Why the Rs3,000 Crore Market Cap of 10 of the RBI’s ‘Dirty Dozen’ Defaulters Will Simply Vanish
Two of Reserve Bank of India (RBI)’s “dirty dozen” corporate borrowers, which entered bankruptcy process under the National Company Law Tribunal (NCLT) are unlisted companies. The aggregate equity market capitalisation of the remaining 10 as of 20 April 2018 was a little over Rs3,000 crore. Many financial commentators have expressed surprise at the stock market valuations of these 10 companies. Who is buying these stocks? After all, the bankruptcy process will ensure that these stocks goes to zero.
 
Take the example of Alok Industries. The equity market cap of the company on 20 April 2018 was Rs307 crore at Rs3.14 per share. Last week, we learnt that Reliance Industries’ joint bid with JM Financial Asset Reconstruction Co was rejected by the creditors of Alok Industries. Which means that the company will be liquidated.
 
Now, one problem is that liquidation value is that it is almost always going to be far less than money owned to lenders. In the case of Alok Industries, media reports tell us that its liquidation value is estimated to be Rs4,200 crore while claims of lenders add up to more than Rs29,000 crore.
 
If Alok Industries is liquidated, it is certain that all the money will go to the lenders and they will still not get back most of their money. Under those circumstances, how can equity have any value?
 
I often cite such situations in my class by using an image, which I call “Canine Capital Structure.”
 
Canine Capital Structure
 
 
The dog in the end (the equity owner) will have nothing left over for him if all the food in the bucket is taken by dogs ahead of him in the queue.
 
The same logic applies the cases other than Alok. Whether those companies are liquidated or sold to a successful bidder, its almost certain that lenders will not recover all of their money. And if that is going to be the case, then equity can have no value. In liquidation cases, like those or Alok Industries, this is easy to visualize and understand this. Not so, however, if the company is sold. But as other commentators have pointed out it, it will not matter. Dilution will ensure that current stockholders in these businesses will lose almost everything.
 
Incidentally, this particular behaviour of the market participants is not unusual. Indeed, Benjamin Graham wrote about it in the third edition of this book, “Security Analysis”.
 
When a company has senior issues and common stock, and all its securities are of speculative calibre, the common sells too high. This is caused by the speculator’s frequently exclusive interest in common stocks and his preference for low-priced issues.
 
These overvaluations within a company are not so much in a class by themselves as they are vivid illustrations of the general tendency for speculators to buy regardless of price. When there is a senior issue available for comparison, the fact of overvaluation may often be established almost mathematically.
 
(Sanjay Bakshi is an investor and Adjunct Professor at Management Development Institute, Gurgaon.)
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    Mahesh S Bhatt

    1 year ago

    Alok Equity Holders will go Parlok for returns Amen Mahesh Bhatt

    Kamal Garg

    1 year ago

    Not able to understand the purpose of writing this article. It is a common and accepted doctrine that 'equity' is a risk capital - irrespective of whether you call in 'Canine Capital' or whatever - and therefore comes last in liquidation process. All other claimants will have definite and legally valid 'priority' in terms of distribution of liquidation money. Nothing new. It is everywhere in the world. The same class of equity investors enjoy unlimited returns on their investment if the company does well also.

    Arun Marwah

    1 year ago

    What about companies like Gammon India, Gammon Infra??? Can you please let us know about their status??

    Ramesh Poapt

    1 year ago

    sir, pl share your views on such technical aspects of the stocks
    frequently for the benefit of small investors. THANKS

    Deepak Narain

    1 year ago

    I think government should co-opt your expert on the Board of RBI.

    Amitabha Bhattacharjee

    1 year ago

    There is no autonomy of NCLT they are for the Boss

    R Balakrishnan

    1 year ago

    When the ROCE is in single digits, market capitalisation is an illusion. Below borrowing R. OCE, gold plated projects are the hallmark of many great losing ideas. Bankers injected with bribes have filled their pockets and walked on. Illusions are kept on for some time, evergreened or whatever. When the cookie crumbles, even the crumbs are fake

    Sunil Kumar Hemnani

    1 year ago

    Great initiative by Prof Bakshi & Moneylife foundation , a real education for us . Many thanks !

    Ramesh Mehta

    1 year ago

    Looking forward to more articles by Prof Bakshi.

    Vivek Naik

    1 year ago

    Nice to see Prof. Bakshi as an author on Moneylife :)

    Monetary panel minutes signal a hawkish RBI in the offing
    The RBI has signalled the prospect of a more hawkish stance on interest rates despite lowering its inflation forecast for the current year at its first monetary policy review of the fiscal earlier this month, according to the minutes of the central bank's latest Monetary Policy Committee (MPC) meeting here released on Thursday.
     
    On April 5, the Reserve Bank of India (RBI) maintained the status quo on its repo, or short-term lending rate for commercial banks, at 6 per cent for the fourth bi-monthly review in succession, along with its 'neutral' stance.
     
    The released minutes showed that RBI Deputy Governor Viral Acharya is likely to vote for "withdrawal of accommodation" when the MPC meets in June. 
     
    "Since the last MPC meeting, I have moved substantially closer to switching from the neutral stance to beginning the process of withdrawal of accommodation. This is in spite of the softening of inflation in recent prints," said Acharya as per the minutes. 
     
    "I view the (Inflation) risks as tilted significantly to the upside given the continuing rise in the ex-food-and-fuel inflation. Besides oil prices, my another primary concern is the risk of fiscal slippages, at both the Centre and state levels.
     
    "It is important to let some more hard data come in, especially on growth, and allow some more time to let the early skirmishes on the global trade front play out," he said. 
     
    As per official data, retail inflation based on the consumer price index (CPI) eased marginally to 4.28 per cent in March, from 4.44 per cent in February, but remained outside the RBI's medium-term target of 4 per cent. 
     
    In a repeat of the previous policy review in February, five members of the MPC, including the three external ones and the Governor, voted in favour of the decision, while RBI Executive Director Michael Patra voted for an increase in the repo rate by 25 basis points.
     
    The MPC statement after the meeting said the recent volatility in global crude prices has brought considerable uncertainty to the near-term inflation outlook. 
     
    "Does it present a persuasive case for an easier/neutral monetary policy stance? It is important to recognise that volatility in the prices of vegetables is obscuring a clearer evaluation of underlying inflation pressures," according to the assessment by Patra. 
     
    According to RBI Governor Urjit Patel, the inflation outlook faces several uncertainties emanating from the increase in minimum support prices for kharif crops, volatile crude oil prices, "the staggered impact of revision in HRA by various state governments, fiscal slippages by the Centre and the states and the performance of the monsoon".
     
    "I would like to wait for more data and watch how various risks to inflation evolve, going forward. I, therefore, vote for holding the policy repo rate at the current level and maintaining the stance as neutral," Patel said. 
     
    External member Ravindra Dholakia also cited several uncertainties around the inflation forecast, as per the MPC minutes. 
     
    "There is hardly any evidence on employment growth picking up to a level that would put upward pressure on the wage growth. 
     
    "Fears of a trade war among major global players are turning increasingly realistic with likely adverse impact on our exports and costs of production. It may severely affect our growth recovery over the coming year," he said.
     
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
     
     
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    Nasir Ahmed Rayadurg

    1 year ago

    Every piece of financial steps taken has only caused more confusion and hardship to common man while the rich are laughing their way out from Banks to Foreign locations and making a merry and aam aadmi as usual is utterly left in the gutter

    SBI not to charge fees on PoS cash withdrawals
    Lending major State Bank of India on Thursday said that it will not charge any fees from customers who avail the facility of withdrawing cash through its PoS (Point of Sale) machines installed across various merchant locations.
     
    As per Reserve Bank of India (RBI) guidelines, customers can withdraw Rs 1,000 in tier I and II cities whereas Rs 2,000 can be withdrawn in tier 3 to 6 cities per day per card. 
     
    "SBI has a total of 6.08 lakh PoS machines of which 4.78 lakh PoS machines are enabled to dispense cash to the customers of SBI and the banks who have enabled this facility for their customers," the bank said in a statement.
     
    The development comes just a few days after Finance Minister Arun Jaitley sought to allay fears amidst reports of a cash crunch and empty ATMs in the country by stating that "there is more than adequate currency in circulation", even as the government blamed "unusual demand" for shortages in some areas.
     
    Besides, the central government announced that it has decided to increase printing of Rs 500 notes by five times.
     
    In addition, the RBI said that it is "taking steps to move currency to areas" which have witnessed unusually large cash withdrawals.
     
    "The shortage may be felt in some pockets largely due to logistical issues of replenishing ATMs frequently and the recalibration of ATMs being still underway. RBI is closely monitoring both these aspects," the RBI had said in a statement on Tuesday.
     
    "Further, as a matter of abundant precaution, RBI is also taking steps to move currency to areas which are witnessing unusually large cash withdrawals."
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
     

     

  • User

    COMMENTS

    Ashok Senniappan

    1 year ago

    Another push for use of cards , a policy in right direction.The use of cards should made mandotory for Payment of Taxes and various utilities ,Cinema halls,Railway stations, Air ports,Ration shops,Malls,Petrol bunks and LPG out lets so that pressure on printing of new notes and circulation of counterfeit notes is reduced considerably

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)