Debt-laden Companies Slow India’s Economy

10 August 2011 - Which Way to Pay

Debt-laden Companies Slow India’s Economy

 Despite Rajat Jain’s interview published today in the Economic Times saying that India is still among the best-performing markets in the world, the Principal of the Mutual Fund may not be aware of the present strain upon banks arising from debt-laden companies.

ICICI Bank’s takeover of a stake in a debt-troubled telecom tower firm is an ominous indication of things to come; the present economic downturn and slumping share prices erode the value of collateral on loans which companies are already struggling to repay. Indeed weakening markets, higher interest rates and the global debt crisis can only increase the struggle in raising sufficient funds and manage borrowings leading to a bleak credit outlook for many companies.

The problem is compounded for banks because founders of several companies have pledged their shares for loans, meaning that as stocks fall, banks are demanding a top-up in security. Current statistics indicate that more than $33 billion worth of shares have been pledged with banks as collateral. Furthering this, founders of as many as 17 companies have pledged over 90% of their holdings according to Merrill Lynch in the Bank of America’s June report.

In response to the figures, Jagannadham Thunuguntla, head of equity at brokerage SMC Capitals said; "This is over-leveraging. It's like a fire. It will hit both the corporates and the banks... There are some companies where the founders have pledged almost 100 per cent of their shareholding. It could backfire."