Can Axis Bank and State Bank of India’s haste to sell a power plant in Maharashtra to a little-known asset reconstruction company (ARC) run into regulatory hurdles? A bid by Chartered Finance Management (CFM) ARC for Vidarbha Industries Power Ltd (VIPL), which has a 600 mv coal-based power plant near Nagpur, is under the consideration of Axis Bank and SBI, the lenders to the power company.
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However, sources say that both the banks may have ignored the red flags against CFM ARC, which was served with a show cause notice (SCN) by the Reserve Bank of India (RBI) for questionable business conduct and was on the verge of losing its licence. Also, the Income Tax Department had conducted searches on the ARC for its links to shell companies, the sources said.
Axis Bank is the lead in the consortium that had lent money to VIPL and SBI is the largest lender to the power company. Both these banks play a vital role in approving the bids for the sale of VIPL and after evaluating the offers for the past few months, they are seriously considering the bid by CFM ARC, the sources said. The lender will be meeting today to take the deal ahead, said an expert close to the developments.
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It is not clear if CFM has disclosed to the lenders that it was served an SCN by the RBI last year and it had come on the verge of losing its license. CFM was among the four ARCs raided by the Income Tax Department in December 2021. The raids had revealed a nexus of the ARCs with the borrower group and a maze of shell or dummy companies used in acquiring non-performing assets (NPAs). Following this, the RBI had issued an SCN to the ARC, the sources said.
An expert who spoke to Zee Business says that CFM ARC on its own lacks the financial muscle to close the deal for acquiring the power plant. CFM ARC’s balance sheet reveals a mediocre status of its financial strength compared to the bid that it has submitted to the banks. Sources say CFM ARC has submitted a Rs 1,220-crore bid for acquiring VIPL and promised to pay the entire sum in just 90 days of the lenders’ approval of the proposal.
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But a study of CFM ARC’s balance sheet shows it is primarily funded through debt to the tune of Rs 800 crore and equity of only Rs 200 crore (80 per cent debt and only 20 per cent equity). In that, the balance sheet also carries certain short-term debt indicating instability of long-term funds with the ARC. Add to this, the poor profitability and operating cash flows for the financial year 2022. CFM ACR’s operational EBITDA, which stood at a measly Rs 52 crore and PAT at Rs 30 crore for FY2022, clearly indicates that it may not be in a position to close such a large deal without major funding from a third party. The onus of the basic due diligence lies on the two banks, experts said.
VIPL, a subsidiary of Reliance Power, turned into an NPA in 2019 after it was constrained due to its disputes involving power purchase agreements and marred by the regulatory delays in recovery of its fuel costs. Apart from CFM ARC, another company National ARC, a government entity, too had submitted its bid for VIPL where it offered 15 per cent upfront of the total bid of Rs 1,150 crore and the balance over the next five years. VIPL itself has made a one-time settlement offer to the banks wherein it was willing to pay a total of Rs 1,260 crore with 10 per cent upfront and the balance in 75 days after lenders approve the deal. VIPL has also proposed a ‘Swiss Challenge’ method of bidding for better valuation, the sources said.
Emails sent to Axis Bank, SBI and CFM remained unanswered till the time of publishing the story. Zee Business would be adding their replies to the story as and when received.
