Indian banks are stepping up legal action and usage of conversion rights against defaulting companies as economic slowdown and high interest rates lower debt repayment capabilities of companies.
One of the latest companies to face music are Zoom Developers. Lenders, led by Punjab National Bank, have referred the engineering and project implementation company to the debt recovery tribunal after a corporate debt restructuring (CDR) scheme failed to take off. Zoom has Rs 2,700 crore in loans and guarantees outstanding to 26 public sector and private sector banks.
Another defaulting company that faced action recently was GTL. On July 26, ICICI Bank invoked 2.85 crore shares, which accounted for 29.30 per cent stake in the telecom infrastructure provider, that were pledged by Global Holding Corporation, one of its promoter group firms.
Before that IDBI Bank had converted part of the debt of Ispat Industries to equity when the steelmaker defaulted, putting pressure on the company to repay the rest.
MVS Seshagiri Rao, joint managing director and group CFO of JSW Steel, said economic slowdown and high interest rates were putting stress on companies, forcing banks to step up action.
“When we took over Ispat in December 2010, IDBI Bank had already exercised the option of conversion right by which the bank converted part of the debt to equity. Later, we refinanced the entire debt,” Rao said.
In the case of Zoom, a senior official of PNB said they had approached the debt recovery tribunal to attach the company’s properties so that banks could recover the dues.“The CDR scheme is to make companies viable but in this case the business model is not viable. However, we have fully provided for our exposure so there will be no impact on the balance sheet,” the official said.
An official involved in the CDR scheme said, “Under the scheme, banks had to provide additional guarantees of Rs 750 crore, which were later struck down by the banks as the company was not keen to revive its business.” The company was also facing CBI investigation for financial irregularities.
No company official was available for comments despite calls made to its offices in Mumbai. The company website showed it was under construction.
The CDR scheme of the Reserve Bank of India helps companies in distress to extend the tenure of loans and get interest written off so that they can become operationally efficient. However, in the case of Zoom Developers, bankers concluded that writeoffs would not help the company.
Zoom Developers’ debt became a non-performing asset in 2009 when the company, which imports plants and machinery and installs indigenous plants, delayed payments to banks.
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