As stubbornly high borrowing costs and falling commodity prices put pressure on India Inc, asset sales are emerging as a quick route for firms to raise cash and pare down debt. The heavily indebted Jaiprakash Power Ventures has inked deals to sell a thermal power plant as well as two hydropower projects to JSW Energy, at an enterprise value of over ₹12,000 crore. Gammon Infrastructure has agreed to sell six road projects and three power plants to investment firm Brookfield Asset Management for ₹563 crore. And this week, falling metal prices prompted Aditya Birla Minerals, a subsidiary of Hindalco, to sell its Australian copper mine to Lighthouse Minerals.
Such asset sales are desirable from a macro perspective. They allow productive assets to be transferred from weaker to stronger hands. In a country where bankruptcy proceedings take an inordinately long time, and creditors and investors are often made to jump through hoops to secure their interest in distressed firms, asset sales allow companies to separate good assets from bad and liquidate them before they lose all value. But having said this, the recent rash of asset sales hasn’t been great news for either the selling firms or for their equity shareholders. The acquirers have driven a hard bargain on valuations. In both the Jaiprakash and Gammon deals, for instance, units are to be sold at a discount to book value, with the seller receiving only a fraction of the purchase price in hard cash (the lion’s share is by way of debt obligations transferred to the acquirer). Therefore, even after resorting to asset sales, the selling firms continue to carry a huge debt on their balance sheets. Moreover, the acquirers have agreed to take over only the most promising assets, forcing the sellers to exit their cash cows and hold on to dodgy assets. Essentially, firms have traded in a chunk of future profits for a quick fix to their debt problems.
While lenders to these firms may have reason to cheer at these deals, equity shareholders have mostly been left high and dry. Not only are they unlikely to get their hands on any part of the proceeds by way of dividend, they also have to make do with sharply lower earnings. This is why many highly indebted companies have already been reduced to penny stock status in the markets. While equity shareholder claims in a company rank lower than those of creditors, too many instances of shareholders taking a haircut can shake investor faith in equities as an asset class. So far, the debate about the corporate sector’s debt problems has mainly revolved around the plight of lenders, the banks and their depositors. Maybe it is time the Securities and Exchange Board of India spoke up on behalf of equity investors as policymakers prepare to redraft domestic bankruptcy laws.