State-run IFCI itself is unsustainable and was bailed out by the government in the past. It has sanctioned a loan of Rs225 crore to an entity which is on the RBI list of wilful defaulters
IFCI Ltd, which has been running on grants from the Indian government and is undergoing a massive restructuring (more about that later) has sanctioned a whopping Rs225 crore loan to Blue Coast Hotels Ltd, formerly known as Blue Coast Hotels & Resorts Ltd. Before that, the entity was known as Morepen Hotels Ltd.
Incidentally, both these entities are related to Sushil Suri, a prominent name on the RBI’s wilful defaulters list, and Blue Coast still owes Rs10 crore to the state-run financer, said a company official from IFCI. As of December 2009, Mr Suri owned 0.37% stake in Blue Coast Hotels and 1.22% stake in Morepen Laboratories Ltd. Blue Coast Hotels & Resorts is a group company of Morepen Laboratories where Sushil Suri is chairman and managing director.
The entire process of sanctioning Rs225 crore to Blue Coast Hotels took less than 10 days and has raised many eyebrows in IFCI corridors as well. IFCI has also decided to add Rs10 crore to the total amount sanctioned for Blue Coast Hotels so that the hotelier can honour the debt.
Apparently, it seems that Mr Suri, who had appeared in the RBI’s ‘wilful defaulters list’, is no longer a defaulter. “We have received a certificate from the statutory auditors of the company (Blue Coast) saying that his name is no longer on the RBI’s wilful defaulters list,” said an official from IFCI. The official, however, declined to comment on the terms of the deal.
A source close to the developments said, “I find it hard to find another example of a financial institution sanctioning a large loan to a group that is already in default. The entire process from application to sanction took less than 10 days with the loan originating from IFCI's Hyderabad office. It is also a matter of concern that IFCI is giving loan to a person who is on RBI's 'wilful defaulters list'.”
According to the filing to the Bombay Stock Exchange (BSE), Morpen Laboratories had a total debt of Rs757 crore. The company incurred a net loss of Rs10.90 crore for the quarter ended December 2009 compared to Rs13.50 crore for the corresponding period last year.
Separately, the government has invited expressions of interest for a study of key strategic issues pertaining to IFCI. The consulting firm will be mandated to examine the current business model of IFCI in the context of the business environment and to explore comprehensively the strategic choices for the future business model so as to ensure economic viability and long-term sustainability, the government said in a notification.
By 2002, IFCI had accumulated huge losses which completely eroded its equity capital and reserves. To avoid any further crisis, in 2002-03, the government, in consultation with state-run banks and financial institutions, had worked out a restructuring package for IFCI, which included financial assistance of Rs5,220 crore to the entity over the period from 2003 to 2011-12. Under this package, the first tranche of Rs523 crore was provided as optional convertible debentures with a right to recompense at par and Rs2,409.30 as grants till 2006-07.
According to the government notification, the broad terms of the assignment of the consulting firm are as follows.
1) Whether the business model of IFCI is sustainable in terms of risk, profitability and return over the medium to long term, in the present day economic and regulatory environment.
2) What are the incremental activities or areas which can be aligned with the existing business model of IFCI to add to its profitability and to assure a robust sustainable growth strategy?
3) What would be a better fit for IFCI (a) induction of a strategic investor, (b) merger with a public-sector entity, and (c) continuing as it is on a standalone basis? These options should clearly articulate the areas of synergy and value creation.
4) How can the interest of the government be safeguarded in the event of induction of a strategic investor or merger with a public sector entity, keeping in view the government’s holding of Rs523 crore, Optionally Convertible Debentures (OCDs) in IFCI and outstanding government guarantees to IFCI which were Rs2,468 crore as on 31 March 2009?