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Mumbai Constructions Ltd.: A Case on Restructuring of Loans*

CASE STUDY, BANKING & FINANCIAL SERVICES
ET Cases - FLAME, 11 Pages
AUTHOR(S) : Dr. M Manickaraj - Associate Professor, Dr. K Ramesha, Dean – Research and Consultancy - National Institute of Bank Management, Pune

Case Preview

Mumbai Constructions Ltd.: A Case on Restructuring of Loans

 

Mumbai Constructions Ltd. (MCL) had borrowed heavily from a consortium of banks and financial institutions. The profitability of the company fell down due to various factors and could not service the loans on time. Mr Arya, General Manager (Credit) of Lunar Bank, the leader of the consortium of lenders, was of the view that if the loans given to the company are restructured suitably under the Scheme for Sustainable Structuring of Stressed Assets (S4A) of the Reserve Bank of India (RBI), it will help the company to revive and service the loans. As such, he had to draft a plan for restructuring the loans given to MCL in accordance with the S4A scheme and the same should be placed before the members of the consortium as well as the Lunar Bank’s Board for approval.

MCL’s Background

MCL was a company engaged in engineering & construction, real estate, infrastructure development, urban development and management. It commenced its operations in 1936 and was a pioneer in the field of engineering and construction in India. The company had many firsts to its credit and had built 25% of India’s hydro power projects, 65% of nuclear power generation capacities, over 3,800 lane kilometres of express/highways, more than 320 kilometres of tunnelling and over 365 bridges. Its subsidiaries were leading players in transportation, power and water projects. Its turnover for the year ending March 2016 was INR2,710 crore and its consolidated turnover for the year was INR5,845 crore. The historical financial statements (standalone and consolidated) can be found in Annexures II to V..................

Exhibits

Exhibit I: Repayment Obligations of MCL (INR Crore)

Exhibit II: Order Position of MCL

Exhibit III: Estimated Cash Flows Though Monetization of Investments (INR Crore)

Exhibit IV: Estimation of Free Cash Flows (INR Crore)

Annexures

Annexure I: Scheme for Sustainable Structuring of Stressed Assets (S4A) (Extracts)

Annexure II: Profit and Loss Account of Mumbai Constructions Ltd.

Annexure III: Balance Sheet of Mumbai Constructions Ltd.

Annexure IV: Consolidated Profit and Loss Account of Mumbai Constructions Ltd.

Annexure V: Consolidated Balance Sheet of Mumbai Constructions Ltd.

Teaching Note Preview

Mumbai Constructions Ltd.: A Case on Restructuring of Loans

 

Synopsis

Mumbai Constructions Ltd. (MCL) had borrowed heavily from a consortium of 30 banks and financial institutions. Total amount of loan outstanding as on September 30th 2016 was INR3,500 crore and the non-fund facilities outstanding was INR2,800 crore. Consultants engaged by the banks had recommended restructuring the loans under the S4A scheme. Lunar Bank was the leader of the consortium. Mr. Arya, General Manager (Credit) of the bank was of the view that if the loans given to the company are restructured suitably under the Scheme for Sustainable Structuring of Stressed Assets (S4A), it will help the company to revive and service the loans. He was also sure that if the loans are not restructured, a small amount only can be recovered and loss to the lenders will be heavy. Arya had to draft a proposal for restructuring the loans of MCL under the S4A scheme and submit it to the board of Lunar Bank and the members of the consortium for approval. The key issues that he had to consider while restructuring the loans were:

1. Determination of sustainable debt (Part A) and unsustainable debt (Part B)

2. Number of equity shares to be issued by MCL to the lenders as a part of converting Part B debt. Another issue was determining the value of equity shares in accordance with the SEBI guidelines.

3. Ascertaining the amount of Part B debt that would be converted into Optionally Convertible Debentures (OCDs).

4. Additional working capital and BG to be provided to MCL.

5. Terms and conditions to be stipulated.

6. Analysis of the historical financial statements of the company to find out indicators that can be used as Early Warning Signs (EWS) of distress.

Expected Learning Outcomes

• Discuss the consequences of financial distress of business firms and the need for restructuring loans.
• Describe the process involved in restructuring loans.

Case Positioning and Setting

The case may ideally be used in advanced courses in banking particularly in Management of NPA and Recovery and in management development programmes such as Corporate Lending and NPA Management.

Risk of default by borrowers is always a major concern for banks and some borrowers may face distress due to various factors and hence may not be in a position to repay loans. However, the problem could be temporary in nature and hence if the loans are restructured appropriately the borrowers may be able to come out of the problem and be able to repay the loans. This will help both the borrower and the lenders. Fortunately, the Reserve Bank of India has announced several schemes for restructuring loans from time to time and the most recent one was the S4A scheme which is relevant for big corporate borrowers with loan amount of INR500 crore and above. The case will enable teaching the implementation of the S4A scheme..................

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Abstract

Mumbai Constructions Ltd. (MCL) was one of the oldest players in the field of construction, engineering and real estate in India. The company had borrowed heavily from a consortium of 30 banks and financial institutions. Total amount of loan taken from the consortium and outstanding as on September 30, 2016 was INR3,500 crore and the non-fund facilities outstanding was INR2,800 crore. Though its order book was quite full and had the experience and expertise to execute projects efficiently, profitability of the company fell down due to various factors and could not service the loans on time. Lunar Bank was the leader of the consortium. Mr. Arya, General Manager (Credit) of the bank opined that if the loans given to the company are restructured suitably under the Scheme for Sustainable Structuring of Stressed Assets (S4A), it will help the company to revive and service the loans. He was also sure that if the loans are not restructured, only a small amount can be recovered and hence subsequent loss to the lenders will be heavy.

Arya had to draft a proposal for restructuring the loans of MCL under the S4A scheme and submit it to the board of Lunar Bank and the members of the consortium for approval. The key issues that were matter of concern for him were determination of sustainable debt (Part A) and unsustainable debt (Part B); number of equity shares to be issued by MCL to the lenders as a part of converting Part B debt. Other issues were determining the value of equity shares in accordance with the SEBI guidelines; ascertaining the amount of Part B debt that would be converted into Optionally Convertible Debentures (OCDs); decision on providing additional working capital and Bank Guarantee (BG) to MCL; terms and conditions to be stipulated in the restructuring package. Arya also wanted to analyse the historical financial statements of the company to find out indicators that can be used as Early Warning Signs (EWS).



Pedagogical Objectives

This case will be highly relevant for post graduate students pursuing banking and for the executives in banks and financial institutions. The major objectives of the case are:

  • To discuss the consequences of financial distress of business firms and the need for restructuring loans.
  • To describe the process involved in restructuring loans.

Case Positioning and Setting

The case may ideally be used in advanced courses in banking particularly in Management of NPA and Recovery and in Management Development Programmes such as Corporate Lending and NPA Management. Risk of default by borrowers is always a major concern for banks and some borrowers may face distress due to various factors and hence may not be in a position to repay loans. However, the problem could be temporary in nature and hence if the loans are restructured appropriately the borrowers may be able to come out of the problem and be able to repay the loans. This will help both the borrowers and the lenders. Fortunately, the Reserve Bank of India has announced several schemes for restructuring loans from time to time and the most recent one was the S4A scheme which is relevant for big corporate borrowers with loan amount of INR500 crore and above. The case will enable teaching the implementation of the S4A scheme.

* FLAME CASE CONFERENCE 2017

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- Abstract
- Case Study
- Teaching Note (**ONLY for Academicians)
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