Economics
In News: Bloomberg, quoting CreditSights, a unit of the credit ratings agency Fitch, reported that the Adani Group is “deeply over leveraged”, and may, “in the worst-case scenario”, spiral into a debt trap and possibly a default.
- The report noted that the Group has been making aggressive investments that are predominantly funded with debt, putting pressure on its credit metrics and cash flow.
When is a company ‘over leveraged’?
- A company or business is said to be “over leveraged” if it has unsustainably high debt against its operating cash flows and equity.
- Such a company would find it difficult to make interest and principal repayments to its creditors, and may struggle to meet its operating expenses.
- In the latter case, the company may be forced to borrow even more just to keep going, and thus enter a vicious cycle.
- This situation can ultimately lead to the company going bankrupt.
What happens when a company is over leveraged?
- Being over leveraged constraints companies’ growth plans.
- If payments are not paid in time, it may lose assets, which may be taken over by creditors, who may also launch legal proceedings to recover their money.
- The inability to repay existing debts puts limitations on future borrowing by the company.
- Also, an over leveraged company will find it extremely difficult to get in new sets of investors, all of which will add up to further diminish its financial present and future.
Source: Indian Express
Previous Year Question
Q.1) Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India? (2022)
- An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
- A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
- An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
- A foreign company transfers shares and such shares derive their substantial value from assets located in India
