Loan conversions, share purchases; money parked with MFs up 40.6%

Unable to recover some of their loans, banks have opted to increase their ownership in a number of struggling companies by converting debt into equity.

Latest RBI data show that banks’ direct equity investments rose 37.5 per cent to Rs 32,800 crore during the year to April 2013. An analysis of BSE 500 companies reveals that in 2012-13, banks increased their equity stake in 163 listed companies.

This is marginally higher than the number of companies in which they hiked investments in 2011-12. A further examination of the list shows this was either by converting debt into equity or by participating in follow-on offers.

The biggest jump was in Suzlon Energy, where bank holding increased from less than one per cent to 13.6 per cent following a debt recast that saw the issue of 30 crore shares at Rs 18.5 per share to the company’s lenders.

Bankers acquired a 2.09 per cent stake in ABG Shipyard (from nil) on loan conversions, while their shareholding in Parsvnath Developers, a real estate company bent by debt, doubled to 0.5 per cent over the year.

Banks also hiked their stake in United Spirits by 0.14 percentage point, after promoter Vijay Mallya’s Kingfisher Airlines failed to meet loan repayment commitments.

Apart from loan conversions, banks also bought more shares in companies such as ITC, Coal India and HDFC Bank, while pruning their holdings in TCS and ONGC.

It was not just in shares. Banks’ investment in bonds/debentures issued by private firms also shot up by a third to Rs 1,01,210 crore during the period. Overall, banks invested more in private sector companies than in PSUs. Their investments in PSU shares grew just 20.3 per cent, while their bond holdings in such companies fell. Banks have also ratcheted up their investments in mutual fund schemes once again, the same RBI data show. Bank money parked with mutual funds jumped 40.6 per cent to Rs 51,880 crore in the year to April 2013.

Surplus funds

Worried about quid pro quo arrangements between banks and mutual funds, the RBI had in May 2011 capped banks’ exposure to liquid mutual funds at 10 per cent of their net worth. Their mutual fund investments, which were as high as Rs 1.11 lakh crore then, were trimmed last year only to be raised again recently.

Banks have been parking their surplus in liquid funds within the 10 per cent limit as before, but have been exploring short-term and dynamic bond funds too for better returns, say industry watchers.

“Most of this money is parked in liquid funds. But if they intend to invest beyond 10 per cent, they look at short-term funds of over a year's average maturity,” explained Himanshu Pandya, Senior Vice-President and Head - Products & Communication, ICICI Prudential AMC.

According to Pandya, within his fund house, the Liquid Plan and Flexible Income Plan have seen the largest inflows from banks

IDBI MF Executive Director Sarath Sarma said: “Some banks have invested in short-term bond funds which run a duration of over one year to take the benefit of declining interest rates.”

(This article was published on June 22, 2013)
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