FIs ask promoters to pledge shares for new loans

"It is not only the five last-mile steel projects where we are demanding pledging of shares – with voting rights – as a pre-condition for fresh infusion of funds. Henceforth, in any sector, where ever there is a cost or time overrun, and the promoters are asking for concessions in terms of fresh funds infusion or moratorium on repayments, we are asking for pledging shares," sources said.

The `drastic’ step was taken at a recent meeting of institutional heads. "With the pledging of shares, the voting rights come automatically. If any problems crop up, the institutions should be able to bring in a new management," the sources said.

Senior executives of the term-lending institutions, however, admit that there is resistance from the corporates. "We are going ahead despite this. Tough steps should be taken now when the country faces an industrial slowdown. If a promoter is found unfit to run a company, we need to change him even though that is not an easy task," the sources added.

The term-lending institutions are working out a collective approach to combat promoters’ clout. "We will bring in changes in documentation of all new loan agreements which will strengthen our stance," institutional sources said.

There has been a consensus among the institutions to insist on a stricter 1:1 debt-equity for all projects across all industries. "We are in the process of implementing the revised debt-equity ratio for all fresh sanctions. As far as the existing projects are concerned, the new debt:equity ratio will be applicable for fresh loans for expansion and modernisation," the sources said.

Senior executives of financial institutions, however, say that it may not be possible to go in for a 1:1 debt-equity ratio for all projects. For instance, they may have to settle for a higher debt-equity ratio in the power sector. "Ideally, all projects should have the 1:1 debt-equity ratio. We may, however, have to relax the guidelines for some sectors like power," the sources said.

The objective behind the tighter debt-equity ratio is to reduce the corporates’ interest burden. "If a company is not making profits, it can skip dividends. But there is no escape for the debt repayment even when it is passing through the worst of times. With a stricter debt-equity ratio, the company’s interest burden will be substantially reduced," they said.

Insisting on a 1:1 debt-equity ratio will result in many projects being shelved. For capital-intensive projects, like in power, cement, steel, refineries, or even fertilisers, such a high equity proportion will be impossible to garner. Perhaps a reason for the tighter ratio is to discourage new projects in the current environment. It may also be an attempt to protect the bottomline of the financial institutions.

The move to ensure pledging of promoters’ shares as collateral will ensure that they toe the line. If the institutions want to change the promoter, this condition will ensure that they have the leverage to do so.