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Debt Row Companies

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One of the most basic indicators of how well a corporation is doing is its ability to service the debt that it has taken on its books. During periods of low interest rates, debt capital is often favoured by a company's financial officers. However, while raising any debt, it is implicit that the company expects its operations to make enough cash to service the debt.

If companies in large numbers find it difficult to service their debt, it is an ominous indicator of the overall state of the economy. And that is what seems to be happening in India today. Over 390 companies have approached the corporate debt restructuring cell in Industrial Development Bank of India, the nodal agency for company debt restructuring, until June this year, seeking to restructure debt worth Rs 2 lakh crore. In simple terms, these companies want the terms of the loans they had taken earlier to be made easier, in order to keep their heads above water. What is worse is that some of these companies are household names, promoted by big corporate groups.

How did they land in this mess? Will this inability to service their debt under the original conditions lead to a wider financial crisis? Is there any particular industry which is finding it more difficult to pay back debt? These are some of the questions deputy editor Srikanth Srinivas looks at in our cover story this issue.

Talking of companies and cash, one company that has the reverse problem — too much money being thrown up by its core operations — is Reliance Industries (RIL). Its business is generating so much cash that the management has to constantly work on ways to deploy all that money productively. A few years ago, RIL identified the organised retail industry as a good sector to invest in. Thus was born Reliance Retail. 

One thing that set Reliance Retail apart from its peers — besides the usual mammoth-scale ambitions — was its focus on the fruits and vegetables segment. The last couple of years has been bad for the retail sector as a whole. Reliance Retail too is yet to make any profits. But that is not deterring RIL from investing heavily in its retail venture. And, in the process, it is revolutionising the farm-to-fork chain in the country. Read senior editor Nevin John's report on the initiative on page 42.

(This story was published in Businessworld Issue Dated 23-07-2012)