Chola DBS to dip into reserves
NBFC To Use Part Of Its Premium Kitty To Offset Losses Sugata Ghosh MUMBAI CHOPPY times call for unusual bookkeeping. In a sharp accounting practice seldom pursued by financial services providers, Cholamandalam DBS Finance — one of the country's biggest non -banking finance companies — is dipping into its security premium reserves to offset losses. Normally, finance firms treat loan losses as part of normal business transactions which boil down to lower profits. But Chola's decision, aimed at averting a big blow, is being justified on the ground that these are unusual losses suffered in an abnormal year marked by a serious downturn. Chola will need court approval, as well as its shareholders', to rejig the book. If the proposal goes through, the company's capital and reserves would shrink to counter the impact of Chola's irrecoverable personal loans and investments, the values of which have crashed. "It's keeping in view that the situation will not correct immediately, and it will not be possible to recover these assets. This is a one-time, unprecedented loss....We would like to maintain our profitability track record," P Sujatha, company secretary of Chola DBS, told ET. The company wants to use a part or the entire Rs 323.5 crore balance lying in its security premium account to create provisions for standard assets, bad loans, investments and losses suffered by Cholamandalam Distribution Services, a group subsidiary. * Chola waiting for shareholders' nod * IF THE court upholds the unconventional move, it would underscore the turbulent times and prompt other lenders to follow suit, amid mounting delinquencies. Accountants, however, differ on the use of share premium reserves for this purpose. They feel use of premium reserves is restricted to specified purposes like preliminary expenses, redemption of preference capital, bonus offering and expenses on issuance of securities. According to the Chola DBS official, the law and past court rulings provide for the use of premium reserves for "unrepresented assets" (or, receivables which cannot be salvaged). The company is in the process of seeking shareholders' approval on the proposal, which has to be passed through a special resolution. Chola DBS is also proposing a Rs 300-crore capital infusion by way of preferential allotment of securities to DBS and the Murugappa group, the original promoters of Chola. A leading Murugappa group company (and not the promoter family) will invest Rs 150 crore, while DBS will invest the balance Rs 150 crore. On an asset book of roughly Rs 7,000 crore, Chola DBS has a personal loan portfolio of Rs 3,000 crore, vehicle finance loans of Rs 3,000 crore, loans against shares of Rs 700 crore and the balance consists of other assets. Its net worth is around Rs 650 crore. Chola DBS had to fight a liquidity crunch in the third quarter of this fiscal. MFs , which have been the regular financiers to NBFCs, had refused to invest any more money and roll over old debentures they had bought. With banks also reluctant to extend credit lines, finance firms were pushed to the wall. In case of Chola DBS, MFs had funded almost half of the company's assets. [email protected] --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
