SPIC sets off alarm bells

Suresh Krishnamurthy

SPIC has defaulted on its payment obligations to institutional investors, and the rating agency, CARE, has downgraded the rating of its fixed deposit programme to speculative grade.

Though SPIC can be considered a fallen angel in the stock market, it enjoys considerable patronage in the fixed deposit markets. At end-March 2000, its fixed deposit obligations were Rs 58 crore, indicating the investor interest in the company.

In fact, the franchise value has enabled SPIC to access fixed deposits at rates which were not quite in consonance with its various financial parameters. The major reason for this was that SPIC has been around for decades and investors, perhaps, perceive that whatever the circumstances, the promoters would not allow the company to default. Though this perception did not have a reasonable basis in terms of financial parameters, it persisted.

The default and the court wrangle involving MCC Finance, with which SPIC is associated, may have diluted the latter's franchise value, but did not alter the perception significantly. The latest developments, however, may have done some damage to this perception.

Investor patronage to SPIC indicates the undesirable characteristic of the fixed deposit market, where perceptions matter to a large extent. Not only SPIC, but several loss-making government companies and associate companies of prominent groups have enjoyed investor support. A company with a good brand image would be able to mobilise deposits at reasonable rates, irrespective of its financial position. If such a company floats a new one, even that would be able to raise funds at similar rates. This is notwithstanding the fact that this new entity is yet to establish itself in its business.

The latest development is critical. If SPIC manages to honour its obligations to the retail investors, this episode would soon be forgotten and brands would continue to enjoy a premium in the market for retail funds, regardless of their financial performance.