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Strategic Debt Restructuring at Gammon India Limited*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases - GSMC, 11 Pages
AUTHOR(S) : Sanjay Dhamija, IMI, New Delhi

Case Preview

Strategic Debt Restructuring at Gammon India Limited

The year 2016 was still two months ahead but the city of Mumbai had already started its preparations to welcome the New Year. However members of the consortium of lender banks to Gammon India Limited (Gammon) were getting ready for an important meeting that was to decide the future of an iconic company. The meeting was to deliberate about converting the outstanding loans to Gammon into equity with change of management. Gammon was in the midst of a Corporate Debt Restructuring (CDR) exercise with the consortium since 2013. In terms of CDR, the consortium extended significant concessions to Gammon, however, the financial performance of the company failed to improve. The conversion of the outstanding loans to equity, if enforced, would make the consortium banks the majority shareholders in Gammon. The consortium was also expected to find a suitable buyer within a given time frame for the revival of the company. There was also a question as to what role the current management would be allowed to play to ensure that the progress of the ongoing project was not adversely affected. The consortium needed to balance the interest of all the stakeholders..............

Gammon India Limited

Gammon was amongst the largest physical infrastructure construction companies in India. The company undertook its maiden project almost 100 years back which included the pilling and civil foundation work for the iconic ‘Gateway of India’ in 1919. Over the next nine decades it achieved prominent presence in all sectors of civil engineering, design and construction (see Exhibit I). Gammon’s projects covered highways, public utilities, environmental engineering and marine structures and the design, financing, construction and operation of modern bridges, viaducts, and metro rail. (See Exhibit II for some of the landmark projects executed by Gammon)...............

Corporate Debt Restructuring

In the face of the financial stress and possible further defaults, Gammon decided to opt for the Corporate Debt Restructuring (CDR) mechanism in 2013. CDR was an exercise where lender banks came together to work out an easier deal for the financially stressed borrower. CDR was done through a properly coordinated plan in order to protect the interest of the company shareholders and the lenders.

“There are occasions when corporates find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is called for...............

Strategic Debt Restructuring

The Reserve Bank of India in June 2015 laid down the norms for Strategic Debt Restructuring (SDR), paving the way for the lender banks to convert their loans to equity with possible change in management. The conversion was to be done at the fair value taking into account the current market price and the book value. The norms stated that if borrower companies were not able to come out of stress due to operational/managerial inefficiencies despite substantial sacrifices made by the lending banks, change of ownership will be a preferred option................

Assignment Questions

I. Analyse the financial performance of Gammon India Limited and identify the key reasons (external and internal) for the decline in its financial performance.
II. Why did Gammon India Limited make a reference to the CDR cell?
III. Why did the lenders agree to make concessions as a part of CDR to Gammon India Limited?
IV. ................

Exhibits

Exhibit I: Business Portfolio of Gammon India

Exhibit II: Landmark Projects Executed by Gammon India

Exhibit III: Summary of Financial Position of Gammon India (Consolidated)

Exhibit IV: Gammon’s On-Going Projects

Exhibit V: Progress of Cases Referred for CDR

Exhibit VI: Relative Performance of Share Price Movement of Gammon India

Teaching Note Preview

Strategic Debt Restructuring at Gammon India Limited

 

Synopsis

The case presents the issues involved in the Corporate Debt Restructuring (CDR) of a financially stressed company. The rationale and process for CDR and also the contributory factors for the success or failure of the CDR exercise are highlighted. A consortium of banks is convening a meeting to discuss the possibility of converting their loans to equity in Gammon India Limited (Gammon) with management change. Gammon, with almost 100 years of presence in the construction and infrastructure sector, was undergoing CDR exercise for the past two years. The consortium is proposing to invoke the provisions of Strategic Debt Restructuring (SDR) announced recently by the Reserve Bank of India. The exercise of SDR would lead to banks acquiring a majority stake in Gammon. The case discusses the considerations involved in the SDR decision.

Pedagogical Objectives

  • • To analyse the financial health of Gammon India Limited and identify the factors (internal and external) impacting the financial performance of the company.
  • • To understand the rationale, structure and process of CDR and restrictions imposed by the creditors in case of CDR.
  • • To understand the factors which contribute to the success or failure of CDR.
  • • To analyse the provisions of SDR announced by the Reserve Bank of India and difficulties faced by the banks in invoking these provisions.

 

Case Positioning and Setting

This case can be used in the MBA, Executive MBA or Executive Development Programs in elective courses relating to Management of Banks and Risk Management in Bank on topics relating to credit risk. Alternatively, the case can also be used in Strategic Financial Management while discussing financing decision.

Assignment Questions

  • I. Analyse the financial performance of Gammon India Limited and identify the key reasons (external and internal) for the decline in its financial performance.
  • II. Why did Gammon India Limited make a reference to the CDR cell?
  • III. Why did the lenders agree to make concessions as a part of CDR to Gammon India Limited?
  • IV. .............

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Abstract

The case presents the issues involved in the Corporate Debt Restructuring (CDR) of a financially stressed company. The rationale and process for CDR and also the contributory factors for the success or failure of the CDR exercise are highlighted. A consortium of banks is convening a meeting to discuss the possibility of converting their loans to equity in Gammon India Limited (Gammon) with management change. Gammon, with almost 100 years of presence in the construction and infrastructure sector, was undergoing CDR exercise for the past two years. The consortium is proposing to invoke the provisions of Strategic Debt Restructuring (SDR) announced recently by the Reserve Bank of India. The exercise of SDR would lead to banks acquiring a majority stake in Gammon. The case discusses the considerations involved in the SDR decision.



Pedagogical Objectives

  • To analyse the financial health of Gammon India Limited and identify the factors (internal and external) impacting the financial performance of the company
  • To understand the rationale, structure and process of CDR and restrictions imposed by the creditors in case of CDR
  • To understand the factors which contribute to the success or failure of CDR
  • To analyse the provisions of the SDR announced by the Reserve Bank of India and difficulties faced by the banks in invoking these provisions

Case Positioning and Setting
This case can be used in the MBA, Executive MBA or Executive Development Programs in elective courses relating to Management of Banks and Risk Management in Bank on topics relating to credit risk. Alternatively, the case can also be used in Strategic Financial Management while discussing financing decision.


* GSMC 2016, IIM Raipur

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