Interest rates could surge, exchange rates may collapse, the sun might stop shining brightly.
Every conceivable danger an investor needs to be aware of in an initial public offering is discussed in the August prospectus of Sterling and Wilson Solar Ltd., among the world’s biggest engineering contractors to solar farms. And yet, the risk that struck hapless shareholders was buried under related-party transactions on Page 37: that the Indian company’s storied founders won’t keep their promise.
The 42% carnage in Sterling and Wilson shares over three trading sessions in Mumbai is the story of this broken pledge. Controlling shareholders had promised to return with interest what they owe the business — but are now dragging their feet. That’s shabby treatment of minority investors, and that, too, within just three months of the firm being floated to the public. It’s also a cautionary tale about India’s beleaguered real estate industry and its inability to raise cash.
A debt-saddled India Inc. has bungled its cash-flow forecasts, triggering a $200-billion-plus bad loan problem. The stress in the banking system has filtered into the balance sheets of shadow financiers who provide the lifeblood of financing to the property industry. Their own funding under strain, these lenders have started mistrusting borrowers that not long ago were ranked among the bluest of chips.
The 154-year-old Shapoorji Pallonji Group, which constructed the Reserve Bank of India’s Mumbai headquarters as well as the Sultan of Oman’s palace, had given its word to IPO investors. In 90 days after the listing of Sterling and Wilson Solar, the founders — Shapoorji Pallonji and Company Pvt and partner Khurshed Daruvala — would return the loan of 23 billion rupees ($325 million) they had taken from the firm.
“What’s $325 million to these rich backers?” investors must have thought, as they wrote their IPO subscription checks. Pallonji Mistry, the 90-year-old patriarch of the group, now run by son Shapoor, is worth more than $20 billion, according to Bloomberg data. The privately held construction unit garners $1.75 billion in annual operating income, according to a rating agency estimate.
The solar company’s public issue went through, though it didn’t pull in as much money for the founders as the Mistry family had hoped for. Still, the group’s struggle to keep its IPO commitment became clear only late last week. Four days before the Nov. 18 payment deadline, the founders wrote to the company’s board, asking for a more lenient payment schedule and a reduction in the principal amount, citing “significant and rapid deterioration in the credit markets.” Shares in Sterling and Wilson Solar, a profitable business with a global order book, tanked.
More crucially, the Shapoorji Pallonji Group’s money problems gave Mumbai’s already-jittery financial community another reason to feel nervous. Several of India’s current and former billionaires are in trouble. But this isn’t just any tycoon. The Mistry family owns an 18.4% stake in India’s salt-to-software conglomerate Tata Group.
That shareholding is worth $14 billion. Or that’s what Pallonji Mistry’s younger son, Cyrus, claimed in a legal appeal after he was ousted as Tata Group chairman in a 2016 boardroom coup. It used to be child’s play to raise money against those shares. But as the fight rolled on, Tata Group amended its charter and became a private limited firm. That has presumably limited the liquidity of the Mistry family’s shareholding, even though rating firms don’t acknowledge any such loss of flexibility.
Then came the sudden collapse in September 2018 of highly rated infrastructure financier IL&FS Group. Funding for shadow banks froze up, forcing them to raise borrowing costs — particularly for real-estate players who were juggling long-term assets by rolling over short-term loans. ICRA Ltd., an affiliate of Moody’s Investors Service, said the Shapoorji Pallonji Group’s flagship construction firm was “exposed to refinancing risk.”
With the funding crunch in India’s credit markets showing no sign of abating, and the economy slowing sharply, managing that risk is getting tougher.
Listing the solar business was part of the group’s deleveraging plan. That it has gone so badly may affect the next attempt to slim down. A possible sale of Eureka Forbes Ltd., a water purifier business, could unravel if investors fear getting shortchanged again. If Eureka Forbes does seek outside money, bankers must highlight that risk, rather than speculate about a future in which the sun stops shining or water runs out. The present is dystopian enough.