MBA Core, NMIMS Debt Restructuring of

Submitted to Prof. Anupam Rastogi

Submitted by: Shubhangi Saraf – C049 Saurabh Dhole – D023 Swati Muchchal – D038 Vamsi Krishna Reddy – E062

ACKNOWLEDGEMENT

We would like to express our profound gratitude to Professor Anupam Rastogi for his exemplary guidance, the monitoring and constant encouragement throughout. The opportunity given to us to do ‘Debt Restructuring of Deccan Chronicle’ to us was very fulfilling and we have learnt a lot through the course of the assignment.

We would also like to thank him for helping us find the resources necessary to complete the assignment.

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EXECUTIVE SUMMARY

Deccan Chronicle Holding Ltd. is an Indian company with the core business of publishing newspapers with a huge market share in South India. In the past five to six years it had diversified and invested into a lot of areas related and unrelated with its core business. The company had been doing very well till almost the end of 2010 and even in some months of 2011. It had acquired a team called Deccan Chargers in the bididng of IPL and the company was totally new to this area.

The problems however began to come due to multiple reasons like slowdown of ad expense, unable to meet its debt obligations, new business having longer gestation periods etc. Though the company wanted to put in plea for Corporate Debt Restructuring, it wasn’t able to do so due to failure to meet all requirements of the CDR cell. BCCI also cancelled the license of Deccan Chronicle and has sold the team to Sun TV.

Now the company is awaiting the results of Forensic Audit that is being conducted on its books by Canara Bank and Banks could enter into bilateral restructuring deal with the company at a later stage

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CONTENTS

S.No Topic Page No.

1 About the company 4 -5 2 History 6 3 Indian Newspaper Industry 6-7 4 Financials 8 5 Strengths 9-10 6 Timeline 11 7 Losing its Credit Rating 12 8 Questions over CARE’s ratings 12-13 9 Importance of Credit rating 14 10 Winding up Petition by IFCI 15 11 IPL Team 15-16 12 Interview excerpt with the Chairman 17 13 The CDR mechanism 18-24 14 CDR failure 25-26 15 Fraud Case 26-27 16 Present Status 28

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ABOUT THE COMPANY

Deccan Chronicle Holdings Ltd. (Deccan Chronicle) is one of the leading newspapers companies in the state of in India. The company is engaged in the printing and publishing of newspapers and periodicals. It publishes English daily newspaper in Andhra Pradesh, Tamil Nadu and Karnataka. It also publishes daily, weekly and monthly editions of Andhra Bhoomi, a publication in the Telugu regional language.

Deccan Chronicle Holding limited is the publisher of largest circulated English newspaper in South India – Deccan Chronice’ with a circulation of over 1.45 million copies per day across Andhra Pradesh, Tamil nadu, Karnatak and Kerala with Eleven editions from , Vijaywada, , Vishakapatnam, Anantpura, , , Chennai, Coimbatore, Bengaluru and Kochi.

DCHL also publishes ‘Asian Age’ an ERnglish daily newspaper in Mumbai, Delhi, Kolkata and London; Finacial English daily ‘’ out of metro cities of delhi, Mumbai, Hyderabad, Banagluru and Chennai: Telegu Daily, weekly, monthly ‘ Andhra Bhoomi’ in Andhra Pradesh.

Deccan Chronicle is an -language daily newspaper. It is published in Hyderabad, India by Deccan Chronicle Holdings Limited. The newspaper's name derives from the originating place, the Deccan regions of India. Supplements are "TV Guide", "Sunday Chronicle", "Hyderabad Chronicle", "Chennai Chronicle", and "Bengaluru Chronicle". It also supplies other weekly features like "School Chronicle" and "Teen Chronicle". The newspaper has a total readership of over 10.88 lakhs.

The Asian Age is an Indian daily newspaper with editions in five major cities, of whom four are located in India and one which is located in England. The newspaper was launched in February 1994, simultaneously in Delhi, Mumbai and London. At present, it has editions in Delhi, Mumbai, Kolkata, Bangalore and London. brings out supplements and special sections on movies, etc. The newspaper is especially popular for its international coverage (far more extensive than in other Indian dailies). Previously, its weekend supplement carried articles and stories of interest from The New York Times and International Herald Tribune.

Andhra Bhoomi is a Telugu daily newspaper. It covers the whole of Andhra Pradesh with editions from Hyderabad, , , Rajahmundry, Anantapur, Karimnagar, Nellore, etc. It also comes with a monthly magazine named Andhra Bhoomi Sachitra Vaara Patrika. With a circulation of 3,65,794, it covers whole of Andhra Pradesh and some parts of South India with Bangalore (mainly)

Financial Chronicle (FC) is an Indian English-language daily newspaper published since 2008. The newspaper primarily covers Indian economic and international business topics, and financial news and issues. Financial Chronicle completed its launch objective of five-city simultaneous publication within the first year itself. Financial Chronicle has had the shortest run-up to a newspaper launch in the history of Indian print journalism. It also has the record of reaching the maximum number of publication centres in the shortest span of time. Financial Chronicle boasts India's youngest team of media professionals.

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DCHL also operates the following divisions which were operated through wholly owned subsidiaries and since merged with the company with ffect from 1st April 2010.

Deccan Chargers known in short as DC was a cricket franchise based in the city of Hyderabad in the Indian Premier League. The team was one of the eight founding members of the IPL in 2008. The media group acquired the franchise for an amount of USD 107 million on 24 January 2008.

Franchise termination

Due to financial problems Deccan Chronicle Holdings Ltd, the team owner of Deccan Chargers announced an sale of their team by auction. The sale, announced in a newspaper advertisement on Thursday, will be through a bidding process that will be completed on 13 September, with the winning bid announced on the same day. However the auction for the franchise on 13 September 2012 has ended with no results as the team's owners rejecting the sole bid they received from PVP Ventures.It was reported that Deccan Chargers owner rejected the bid by PVP ventures as DCHL's bankers were not happy with PVP's plan to divide the bid amount in two parts over the next ten years.[8] Later on 14 September 2012, the BCCI announced that the Decaan Chargers IPL franchise was terminated due to various violations of BCCI codes by DCHL. and the tender will be called for new team. DCHL moved to court to sort their issues with BCCI on termination.

Odyssey aims to fulfill the aspirational needs of consumer, positioned as neighborhood leisure store offering consumer lifestyle products that includes books, music, stationery, gifts, toys, pens, eye ware etc., having over 50 stores spread across the States of Tamil Nadu, Andhra Pradesh, Karnataka, Maharashtra, National Capital Region.

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HISTORY

The company started its operations in AP as a partnership concern in 1938. The late T Chandrashekar Reddy took over the operations in 1976 after the earlier promoters declared bankruptcy. Mr Reddy subsequently handed over the operations to his two sons T Venkattram Reddy and T Vinayak Ravi Reddy who have been managing its operations since late 1970s.

1976: T 1938: started in AP as 1994 : Asian Age Chandrashekhar took partnership concern launched over operations

2008 : Deccan Chargers 2004: Financial 2005: Odyssey acquired launched as subsidiary Chronicle launched as subsidiary

2010: Both the subsidiaries bought 2012 : Troubles began undet Deccan Chronicle Holdings Ltd.

INDIA NEWSPAPER INDUSTRY

 The important observation in the printing ink industry is that though the volume & value are increasing by 10-15 %, the average price over the years does not seem to be increasing.  This indicates that the growth potential is coming from the C & B print quality segments of the market.  The average price per kg of inks in India is significantly lower than that of developed markets.  This confirms that the consumption of printing inks in India is influenced by the C & B print segments. India, in the next 5 years is on the path of upgrading its benchmark of quality because of the digital technology revolution in pre-press, press and post-press.  This would ensure keeping in tune to consumer’s preference for quality for an ultimate handshake of the printed product locally - globally.  This could lead to a value growth in the range of 20 -25% against the volume growth of 12 -15%.

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 This decision to support quality up gradation needs to be taken at the level of print buyers & consumers, as the pressure on printing ink manufacturers is very high to reduce prices at the cost of quality.  In other words, while we have prospered in the growth segment; we still need to upgrade ourselves from C to B and B to A quality segment.  The price & value growth would be high, the consumption level in volume terms could also be high.  Owing to, better yield & lower wastage; leading to global benchmarking of quality – environmentally safe and efficient manufacturing standards, etc……  The quality expectations of the printers keep on increasing, leading to higher average prices & better contributions to profit. Thereby, assuring good investment in research ‘n’ development.Out of world’s 100 largest newspapers India holds 17 newspapers  Rise in population & literacy would ensure the continued growth of the newspaper industry  Huge scope for growth - with 258 million literate adults in India, who don’t read any publication  With increased number of publications; readers are exercising choices; leading to increased habit of reading 2 newspapers among current readers.

Indian Printing Industry

 Despite stiff competition globally and locally, growth of Printing Industry is sure owing to;  Increase in disposable income  Desire to better the standard of living  Availability of International brands  Access to ever increasing number of brands across all categories  Forcing Companies to increase Media Ad spend (across different channelsout door media, On air, Publications, etc…) to capture consumers’ eyeballs,arrest their attention; hoping for mind space leading to brand recalltranslating into purchase.

Pressures on Print

 Battling for a place in the media mix, like;  Electronic media  Rush and time pressure  Natural “preference for print” eroding – TV viewing time, Internet, etc..  Combine traditional advantages with new flexibility, speed, quality.

Technology driving major trends

 Faster turnaround  Shorter runs  No more “buy and store”  And of course...less cost!  Low inventory levels

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FINANCIALS

Shareholding Pattern

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STRENGTHS

Consistent leadership in the Andhra Pradesh print market, steady position in Chennai (fighting competition from Times of India-TOI) and entry into Bangalore (third largest print advertising market) in May 2008 have helped DCHL strengthen its foothold in the Southern markets. We believe that enhanced presence places DCHL in a significantly better position in terms of offering bundled advertising for any media planner looking for a pan-South India platform. According to ABC JJ 2009, DCHL registered a total daily circulation of 1.35mn, an increase of1.2% over JD 2008 and 25.9% over JJ 2008 (due to launch of the Bangalore edition). While the publication continues to strengthen its position in its core market of AP while holding on in Chennai Bangalore has ramped up to an impressive daily circulation of 245,000 copies.

Andhra Pradesh - Deccan's cash cow

Andhra Pradesh (AP) is DCHL's home market and remains the backbone of its operations generating strong Revenues and Cash flows. Deccan Chronicle is a market leader in AP accounting for almost 60% of the readership. Rich history dating back almost 70 years, larger set of offerings (with highly localised content) and higher pagination have helped DCHL maintain its stronghold in the region.

Chennai - Holding on

DCHL expanded its operations in Tamil Nadu with the launch of its flagship daily in Chennai in March 2005. Deccan Chronicle currently enjoys No.2 position in the Chennai market with a daily circulation of 302,522 copies (ABC JJ 2009) and a readership base of 282,000 readers (IRS 2009 R1). However, following entry of TOI last year, competition has intensified denting Deccan Chronicle's readership in Chennai, which is exhibiting signs of weakness.

Bangalore - So far, so good

Post expansion into Chennai, Deccan Chronicle was launched in Bangalore in May 2008 with an initial run of 100,000 copies. Currently, Deccan Chronicle has ramped up its daily circulation to 245,000 copies (ABC JJ 2009), which compares well to leader TOI, which has a circulation of over 400,000 copies. Over the past one year, Bangalore has emerged as an interesting market for the print dailies. Post Deccan's entry in Bangalore, DNA also launched its Bangalore daily edition in December 2008 further fragmenting the market. Not to be left behind, existing players also got into action, with revamping its newspaper and taking recourse to outdoor advertising. The impact of new players is clearly visible in recent readership trends, which reflect a drop for both TOI and Deccan Herald, the latter clearly impacted more than the others. Readership statistics of DNA and Deccan Chronicle's Bangalore editions have not been reported in the IRS, however both have registered an increase in circulation (DNA has an estimated circulation of 175,000 copies).

While Deccan's circulation ramp up in Bangalore in a short time span has been impressive, we remain cautiously optimistic on DCHL's Bangalore venture (especially post the DNA launch) and await

10 | P a g e readership figures on the same. Nonetheless, it is estimated the Bangalore edition to remain a key incremental Revenue growth driver for DCHL in the ensuing years. In terms of Profitability, it is expected the edition to incur significant marketing expenses in the initial period and achieve breakeven only towards late when the Advertising Revenues grow to a level that they can absorb the fixed costs.

Odyssey India - Focus on Revenue generation

Odyssey India, acquired by DCHL in September 2005, is a leisure retail store chain selling books, music, stationary, multimedia and magazines. Starting with a 3,500 sq ft store in ADyar, the southern suburb of Chennai, in 1995, Odyssey now occupies 260,409 sq ft of retail space spread over 46 stores and 14 cities. The chain receives about five million walk-ins every year. Recently, DCHL also forayed into the stylish eyewear retail format by opening exclusive designer eyewear stores. Odyssey incurred significant capex in FY2009 (added 21 stores) and plans to slow down in the near future. Management expects to increase its retail space to 0.5mn sq ft over the next three years to achieve Net Profit Margins of 10% post the scale up.

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TIMELINE

Deccan’s Crisis started on July 4, with downgrade of its short-term debt to Default by CARE. Following is the sequence of events that took place since then:

•CARE downgrades Deccan Chronicle short-term debt to "D" (default) •After it defaulted on a set of NCDs due on Jun 29 or so. July 4 •Stock @ Rs. 32.

•CEO Resigns. Stock @ Rs. 18. •Defaulted on more debt payments July 29 •Salaries to the Deccan Chargers team have not been paid.

•DCHL promoters may have double-pledged their shares to cover very large loans •Karvy Broking Ltd. filed a criminal complaint against the promoters Aug 2

•Company applied for CDR •Canara Bank, the first lien holder of some assets is conducting a forensic audit which might reveal irregularities in fund use and any multiple liens on the same assets. Sep 12 •The CDR proposal moved to Sep 26, when the lenders will decide.

•DCHL rejects the Deccan Chargers bid by PVP capital of Rs. 900 cr. Only bid for the tender. •DCHL's lenders demanded a bank guarantee for Rs. 450 cr. which was not forthcoming from the Sep 13 buyer

•BCCI Cancels the Deccan Chargers contract. DCHL has no team left to sell. •DCHL files petition against BCCI in HC Sep 14 •HC asks DCHL to give bank guarantee of Rs. 100 cr or else BCCI’s decision will hold.

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LOSING ITS CREDIT RATING

 Non Convertible Debentures  DCHL had some debt becoming coming due on 29th June, which might be the  Bonds in default (these were 5 year 8% bonds, interest paid monthly)  Two commercial paper issues were due on the 10th and 15th of July  CARE downgraded Deccan Chronicle debt to "D" (default)  Pramerica

Deccan Chronicle Holdings Limited raised close to Rs 500 crore from institutional investors - including insurance funds, term lenders and mutual funds - a year ago. It managed to retire debt of about Rs 300 crore, but fell short on repayment to some institutional investors, including Pramerica– Deccan Chronicle Holdings accounted for 1.3 percent of Pramerica's liquid fund, 3.3 percent of its ultra short- term bond funds, 6.2 percent of credit opportunities fund, 4.8 percent of dynamic monthly income fund and over 5 percent of Pramerica Dynamic Fund on 31 May 2012(Value Research)

With respect to these two cases, representatives from CARE said “"The revision in rating is due to default by the company on short-term non-convertible debentures (NCD). As per submissions, the company had a cash/FD balance of Rs 372 crore as on December 31 and gross cash accruals amounting to Rs 20 crore. Despite the liquidity, the company has defaulted on its debt obligations. The company has not offered any explanation regarding the same"

QUESTION MARK OVER CARE’S RATING

CARE had been rating DCHL for 8 years. As DCHL raised large sums of money - lenders claim the company borrowed in excess of Rs 4,300 crore in the 15 months ending June 2012 - CARE assigned the highest ratings to most financial instruments of the company. CARE awarded AA and A1+ ratings to various instruments of DCHL. An AA rating (for long- and medium-term instruments) signifies “high degree of safety” regarding “timely servicing of financial obligations ”according to the agency’s website. An A1+ rating is the highest for short-term debt instruments and “carry the lowest credit risk”. On July 2, it revised the company’s long-term bank facilities from AA to B and put it under `credit watch’, and short-term bank facilities from A1+ to A4, putting that under `credit watch’ as well. The short-term instruments amounting to Rs 200 crore outstanding were revised from A1+ to D. “This was one of the rarest cases where short-term highest rating was downgraded to D (default grade) within couple of weeks of re-affirmation,” While Deccan’s misfortunes have been blamed on rampant and indiscriminate expansion and diversification, some analysts say the huge exposure banks have to the company may have something todo with the high rating it enjoyed. Even in its November 2011 review, CARE noted that the rating was constrained by higher collection days leading to stretched working-capital cycle, loss- making divisions (viz IPL franchisee and retail business)leading to a decline in profitability margins and inherent industry risk. But it kept the ratings intact. In the 15 months between April 1, 2011 and June 30, 2012, the company went on a borrowing spree, raising funds from various banks and financial

13 | P a g e institutions under many heads such as working capital requirement, term loan, short-term non- convertible debentures and even as credit facilities. While the banks are stuck with their exposure to the firm - funds raised by DCHL with the rating assigned by CARE -the agency remained clueless.

Response by CARE

Our ratings to DCHL were based on the balance sheet of March 2011 as well as the sound market position of the company

We have also been looking at the quarterly numbers of DCHL and the published debt numbers time to time. For all four quarters of FY12 the company reported profits

DCHL also confirmed cash balance/fixed deposits of Rs.372.34 crore as on December 31, 2011 andRs.356.97 crore as on March 31, 2012

While the gross cash accruals had reduced during FY12the financial and cash position of DCHL continued to remain strong

No adverse feedback was received from any institutional investors/bankers

CARE also asked for more information from the company and reasons for sudden drop in its liquidity position. However, the company stopped communicating with CARE at that point in time and hasn’t replied to any of the queries raised by CARE. The FY12annual accounts were also not available.

In these circumstances CARE had no choice but to suspend the ratings assigned to DCHL as it was not in a position to monitor the ratings and give meaningful information to the investors. Today, looking at the reported debt levels, about Rs.70 crore interest cost for whole of FY12 seems surprising. In hindsight, the company might have been hiding some numbers and probably this would have influenced the ratings.

Rating agencies admit that there is some bit of rating shopping—the practice of companies approaching agencies and accepting the highest rating. Under current norms, a rating agency can publish the rating it awards to a company only if the company accepts the rating.

The rating agencies also believe the fault lies elsewhere—and especially with auditors. They claim that the poor quality of audited numbers often misleads them from arriving at accurate ratings.“The disclosure standards of companies certainly play a role. If an accurate picture of accounts is not presented, opinion of rating agencies can be misled,” Takkar said.“We do not accept all the audited figures at face value. We do make adjustments to the extent it is practical. If the underlying accounts do not reflect true and fair picture, then there rating opinion could be impacted,” he added.

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IMPORTANCE OF CREDIT RATING

The guidance of rating agencies is a critical input for the Indian banking system, which is already reeling under mounting bad loans. The total amount of loans restructured by Indian banks under the corporate debt restructuring (CDR) mechanism crossed a staggering Rs.1.68 trillion, on a cumulative basis, on 30 June, registering an addition ofRs.17,957 crore in the three months since April. Bad loans of Indian banks rose 51.6% in the 12 months ended June to Rs.1.5 trillion, up from Rs.98,245 crore last year.

In the past, there have been instances where raters differed over the ratings of instruments and companies, sending confusing signals to investors. For instance, in July 2011, credit rating agencies differed over the ratings of perpetual bonds, a relatively new instrument for Indian companies although banks have been using these instruments to raise funds for at least the past three years.

The differences stemmed from the option that allows an issuer to defer payments or even stop making payments on perpetual bonds, depending on the nature of the security, without being declared a defaulter. Crisil Ltd had assigned top investment grade of AA/positive to Tata Power Co. Ltd’s Rs.1,500 crore perpetual debentures issued that promised an 11.4% return with a step-up provision if not redeemed after 10 years. Another rating agency, India Ratings and Research (formerly known as Fitch Rating India Pvt. Ltd) sounded a warning on corporate perpetual bonds, without naming the Tata group company. “They are...inherently riskier than other debt obligations, and should, therefore, be treated with considerable caution by investors,” it said.

Reasons

1. Competitors

2. Rating shopping

Rating agencies admit that there is some bit of rating shopping—the practice of companies approaching agencies and accepting the highest rating. Under current norms, a rating agency can publish the rating it awards to a company only if the company accepts the rating

AGENCIES’ RESPONSE

The rating agencies believe the fault lies elsewhere—and especially with auditors. They claim that the poor quality of audited numbers often misleads them from arriving at accurate ratings.

“The disclosure standards of companies certainly play a role. If an accurate picture of accounts is not presented, opinion of rating agencies can be misled. We do not accept all the audited figures at face value. We do make adjustments to the extent it is practical. If the underlying accounts do not reflect true and fair picture, then there rating opinion could be impacted.

CEO, ICRA

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WINDING UP PETITION BY IFCI

On 27 July, IFCI had filed the winding up petition against DCHL in the AP High Court following a default by the media firm. IFCI had subscribed to Rs 25 crore of non-convertible debentures(NCDS) issued by DCHL last year that promised Rs 27.8 crore on redemption.

The lender submitted to the court that the media company failed to pay the amounts on the due date and the cheques issued by them were dishonoured by the banks. Accusing DCHL of owing thousands of crores of rupees to various lenders, IFCI feared that the entire networth of the media firm may erode shortly on account of huge liabilities, making it commercially unviable and insolvent.

DCHL submitted a compromise proposal to their lender IFCI, urging it to withdraw the winding up petition filed in Andhra Pradesh High Court.The DCHL promoters have proposed to clear the outstanding dues of around Rs 18 crore in four monthly installments starting from October

RESPONSE

"Of the total amounts of Rs 27.8 crore, we could recover only some Rs 10 crore so far through the legal proceedings and the balance is now being proposed by DCHL in four installments from October. We will withdraw the winding up petition only after receiving the last installment,"

-IFCI Executive

"Based on this compromise deal, IFCI has moved the Debt Recovery Tribunal at Delhi with a compromise petition to withdraw the case. As a result, the winding up petition at AP High Court and Company Law Board have now become in fructuous.“

- Counsel of DCHL B. Chandrasen Reddy

IPL TEAM

DCHL planned on selling the IPL team. But it was having difficulty finding a buyer as there was no clarity on the financial health of the team and its situation going ahead and no transparency for a buyer to arrive at a decision.

Deccan called for an auction in mid-September, but the team went unsold after the owners and lenders rejected the only bid of Rs 900 crore from PotluriVara Prasad, a Hyderabad-based filmmaker and financier, following differences over the terms of payment.

DCHL’s contract was terminated by BCCI on 14 September for failing to comply with a deadline to pay overdue player fees. BCCI made its decision after DCHL rejected the PVP bid. DHCL filed petition against this decision.

In response, the Bombay High Court on Monday asked DCHL to give an irrevocable and unconditional bank guarantee of Rs 100 crore to the BCCI on or before October 9, while observing that the cricket board has acted in haste to terminate IPL franchise Deccan Chargers.

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This order would immediately cease to be in effect if DCHL fails to furnish the bank guarantee. The court ruled that DCHL shall pay the undisputed outstanding dues of hotels, transportation etc as regards IPL-5 on or before October 31.

DCHL sold Deccan Chargers to KamlaLandmarc Real Estate, a little-known builder in Mumbai for an undisclosed amount on October 12. But it failed to furnish the bank guarantee by the deadline(October 13, 5 pm) and the Hyderabad franchise was terminated from the IPL.

Auction only bid of Rs 900 crore from Potluri owners and lenders rejected it differences over the terms of payment. Vara Prasad

Contract termination By BCCI on 14 September for failing to comply with a DHCL filed petition against this decision. deadline to pay overdue player fees.

Bombay HC Decision An irrevocable and unconditional bank guarantee of Rs 100 Pay the undisputed outstanding dues of hotels, transportation crore to the BCCI etc of players

Sold the team Kamla Landmarc Real Estate for an But failed to furnish the bank guarantee Hyderabad franchise was terminated undisclosed amount on October 12. by the deadline(October 13, 5 pm) from the IPL.

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INTERVIEW EXCERPT WITH CHAIRMAN TV REDDY(Aug 31 2012)

Why did you resort to overleveraging the balance sheet?

The steep increase in debt is because of the merger of our subsidiary companies, which had huge debt. We had extended unsecured loans to some of the subsidiaries. All these debts are now reflecting in Deccan Chronicle's balance sheet.

Then why did you merge the subsidiaries?

We were contemplating infusing funds into the company after the merger to reduce the debt significantly. It didn't happen. There was a funds mismatch and it misfired.

If funds were a problem, why did you spend 270 crore on buyback of shares?

We couldn't back off on it since we had already taken a decision, informed the regulators and made announcements. In hindsight, now it looks like the decision to go in for buyback was a big mistake.

Analysts blame unrelated diversification into the aviation business through Aviotech for your current financial problems.

Aviotech is only into advisory services and to take up defence offset business. The advisory services are mostly related to human resources. There were no major investments. We make money in this business and do not spend money on investments. The defence offset business is yet to take off.

Has diversification into retail business through Odyssey caused the problems?

Odyssey is one of the subsidiaries that got merged into Deccan Chronicle and that is why the losses and debts of Odyssey are reflected in Deccan Chronicle balance sheet.

Do you regret resorting to unrelated diversification into retail?

No. It is not unrelated. Books are broadly part of publishing business. But new forms of e-books and growing real estate costs have killed the retail industry in the country. That is the price we paid.

How much funds do you need immediately?

I need some 400-500 crore. Once I manage to arrange those funds, everything will subside

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THE CORPORATE DEBT RESTRUCTURING MECHANISM

The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.

Reference to CDR Mechanism may be triggered by

 Any or more of the creditors having minimum 20% share in either working capital or term finance, or  By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.

It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System. However, Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided he is granted an opportunity under CDR mechanism.

Structure of CDR System: The edifice of the CDR Mechanism in India stands on the strength of a three- tier structure

 CDR Standing Forum  CDR Empowered Group  CDR Cell

Legal Basis of CDR

The legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter- Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR Mechanism which is the critical element of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors.

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Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or at the time of original loan documentation (for future cases). The DCA has a legally binding ‘stand still’ agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to ‘stand still’ and commit themselves not to take recourse to any legal action during the period. ‘Stand Still’ is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. However, the ‘stand still’ is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action.

Besides, the borrower needs to undertake that during the ‘stand still’ period the documents will stand extended for the purpose of limitation and that he would not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the ‘stand still’ period.

Standing Forum

The CDR Standing Forum, the top tier of the CDR Mechanism in India, is a representative body of all Financial Institutions and Banks participating in CDR system. The Forum comprises Chief Executives of All-India Financial institutions and Scheduled Banks and excludes Regional Rural Banks, co-operative banks, and Non-Banking Finance Companies.

It is a self-empowered body which lays down policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring and ensures their smooth functioning and adherence to the prescribed time schedules for debt restructuring.

It provides an official platform for both creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interest of all concerned.

The Standing Forum monitors the progress of the CDR Mechanism. It can also review individual decisions of the CDR Empowered Group and CDR Cell. The Forum can also formulate guidelines for dispensing special treatment to cases which are complicated and are likely to be delayed beyond the time frame prescribed for processing. The Forum meets at least once every six months.

Core Group

The CDR Core Group is carved out of the CDR Standing Forum to assist the Forum in convening the meetings and taking decisions relating to policy, on behalf of the Forum. The Core Group consists of Chief Executives of IDBI, SBI, ICICI Bank, BOB, BOI, PNB, Indian Banks Association (IBA) and Deputy Chairman of IBA representing foreign banks in India.

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The Core Group lays down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring. The guidelines also suitably address operational difficulties experienced in the functioning of the CDR Empowered Group. The CDR Core Group also decides on the modalities for enforcement of the time frame. The Core Group also lays down guidelines to ensure that over-optimistic projections are not assumed while preparing/approving restructuring proposals especially with regard to capacity utilization, price of products, profit margin, demand, availability of raw materials, input-output ratio and likely impact of imports/international cost competitiveness.

Members of the Core Group

 Chairman & Managing Director , Industrial Development Bank of India  Chairman , State Bank of India  Managing Director & CEO , ICICI Bank Limited  Chairman & Managing Director , Punjab National Bank  Chairman & Managing Director , Bank of India  Chairman & Managing Director , Bank Of Baroda  Chairman , Indian Banks Association

CDR Empowered Group

The individual cases of corporate debt restructuring are decided by the CDR Empowered Group (EG), which is the second tier of the structure of CDR Mechanism in India. The EG in respect of individual cases comprises Executive Director (ED) level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd., State Bank of India as standing members, in addition to ED level representatives of financial institutions (FIs) and banks which have an exposure to the concerned company. The Boards of all institutions/banks authorize their Chief Executive Officers and/or Executive Directors to decide on the restructuring package in respect of cases referred to the CDR system, with the requisite requirements to meet the control needs.

While the Standing Members of EG facilitate the conduct of the Group’s meetings, voting is in proportion to the exposure and number of the concerned lenders only. In order to make the Empowered Group effective and broad-based and operate efficiently and smoothly, the participating institutions and banks approve a panel of senior officers to represent them in the CDR EG and ensure that they depute officials only from among the panel to attend the meetings of EG. The representative have general authorization by the Boards of the participating FIs/banks to take decisions on behalf of their organizations regarding restructuring of debts of individual corporates.

The EG considers the preliminary Flash Report of all cases of requests of restructuring, submitted to it by the CDR Cell. After the EG decides that restructuring of a company’s debts is prima facie feasible and the concerned enterprise is potentially viable in terms of the policies and guidelines evolved by Standing

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Forum, the detailed restructuring package is worked out by the referring institution in conjunction with the CDR Cell. However, if the referring institution/bank faces difficulties in working out the detailed restructuring package, the participating institutions/banks decide upon the alternate financial institution/bank which would work out the detailed restructuring package at the first meeting of the EG when the Flash Report comes up for discussion.

The EG is mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the company and approve the restructuring package within a specified time frame of 90 days, or at best within 180 days of reference to the EG. The EG decides on the acceptable viability benchmark levels on the following illustrative parameters, which are applied on a case-to-case basis, depending on the merits of each case:

 Debt Service Coverage Ratio  Break-even Point(Operating & Cash)  Return on Capital Employed  Internal Rate of Return  Cost of Capital  Loan Life Ratio  Extent of Sacrifice

The EG meets on two occasions to discuss (Flash and Final Report) in respect of each borrower account. This provides an opportunity to the participating members to seek proper authorization from their CEO/ED, in case of need, in respect of those cases where the critical parameters of restructuring are beyond the authority delegated to him/her.

Having regard to the varied features of the borrower-corporates and their promoters/sonsors, they are classified into four categories for the purpose of stipulation of conditions. Borrower Class – A comprises companies affected by external factors pertaining to economy and industry. Class –B borrowers are such corporates/promoters who, besides being affected by the external factors, also have weak resources, inadequate vision and do not have support of professional management. Class-C borrowers are overambitious who have diversified into related/unrelated fields with/without lenders’ permission and those classified in Class-D are financially undisciplined borrowers. The categorization of borrowers is decided by the EG after ensuring that all conditions being stipulated have been discussed with the borrower concerned by the referring institution.

The decisions of the EG are final. If restructuring of debt is found to be viable and feasible and approved by the EG, the company is put on the restructuring mode. If restructuring is not found viable, then the

22 | P a g e creditors are free to take necessary steps for immediate recovery of dues and/or liquidation or winding up of the company, collectively or individually.

Sanction and Implementation of Approved Packages

In order to enhance the efficacy of CDR Mechanism a realistic time schedule has been prescribed by the CDR Standing Forum. Once the final restructuring plan is approved and confirmed by the Empowered Group, CDR Cell issues a Letter of Approval (LOA) for the Restructuring package to all the concerned lenders. The individual lenders are required to sanction the restructuring package within 45 days from the date of issue of LOA and thereafter fully implement it in the next 45 days.

The status of sanction and implementation of restructuring packages is reviewed frequently at Empowered Group meeting. However, in order to place greater emphasis on implementation of the approved packages, Standing Committee of Core Group Member Banks constituted by the Core Group takes up close monitoring to ensure that the packages are implemented expeditiously.

CDR Cell

The CDR Cell, the third tier of the CDR Mechanism in India, is mandated to assist the CDR Standing Forum and the CDR Empowered Group (EG) in all their functions.

All references for corporate debt restructuring by lenders/borrowers are made to the CDR Cell. It is the responsibility of the lead institution/major stakeholder to the corporate to work out a preliminary restructuring plan in consultation with other stakeholders and submit to CDR Cell. The CDR Cell makes initial scrutiny of the proposals received from the lenders/borrowers, in terms of the general policies and guidelines approved by the CDR Standing Forum, by calling for details of the proposed restructuring plan and other information and place for consideration of the CDR EG within 30 days to decide whether restructuring is prima facie feasible. If found feasible, the referring institution/bank takes up the work of preparing the detailed restructuring plan with the help of other lenders, in conjunction with CDR Cell and, if necessary, experts engaged from outside. If not found prima facie feasible, the lenders may start action for recovery of their dues.

The EG can approve or suggest modifications to the restructuring plan, but ensure that a final decision is taken within a total period of 90 days. The period can be extended up to a maximum period of 180 days from the date of reference to the CDR Cell, if there are genuine reasons.

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Monitoring Mechanism

The success of CDR Mechanism depends essentially on close monitoring of each and every package approved by the CDR Empowered Group (EG). The monitoring mechanism comprises (i) Monitoring Institution (referring institution); (ii) Monitoring Committee; and (iii) external agencies of repute to complement monitoring efforts and also to carry out concurrent audit, special audit/valuation etc.

The Monitoring Institution is required to monitor all aspects of implementation of the package and furnish a consolidated report on the status of sanction and implementation of the approved package to CDR Cell every month, in the prescribed format.

The Monitoring Committee (MC) is company-specific and is constituted by the Empowered Group at the time of approval of a restructuring package. It comprises representatives of the referring bank/institution, one or two other CDR lenders having major exposure in the case, one lender with minor exposure and the CDR Cell. The promoters/representatives of the company besides representatives of the concurrent auditor, lenders’ engineer, if considered necessary, are invited for the meetings as special invitees. Whenever larger issues such as relating to sharing of charge, matters relating to working capital tie-up, permission for expansion/modernization, etc. are to be discussed then other lenders including consortium members are invited for the meetings. The concerned companies are required to refer all proposals for expansion, diversification, mergers/demergers, equity raising, one time settlements, partial pre-payment to CDR members/non-CDR lenders to the Monitoring Committee for due scrutiny and recommendation to Empowered Group for taking appropriate decision.

The MC is purely a recommendatory body and does not have powers for according approvals. The Monitoring Committee meetings are expected to be convened by the Monitoring bank/institution every month while the package is under implementation by the concerned lenders and thereafter at an interval of every two-three months to review the progress of implementation and also to discuss and resolve outstanding issues connected with the case. The implementation of the package means giving effect to the approved package by the lenders and compliance of the terms and conditions (stipulated in the package) by the borrower/promoter, to ensure that the package is in place in the true spirit of CDR Mechanism. The objective of the CDR is to keep the package working as envisaged and review the need for changes/ corrections required in deserving circumstances. In certain situations, the need for invoking various stipulations of security or events of default might arise which also is examined by MC and suitable recommendations are made to EG including withdrawal of the package, if necessary.

The Monitoring Committee provides the requisite feedback to the lenders regarding performance of the company vis-a vis CDR projections, various developments such as industry-level comparison, growth

24 | P a g e prospects, production/marketing constraints, disputes faced by the company, managerial efficiency, etc. The Monitoring Committee’s views/recommendations on various matters concerning the package/company are presented to the CDR Empowered Group by CDR Cell/Monitoring Institution for approval/information. The decisions of the CDR Empowered Group are communicated to the lenders and company/promoter by CDR Cell for action at their end.

The Monitoring Mechanism under CDR plays a dynamic and important role in review of the approved packages, resolution of various issues concerning lenders and borrowers and obtaining feedback on the performance of the company. The monitoring process has greatly contributed to ensuring success of the approved packages.

Current State of Corporate Debt Restructuring in India

Banks in India, in fiscal year 201, sought to restructure corporate loans worth about USD 12 Billion. This figure has gone up by 156% compared to last year, driven primarily by tougher economic conditions making it harder for borrower’s to fulfill their liabilities. This current levels of restructuring is the highest since the forum came into existence in the year 2001. The number of CDR cases has also seen a jump from 49 last year, to 84 this year.

Cases brought to the CDR last year included big-ticket loans to telecom tower services provider GTL Ltd , shipbuilder Bharati Shipyard , Construction Co and several sugar and steel mills.

Banks have filed close to eighteen new CDR cases worth USD 1.12 Billion in the month of April 2012 alone. The number of cases is record for the month but the value is not.

Non performing Loans have increased from 2.3% in the month of March last year to 2.9% by December 2011. It is expected that bad loan levels will rise to 3.2% by March 2013. It is also expected that loan restructuring in India will rise to USD 37.5 Billion, or 3.5% of total loans, by that time. A large part of these bad loans will be via the large corporate houses.

Lenders have begun getting a little weary of sectors such as those of power, commercial real estate, construction, aviation, textile and metals sectors, as these seem to be the hardest hit by the tough economic conditions and lack of proper policies in place.

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CDR – FAILURE

Bankers failed to reach an agreement on whether to admit Deccan Chronicle Holdings to the corporate debt restructuring (CDR) cell as several of the participants felt that the media group may not qualify for admission given the nature of the problem it faces, two people familiar with the discussions said. With more than 30 lenders, including non-banking finance companies Tata Capital and Religare Finvest, involved in the matter, an agreement on whether to recommend the case to the CDR cell remained elusive. Entry into the CDR cell will protect the company from lawsuits filed by individual lenders, said the bankers who did not want to be identified.

An induction into CDR would have helped the company reduce the interest rate on its loans and stretched the loan repayment period. But the CDR guidelines say that only companies in trouble because of reasons beyond the management's control could be admitted. Lenders such as IFCI and Karvy have accused the DCHL's management of inadequate corporate governance and even fraud.

"Borrowers indulging in frauds and malfeasance, and BIFR cases without their express approval are not eligible for restructuring," say the guidelines on loans restructuring. Further, the financial viability of the company is also in question, said an official of a state-run bank who did not want to be identified.

"No account should be taken up for restructuring by banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower," say the guidelines. "The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis."

While the private sector lenders were keen on admitting the Hyderabad-based company into the CDR cell,public sector banks, rattled by a spate of investigations in recent months and probes by the Central Vigilance Commission, were not for referring it to CDR for fear of attracting corruption charges. "Our apprehensions over the liabilities and solvency levels of DCHL are coming true now," said an executive at IFCI, which had already filed suits to recover its loans. "There is still no clarity on how many lenders are there and their exposures to the company. From Rs 3,270 crore in the last meeting of lenders, it has now come to Rs 5,000 crore."

Lenders such as ICICI Bank, Axis Bank and Canara Bank are burning the midnight oil to recover as much as possible from the company and reduce their potential bad loans for the quarter.

Canara Bank is conducting the forensic audit for DCHL. A top Canara Bank official said it would take at least one month to complete the work (on a forensic audit report).

According to the terms and conditions that govern the CDR process, consent of at least three- fourth of the lenders is required to draw a debt restructuring programme for a particular

26 | P a g e company. Total debt to be admitted by the CDR cell is about Rs 2,300 crore, while the banks’ total exposure to DCHL is Rs 5,000 crore.

Another public sector bank associated with CDR for the company said most lenders would convey their view only after studying the forensic report. “If the audit establishes the fraud in the company, then it won’t be considered for the CDR,” an official with the bank said.

Top lenders whose exposure to DCHL is considered by CDR cell are ICICI Bank, Axis Bank, Canara Bank, IDBI Bank and Andhra Bank.

FRAUD CASE

The issue came to light after the Hyderabad-based Karvy Stock Broking Ltd filed a complaint with the Central Crime Station in Hyderabad alleging that the promoters of the listed media entity tricked them during an exercise to pledge shares and raise funds.

According to a complaint filed by Uma Maheswara Reddy, an employee of Karvy, T Venkattram Reddy, chairman of Deccan Chronicle Holdings Ltd, T Vinayak Ravi Reddy, vice chairman, and P K Iyer, also vice-chairman, have been operating their depository accounts at Karvy for some time. Each has 24.61% stake in the company. The trio apparently entered into an agreement with Future Capital Holdings Ltd, Mumbai, for availing of a loan. US private equity giant Warburg Pincus controls Future Capital with a 54% stake bought in June for about Rs560 crore. As part of the loan agreement, the Deccan Chronicle promoters entered into a non-disposal undertaking power of attorney (NDU-POA) in favour of Future Capital, wherein they have undertaken not to dispose of the shares without the consent of the lender.

Karvy, as the depository maintaining their accounts, was requested to confirm the balance (of shares) available in their accounts and countersign the NDU-POA.

The promoters held 6.04 crore shares on the day Karvy confirmed to Future. However, in May this year, Future approached Karvy again wanting to know if the promoters had brought more shares as additional security (top up) for any fall in the margin due to a decline in the price of shares.

Karvy said there was not enough balance in their accounts and forwarded the enquiry from Future to the Deccan Chronicle promoters. Later that day (June 1, 2012), the promoters informed Karvy that the arrangement with Future is being terminated and a letter dated June 1, 2012, from the account holders was received stating that the NDU-POA agreement made by them with Future has been terminated by settling all financial and other terms and the shares are now free from encumbrance.

It was also stated in the letter that the confirmation letter to this effect would also be sent by Future on the same day or latest by June 4, the complaint said.

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However, Karvy said, the Deccan promoters also asked it to transfer a part of the shares held in their accounts to their respective accounts held with another depository participant, Religare Enterprises. The instruction was carried out by Karvy “considering the reputation of the Deccan promoters”, Karvy said. But it sought sought a letter from Future Capital confirming the termination of the deal with Deccan, “which didn’t arrive despite several reminders”.

According to Karvy, on July 2 and 3, the promoters of Deccan asked Karvy to pledge a part of the free shares in favour of IDFC Ltd and the same was executed under the belief that the shares were free from any encumbrance. The episode took an ugly turn after Future sent a fax message to Karvy confirming that it had provided Rs120 crore to Deccan and Rs50 crore to Aviotech Ltd, a group company, and that they had a Charge I Lien (first rights) on an aggregate of 11.2851 crore Deccan shares held in the accounts of the promoters. But the records available with Karvy showed that the accounts held only 6.04 crore shares.

Karvy claimed that the fax letter sent by Future was also acknowledged by P K Iyer as authorised signatory for DCHL and Aviotech.

Future also faxed a copy of a letter purported to have been issued by Karvy on May 28 which confirms that an additional quantity of 1.7467 crore shares of Deccan Chronicle have been topped up in each of the accounts, so the total quantity of shares in their depository accounts covered under the NDU-POA stands at 11.2851 crore.

Karvy now says it never issued any such letter, and claims it is a forgery. It says that a notice questioning the discrepancy was sent to the account holders on July 17, but elicited no response. “It is very clear that the depository account holders by using a forged letter, committed a fraud on us and misrepresented the facts that a higher number of shares existed in their accounts for availing of a loan against them thereby committed a breach of trust and forgery,” Karvy’s complaint goes. “Further by concealing the actual facts and intimating Karvy wrongly that the NDU-POA with Future is terminated, they have induced us to effect the transfer and pledge of shares held in their accounts which, as per Future, the NDU-POA continues to subsist,” the complaint said.

Based on the complaint, the police have registered a case under sections 406 (criminal breach of trust), 420 (cheating), 468 (forgery for purpose of cheating), 471 (using as genuine a forged document or electronic record) read with 34 of the Indian Penal Code. The case is currently being investigated. Sources said that the charges are severe in nature and the investigation would lead to certain major developments in the case. Meanwhile, sources said that the Future Capital, which has already advanced funds based on the pledge, was also considering the option of filing a complaint in the case.

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PRESENT STATUS

 Deccan Chronicle has exited CDR forum  Major lenders have withdrawn their support to the company’s entry into the corporate debt- restructuring cell  Banks like Axis bank, Canara Bank, ICICI Bank have classified DCHL as NPA  The company has been removed from the league by the BCCI for failure to meet obligations such as providing bank guarantees.  The efforts of the Deccan Chronicle management to sell the team did not materialise. The Hyderabad franchise was recently bagged by Sun TV  GE Capital makes moves to take away Deccan Chronicle Holdings Ltd print machines  Tata Capital Ltd one of the lenders, dragged DCHL to court earlier this month seeking to recover dues of Rs. 101 crore.  Shares of Deccan Chronicle Holdings Ltd plunged to its new low of Rs 5.24  Shares of DCHL have lost at least 72% since January, while India’s benchmark index, the Sensex, has risen 20.14% in the same period  Exchanges shift Deccan Chronicle to trade-for-trade segment  DCHL hasn’t published its balance sheet for the year ended March 2012 and has sought an extension till September.  Private banks have given big-ticket loans in the past six-nine months, largely on the strength of the March 2011 balance sheet of the company, despite lack of clarity in the company’s latest financial details and the end-use of funds  Canara Bank has said that banks were operating on the basis of a multiple-lending model, not a consortium model.  Options for DCHL are : o Converting Debt into Equity o Dilute its stake by Equity Issue o Promoter’s pumping in money to guarantee the bank about repayment o Sell Non-Core assets o Hive off the non-core businesses

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