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For sick companies in India, Board for Industrial and Financial Reconstruction (BIFR) is the final pit stop after these tap corporate debt restructuring (CDR) cell and fail to have it as an adequate remedy to ill-health. So, when one looks at dismal balance sheets of western economies (national debt to GDP or fiscal deficit to GDP ratios as per economists), with some exceptions, are these not like sick economies and ideal cases for a BIFR package? Or what I may call Board for Economies Financial Reconstruction (BEFR).

Time is ripe for BEFR to come up as CDR-equivalent measures of quantitative easing and additional credit lines have done negligible repair to troubled US and European economies. Going by debt to GDP or cumulative fiscal deficit to GDP or quantum of currency printed, the first indicator of an Indian BIFR company, i.e. erosion of 50% of net-worth, seems to have triggered already.

Having broached BEFR(ness), let us see the features of a BEFR package and how these can be paraphrased and applied to ailing economies. Most importantly, in the exact sequence.

 Repair P&L, increase income and cut expenses: To tap each source of revenue and raise tax on income of rich and corporates is easy. However, to raise indirect tax is tough, given the voting populace. To cut spends on bureaucracy, defense, populist public programs and to rationalize medical, nutrition and social security subsidies needs strong political resolve.

 Release unproductive/blocked capital: Strategic or financial sale serves best to monetize huge ownership in state-owned enterprises. This is, however, dithered under the garb of not selling family jewels during distress. The resentment expressed is factually to milk state-owned enterprises and to gain political benefits. Intriguingly, the same logic is not applied to bail-outs. QE1/ TARP for banks is a shining example.

 Write-off eroded equity: Reversing past excesses, courtesy monetary policies and artificial liquidity, bubbles in speculative markets inflating asset prices way above intrinsic value is a complex issue with spiraling implications across the globe.

 Infuse equity to recapitalize: Get long-term foreign direct investment. While it sounds absurd that West should seek foreign strategic capital in industries, manufacturing and infrastructure, it could help create jobs as against protectionism and save states from spending from public balance sheet. The credit lines from China/ Middle-East and other BRIC markets are no substitute for permanent foreign capital.

 Induct fresh and capable owners: This is an improbable solution for economies. Unlike companies, ruling parties get a four to five-year interminable contract and sadly, history shows new wners/management is as uninspiring as is the ousted owners’. No personal skin in the game.

 Recast borrowing terms, tenure & conversion: Recasting tenure and terms is likely to meet with limited success. Innovating a solution to convert borrowings into equity is required in the context of economies.

 Sacrifice by lenders, the last resort: While one prays one doesn’t have to in his/her lifetime, the globe is far from being safe on this account. A review in three to four years is merited.

So, who do you think should take a lead in forming a Board for Economies Financial Reconstruction or BEFR? Well, India has the experience in BIFR but China has the wallet; all in a lighter vein!

The views expressed here are personal.

BHARAT BANKA is the Founding CEO of a leading private equity firm.

©Entrepreneur October 2011

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BIFR, business, capital, companies, economy, FDI