Lenders to SpiceJet have expressed concerns over the airline’s decision to hive off its cargo business into a wholly-owned subsidiary without consulting them.
At its AGM in December, the airline had proposed to its shareholders a special resolution to ‘transfer the cargo business as a wholly-owned subsidiary’. It had said it “plans to add more cargo aircraft to scale up SpiceXpress’ existing capacity and transform it into a fullscale freighter cargo service”. The shareholders had voted in favour of this resolution.
However, BusinessLine has now learned that its lenders have expressed concerns. SpiceJet has taken multiple loans from banks including IDFC First, Allahabad Bank, YES Bank, ICICI Bank, City Union Bank and Export Development Bank.
“The loan sanction letter has a special covenants clause, under which the permission of the lenders is mandatory before taking such decisions,” said a source.
Special covenant clause
The special covenant clause in the Registrar of Companies charge documents submitted for SpiceJet’s loans states: “The borrower shall not without prior written permission of the bank undertake or permit any merger, de-merger, consolidation, reorganisation dissolution or reconstitution scheme of agreement of compromise with its creditors or shareholders or effect any scheme of amalgamation or reconstitution including the creation of any subsidiary or permit any company to become its subsidiary.”
“The clause protects the banks,” noted JN Gupta, MD, Stakeholder Empowerment Services. “If the banks’ permission hasn’t been taken, a company cannot move ahead with a resolution of any kind. These are all independent conditions; even if the shareholders give their permission, the decision cannot be taken forward if the banks do not approve it.”
SpiceJet’s Q2 FY21 losses narrowed to ₹112.6 crore as compared to ₹462.6 crore in the year-ago period. The airline attributed the decline to a 60 per cent reduction in expenditure along with 157 per cent year-on-year rise in revenue from cargo business.
“There are two elements to the airline business — passenger and freight. If you remove even one, the claim of the lenders goes away from that cash flow, which is a loss for the banks. You are removing one of the important cash segments of the company and it will have a bearing on the cash flow,” said an industry source.
SpiceJet did not respond to BusinessLine’s email seeking comments for this story.