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The Sterling Wilson debt saga

A letter from Sterling Wilson Solar Ltd. (SWSL) dated Nov 14, informing the exchanges about the extension of debt repayment deadline granted to promoters (Shapoorji Pallonji Company Pvt. Ltd. - SPCPL & K. Daruvala) has created widespread panic. 1/14
As at Aug 19, other companies of the promoters owed Rs. 2,563 crore to SWSL. SWSL, in Aug 19, was IPO bound and the promoters, in the red herring prospectus, promised to pay off the entire debt owed to SWSL, within 90 days, from the IPO proceeds. 2/14
The SWSL IPO was entirely an offer for sale i.e. the IPO was meant only to dilute the promoters' shareholding and no IPO proceeds went to SWSL. The IPO was under subscribed (92%) yet the promoters managed to raise ~Rs. 2,850 crore. 3/14
The deadline to make the debt payments was Nov 18, 2019. The promoters, however, wrote a letter to SWSL on Nov 14, 2019 seeking an extension for the payment citing 'rapid deterioration in the credit markets creating a significant liquidity crisis' as a reason for delay. 4/14
As a result, the stock price hit a lower circuit last Friday. In fact, the stock price has fallen by ~50% from the IPO price (Rs. 780) and is headed further south. The investors' reactions has been of shock and anger. The episode raises some serious questions for everyone. 5/14
Question 1: Should a breach of promise(s) made in IPO documents not tantamount to 'default'? It should be noted that SEBI, in a recent circular, has asked Mutual Funds to classify all 'extension of debt maturities' as defaults, for valuation purposes. 6/14
Further, some entities of Reliance ADAG and Essel Group have recently been downgraded by one or more notches despite an extension of maturity being approved by the lenders. Why should SPCPL be treated any differently? Why should the credit rating of SPCPL not become 'D'? 7/14
Question 2: Why should the promoters be allowed to get away with a blatant lie? The promoters, in their letter, called the liquidity crisis "unforseeable". Promoter, K. Daruvala, in a con-call, added that there was a “high degree of confidence of payment three weeks before”. 8/14
The fact, however, is that the Shapoorji Pallonji group has been coping with a liquidity crunch for over a year now. ICRA, on May 27 (more than 2 months before the SWSL IPO), downgraded SPCL by one notch citing refinancing risks and liquidity troubles. 9/14
Question 3: Why should the promoters be allowed to enjoy 'cheap' liquidity at the cost of equity investors? The SWSL board levied an additional 0.50% interest rate
on the outstanding loan from promoters. This is dirt cheap considering the current borrowing rates of SPCPL. 10/14
SPCPL, and other SP group companies have lately borrowed at exorbitantly high interest rates ranging from 15% to 20%. The promoters, in some cases, have even pledged their family jewel (Tata Sons shares) to get liquidity. So, SWSL' s 0.50% penalty is nothing but charity. 11/14
Question 4: Is 'corporate governance' merely a fancy word? The board that approved the payment extension demand of promoters is numerically skewed in favour of promoters. 3/6 board members are either promoters/ their confidantes. Promoters granted extension to themselves. 12/14
There is no revised plan for payment as yet. Liberal timelines have been granted to put out one. The word "endeavour" has been used to extract a payment promise of Rs. 1,000 crore by Dec 31, thereby enabling a pre-approved, future breach. R.I.P. corporate governance. 13/14
Question 5: Why should equity investors bear the burden of promoter leverage? The consol debt on SWSL' s book is Rs. 2,260 crore. Had promoters paid their dues on time, the company would have been debt free and stock price would have charted new highs. 14/14
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