The Industrial Finance Corporation of India (IFCI), founded in 1948 and with headquarters in New Delhi, was the first development financial institution in India. In 2004, the company saw a decline in its profits, bringing the company to a collapse. With the problems it is facing, its board of directors and the Indian government planned on restructuring the firm to bring it back to its feet.
Shailendra Kumar Rai and C.P. Gupta
Harvard Business Review (HK1041-PDF-ENG)
June 30, 2014
Case questions answered:
- Examine and analyze the various options of financial and organizational restructuring
- How has IFCI been restructured?
- How did IFCI achieve the status of zero NPA?
- What are the basic differences between restructuring a non-financial company and a financial institution?
- How is the IFCI restructuring different from restructuring a non-financial, non-governmental company?
- Examine the impact of restructuring on IFCI’s financial statements.
- What could have been alternative restructuring options for IFCI and why?
- What have been the turnaround strategies for IFCI?
- Based upon the facts of the case what should be the best turnaround strategy for IFCI?
- Given your answer to 9 how would you as a CEO lead IFCI to success?
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IFCI: Turning Around an Ailing Financial Institution Case Answers
This case solution includes an Excel file with calculations.
1.) Examine and analyze the various options of financial and organizational restructuring?
The restructuring process has the goal of avoiding the liquidation of the IFCI because of its high level of NPA and a negative net worth that would force IFCI to close down its operations.
It would cause an enormous uproar in the Indian financial system and a real choc. The Indian government does not want to bail out, but a liquidation of a public institution in India, such as IFCI, is difficult:
- Wrong signal to the market and cascading effects on other institutions
- The process would take years with considerable costs to all parties (shareholders, lenders, creditors)
- The government would need to rehabilitate IFCI’s employees
- Political compulsions prevented the government any radical decisions were ruled out
Merger with Punjab National Bank (PNB)
It would be subject to a lot of due diligence but lots of synergies. It would broaden PNB’s presence in new segments of the market, especially the financial markets and project finance & debt finance. It would then be the opportunity to operate in the project finance field, IFCI’s expertise lay and become a universal bank, at the same time of increasing the fee income for the bank.
However, IFCI is not robust and viable on some financial and organizational levels: the level of 13,1% of NPA is above the minimum required, P/E, P/B, and market cap/sales were bad for the merger and go not in the right way to consider this merger at the end.
Merger with IDBI
Employees of IFCI were strongly in favor of it with multiple synergies in business areas, commonalities of the loan portfolio, similar work culture, salaries, and compensation structures and service conditions.
Moreover, both companies had the government as the major shareholder. But IDBI suffers from the low rates and cheap finance from its bond and equity business.
The bank has its own issues with the increase in NPA (13,8% of the total assets) raised a huge concern. IDBI is not ready for this merger as its own future is uncertain.
A strategic partnership was advertised for inviting bids for the sale of a 26% stake for a global or local investor. Investors would make bids, then be shortlisted and asked for complete due diligence and a new price. More than ten bidders, all of them opted out, among:
Consortium Sterlite/MS: fell apart due to differences of opinion over IFCI’s management: offer of $2,68 per share with only three seats on the board: unacceptable for the bidders
Private Equity Fund New bridge Capital: opt-out with the changed circumstances: Did not manage to find one
This will be explained in the next question.
- Following McKinsey & Co’s recommendation from 2004 to 2006.
- It is made by implementing a turnaround plan to conserve cash, reduce expenses, stabilize cash flow (to be consistent with the debt capacity), and maximize the cash recovery of the different clients.
- It takes into account: cost, ease, speed of implementation, effect on image, risk, and control, and be suitable to the environment in which IFCI was operating.
2.) How has IFCI been restructured?
IFCI has been restructured…
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