Rainmaker in Kotak can make IL&FS fix easy for government

The government’s choice of Uday Kotak to lift the multi-billion Infrastructure Leasing & Financial Services Ltd out of bankruptcy should be no surprise. He is one of the few bankers in the country who have navigated banking crises successfully not once, but at least thrice.

Even for Uday Kotak — who witnessed the Harshad Mehta scandal in the early 1990s, the CRB scam, the bursting of the tech bubble and the post Lehman credit crisis — the job at hand is of monstrous proportion. The balance sheet size of IL&FS is Rs 1,15,815 crore.

What is Kotak’s selling point? A sense of caution. When many bankers were getting carried away by the growth opportunities from infrastructure lending, Kotak saw what all could go wrong. And everything has unfolded just the way he anticipated.

Thanks to his belief that banks are not designed to lend to infrastructure, his bank managed to keep bad loans low at 2.17% of total bad loans when it was 10.69% for India’s largest lender State Bank of India.

One of Kotak’s jobs is to untangle the numerous subsidiaries and associate companies which have mushroomed over the years under IL&FS. Should he aim to revive the institution, or seek moratorium on payments, sell assets and pay as and when an asset is monetised? That’s a difficult question to answer, but the rainmaker in Kotak could make it easy for government.

His instinct for deal making is legendary — from selling the ‘Good Knight’ mosquito coil brand to Godrej, to stepping in to buy a controversial stake in Asian Paints on behalf of UK’s ICI, to the takeover of ING Vysya Bank — all testify to his ability to sell assets at a valuation that few would complain about.

A key principle that Kotak has kept as a bedrock of his business is to keep it simple. That helps him see the risks associated with complicated lending practices and instruments that could initially appear exotic but blow up during times of stress.

While his business has thrived for more than three decades during the ups and downs of the Indian economic cycle, Kotak’s desire to live through the tests could help him overcome the obstacles at IL&FS too.

“If what you create does not outlive you, then you have failed,” Kotak had told ET in an interview. “The thing that excited me then, and that excites me now, is the fun in the journey, and not the destination.”

Over a period, Kotak Mahindra Bank has become a lender with a market value of Rs 2.14 lakh crore, but what has guided Kotak has been the belief that he has to fend for himself and ‘there’s no big brother’ to bail him out. The task before him now is challenging and he will need all his wits to revive IL&FS and bring down its debt.

Of IDBI Bank-LIC Deal, NPA Accounts, and Top Stocks in Focus Today

Indian share markets ended at fresh record high levels on Tuesday. Gains were largely seen in the metal sector and power sector.

At the closing bell yesterday, the BSE Sensexstood higher by 202 points (up 0.5%) and the NSE Nifty closed higher by 47 points (up 0.4%). The BSE Mid Cap index ended down by 0.4%, while the BSE Small Cap index ended up by 0.4%.

Top Stocks in Focus Today

From stocks in the FMCG space, market participants will be tracking Nestle India share price as the company's Swiss parent struck a deal to market the products of US coffee giant Starbucks around the world, outside of its cafes. The agreement gives Nestle perpetual rights to sell Starbucks products such as Starbucks, Seattle's Best Coffee and Teavana outside of the U.S. company's coffee shops, and will result in about 500 Starbucks employees shifting to Nestle.

Ruchi Soya share price will also be in focus today as the company's promoters yesterday sold around 1.06 crore shares or 3.18% stake through open market transactions.

From the pharma space, Lupin share pricewill be in focus today as the company announced it has received final approval for its Gabapentin Tablets USP, 600 mg and 800 mg from the United States Food and Drug Administration (USFDA) to market a generic version of Pfizer Inc.'s Neurontin Tablets, 600 mg and 800 mg.

From the IPO Space...

In the news from the IPO space, Studds Accessories Ltd - the manufacturer of helmets and two-wheeler accessories - has filed draft papers with capital markets regulator to float an initial share-sale.

The initial public offer (IPO) comprises of fresh issuance of shares worth Rs 980 million besides an offer for sale of 3.9 million equity shares by promoters Madhu Bhushan Khurana and Sidhartha Bhushan Khurana, and other existing shareholders.

As per the draft papers, the proceeds of the issue will be used to part-finance the motorcycle helmet and accessories as well as bicycle helmet manufacturing facilities in Faridabad and for general corporate purposes.

Speaking of IPOs, the stock market is gearing up for a burst of IPO activity.

This begs the question: How should one go about investing in IPOs?

We believe a merit-based selection, primarily including valuation, business, and management quality, is the logical way to go about investing in IPOs. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often.

To know how to safely profit from the ongoing IPO rush, download this FREE reportnow and discover How to Get Rich with IPOs.

Of IDBI Bank-LIC Deal...

From the banking space, IDBI Bank share price will also be in focus today. This comes as Life Insurance Corporation of India (LIC) will purchase 14.9% equity stake in IDBI Bank Ltd as a first step towards taking majority ownership in the lender.

IDBI Bank will approach its shareholders for an approval on the above deal on August 31.

The above development comes as earlier this month, the Union Cabinet and the Insurance Regulatory and Development Authority of India (IRDAI) permitted LIC's proposed plan to acquire up to 51% stake in state-owned IDBI Bank.

However, for LIC to increase stake in the bank beyond 15%, approvals are needed from the insurance regulator. Also, the Reserve Bank of India's approval is needed for the transfer of majority ownership to LIC. Since these approvals are yet to come through, it was decided that LIC can first proceed with picking up to 15% in the state-owned lender.

Speaking of the above deal, this attempt by LIC to bail out the troubled IDBI Bank is a classic case of the state insurer buying toxic assets.

In fact, LIC has been acting like the government's ATM for years. It has bailed out public issues of scores of PSUs.

As Tanushree Banerjee wrote in one of the editions of The 5 Minute WrapUp...

Given the high stakes that LIC owns in the most troubled banks, the government needn't even consider the proposal of setting up a 'Bad Bank'. It could just turn LIC into one. At least then the investors owning investments in LIC policies, would know the real risk they carry.

How the above deal completely pans out remains to be seen. Meanwhile, we will keep you updated on all the developments from this space.

Banks to Refer NPA Accounts to Bankruptcy Courts

From the banking sector, as per a leading financial daily, banks have decided to refer over 20 of 32 non-performing asset (NPA) accounts to bankruptcy courts as the Reserve Bank of India's (RBI) deadline for resolution of stressed assets ended yesterday.

On 12 February, RBI had set a 180-day timeline starting 1 March for resolving large corporate loan defaults, failing which banks have to refer these cases for insolvency proceedings.

Among the 20 new accounts that will be referred to the National Company Law Tribunal (NCLT), a majority-including Essar Power, Korba West Power Co. Ltd, Jindal India Thermal Ltd and Sravant Energy Pvt. Ltd-are power projects.

The list also has metal companies, including BMM Ispat Ltd, ISMT Ltd, BRG Iron and Steel and Splendid Metal Products Ltd. Reliance Naval is also among the companies that will be referred to bankruptcy courts

The central bank, through its 12 February circular, asked banks to craft resolution plans for defaulted accounts within 180 days in cases where the exposure is more than Rs 20 billion.

Last year, lenders referred a total of 40 large corporate accounts worth Rs 3.5 trillion to NCLT for initiating insolvency proceedings.

The RBI's strict policies seem to be having a positive impact in the resolution of the long-drawn NPA crisis.

We believe, this can be a big boon for the banking sector and the Indian economy. This will not only help banks recover bad loans to an extent but also help bring back credit growth.