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Corporate Affairs Ministry to seek lenders nod on SCI demerger scheme

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MUMBAI : To expedite the privatisation process, the Ministry of Corporate Affairs will hold a meeting with lenders to The Shipping Corporation of India Ltd (SCI) to gauge their views on the revised demerger scheme, that entails transferring Rs1,000 crore from the firm’s surplus cash to the non-core company spun off from the listed entity ahead of sale.

Banks and financial institutions that have exposure to SCI will be called for a meeting with the Ministry of Corporate Affairs which is tasked with vetting the demerger scheme, multiple government sources said.

State Bank of India, EXIM Bank and Standard Chartered Bank are the main lenders to SCI.

“The lenders will be asked to offer their views – consent or dissent – on the revised demerger scheme during the meeting,” a government official briefed on the plan said.

This is a departure from the process followed while seeking a no objection certificate (NOC) from the lenders for the earlier demerger scheme which involved transferring Rs450 crore of surplus cash to the non-core company named Shipping Corporation of India Land and Assets Ltd (SCILAL).

For the earlier demerger scheme, SCI had sought and secured consent letters from each lender.

“For the revised demerger scheme, we are not seeking individual consent from lenders because it is fraught with delays. This is being done to expedite the demerger process and fast track privatisation of the company,” the government official, who did not want to be named, said.

Lender’s approval is a key requirement of the demerger scheme, per norms stipulated by the market regulator, the Securities and Exchange Board of India or SEBI.

After the Ministry of Corporate Affairs signs off on the revised demerger scheme, it will be filed with the Registrar of Companies to make it effective.

Banks could raise objections to the planned higher fund transfer, which was pegged at Rs450 crore in the original scheme of arrangement approved last year, as it would hurt the company’s ability to service the debt, raise the risk profile of SCI among banks and force lenders to re-price the loan, according to an executive with a management consulting firm.

The huge amount set to be stripped off the company’s cash surplus is also expected to impact its ability to carry on day-to-day operations, he added.

“The resultant interest rate hike will put further pressure on the cash flows of SCI and likely upset payments to vendors, including those related to critical repairs and maintenance of the company’s ships which are necessary to do business and generate revenue,” said a banking executive with knowledge of the matter, asking not to be named.

SCI has a surplus cash of Rs 1,406.91 crore (cash and cash equivalents and bank balances) as on 31 March 2022, according to its latest financial statements.

If Rs1,000 crore is taken out and given to SCILAL, the main company dealing with the core business of running ships is left with just Rs406.91 crore. Of this, Rs 133.85 crore is the balance from the funds raised through a follow-on public offering in December 2010, which can only be used for buying ships, per the objects clause set out in the share sale prospectus.

Effectively, SCI would then be left with Rs 273.06 crore, which will be grossly insufficient for the company management to run the show and earn money, potentially “stifling” the ocean carrier, putting it under financial stress and on course to becoming a loss-making entity.

Hence, the government will likely face a tough time in getting lenders to back the revised demerger scheme, aimed at facilitating privatisation of the main company by unlocking the value of business and assets. The government’s stand is that the value of non-core assets is not getting reflected in the value of SCI’s main business (core assets) and hence needs to be separated before sale.

In December 2020, the Department of Investment and Public Asset Management (DIPAM), which manages asset sales for the government, initiated the process of privatising Shipping Corporation of India, a so-called ‘navratna’ public sector undertaking, by selling the government’s 63.75 percent stake to a strategic buyer.

SCI is India’s biggest shipping company by fleet size, running 59 ships of various types.

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