The Year That Was – Corporate & Industry

The year saw significant corporate events particularly in the financial services sector. Yet, there were some who managed to make the most of the crisis executing record number of deals. Here is a look at some of the Corporate and Industry events.

RBI eventually suspended the board of Yes Bank in March which has been facing liquidity pressure as well as governance issues. RBI came out with a rescue plan which envisaged SBI investing about Rs 11,760 crore for 49% stake in the bank. The bolder part of the scheme was reducing the value of additional tier I capital to zero. These are interest bearing bonds but investors bear the risk as are considered quasi-equity. Yes Bank is a new-age, private sector bank with balance sheet of Rs 3.5 lakh crore at the end of Sept’19. The bank was besotted with highly leveraged balance sheet, exposure to high-risk corporate loan and as it turned out with the arrest of its promoter, indulged in fraudulent business practices including attempt to hide its NPAs and shady transactions. RBI had refused re-appointment of its promoter as CEO leading to change of management in Jan’2019. The new management started earnestly to clean up its accounts with bank’s gross NPAs going up to 7.4% in Sept’19, four times in eighteen months from 1.3% in March’18. However, the financials were too risky for any new investor to put-in the money, forcing RBI to come to its rescue.

That was not all in the banking space. Another bank bit the dust this year; the 94-years old Lakshmi Vilas Bank (LVB), struggling to survive for last 2-3 years. LVB was a Tamil Nadu based small private sector bank with total balance sheet size of nearly Rs 24,400 crore at the end of FY20. LVB saw its NPA go up to as high as 25%, a result of very high exposure to corporate loan, many of which defaulted with the economic downturn. For a change, this was a proper business failure rather than a result of any financial misappropriation like previous four in the series – ILFS, PMC Bank, DHFL and Yes Bank (based on information available so far). The bank has been taken over by DBS India as per the rescue plan initiated by RBI. DBS is a subsidiary of DBS Singapore with total balance sheet of over Rs 51,000 crore at the end of Feb’19. RBI showed lot of patience allowing market forces to find a solution and stepped-in only after all the options were exhausted.

Even as the banking sector saw skeletons falling out of the closet, Reliance Industries (RIL) made the best of these times, monetising its digital and retail asset. The company sold 9.99% stake in Jio Platforms to Facebook for close to Rs 44,000 crore. The deal was a big catch as it valued RIL’s digital assets at half the total market capitalization even though EBITDA contribution of digital assets was less than one-quarter. But that was not enough. This was soon followed by sale of stake to several other investors including Google buying 7.73% for close to Rs 34,000 crore. RIL raised over Rs 1.5 lakh crore in all. The sale helped RIL deleverage its balance sheet with digital business alone having liabilities of Rs 1.9 lakh crore at end Dec’19. However, this was not all for RIL which also struck a deal with Futures group to buy-out its retail business entailing investment of close to Rs 25,000 crore. The deal, facing litigation at the moment, would give a big boost to RIL’s retail business and save it the pain of organic expansion.

An industry level reform done by government in January, before Covid-19 appears to belong to another era. Government deregulated coal mining enabling entry of private sector players and sale of coal in the open market. Coal mining is largely a monopoly with nearly 85% of coal being produced by state run company, Coal India Ltd (CIL). Despite reserves of over 300 billion tons (equal to over 400 years of production!), India imported 235 million tons coal last year, one-fourth of domestic requirement. This is possibly the only sector where the buyer chases the seller! The change in policy has the potential to change the landscape of industry with use of advanced technology, enabling heavy-duty equipment and faster extraction. The policy change was followed by auction of 40 coal mines in June. Even though there were not too many bidders, considering the economic conditions and the fact that it was the first auction, it is a promising beginning for the sector.

At the international level,  crude oil saw a sharp plunge in demand leading to a situation never seen before – WTI Oil futures turning negative! Despite being a globalized commodity, oil market is cartelized by OPEC, which expanded its influence with the formation of OPEC+ in Dec’16. The group succeeded in raising oil prices from about $50 in Dec’16 to over $70 in third quarter of 2018, with synchronized production cuts. The massive, unanticipated contraction in demand due to Covid-19 and lack of co-ordination among the major producers, refusal of some key players to cut down production led to massive crash in prices in March-April. The prices have stabilized at little less than $50 per barrel from a low of about $20 in April. Yet, crude price may continue to record the same kind of volatility with complex market dynamics and greed of market players.

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