timelines are
less than 30 days. Around 90% of the rated pledge debt analysed provided less
than 30 days to liquidate the shares, with ~30% envisaging less than 10 days.
The timelines envisaged in the structure should be a function of the liquidity
in the market to ensure orderly exit without any steep impact cost. However,
the liquidity in the Indian market is insufficient to provide an orderly exit
in less than 30 days.
As shown in Chart below, it would take more than 30 days
to sell Rs 500 crore worth of shares of 50% of companies in the Nifty 500 index
and more than 90 days for 30% of companies in the index, if shares worth the
average daily turnover of the respective shares in 2018 were liquidated every
day.
In my view, the market is ignoring the risk in promoters' pledge
based on certain accommodations made in past couple of months. Obviously these
accommodations are not a sustainable solution and would become redundant at
some point in time. Anyone taking abet based on these accommodations need to
take some extra care.
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