Boom-era quick-fund deals turn sour for cos

MUMBAI: Away from the media glare, many Indian companies are in the midst of bitter negotiations with foreign private equity investors and hedge funds, which had put money in these firms in the hope of making a killing.

These investors came in droves around 2006 and early 2007, buying an instrument called cumulative convertible preference shares (CCPs), which the Indian companies, mostly unlisted, had issued to get quick money and side-step regulations on foreign investment.

Billions of dollars changed hands at boom-era valuations, as local firms promised the investors an easy exit through the stock market. The deal was simple: CCPs had a tenure of three years, offered a fixed interest, and at the end of three years, could either be redeemed to pay back investors or be converted into shares, which could be sold once the company got listed.

The three-year period is now coming to an end and Indian promoters neither have the money to pay overseas investors nor the will to enter a dormant IPO market. Senior bankers told ET that close to $5 billion of CCPs are maturing this year. The instruments will either be converted into shares of the local company or redeemed, depending on what was agreed upon. Some think the number could be higher. These deals are not in the public domain and are rarely tracked by institutions, which compile investment data. But, according to investment banking circles, at least $10 billion had entered the country through this route till June 2007, when a government notification changed the rules of the game.

Today, with many of these unlisted firms defaulting on the interest payment on CCPs and failing to fulfil conditions like floating an IPO or sticking to a pre-agreed business plan, the foreign funds are demanding their pound of flesh. Finding their money stuck, some investors are preparing to begin arbitration proceedings in offshore locations like Singapore , while a few are pushing Indian promoters to relinquish control on firms.

���In a situation of financial crisis, investors are looking at profitable exits as agreed upon either through an IPO or trade sale, which the investee companies are unable to provide, leading to a mismatch of expectations and disputes. Consequently, in some cases, parties are resorting to remedies available in cases of dispute, while some are looking at various options for restructuring their investments,��� said Vyapak Desai, who leads a litigation and dispute resolution practice at the law firm Nishith Desai Associates.