Lenders led by ICICI Bank [Get Quote] have sought a review of the books of Subhiksha Trading Services after taking up the cash-strapped retailer's case for debt restructuring.

"Banks with exposure to Subhiksha have ordered the review to get a clear picture on assets and other financial parameters. The audit report is expected by the close of the financial year (March 2009)," said a senior banker involved with the exercise.

This is probably the first instance of a retailer being referred to the Corporate Debt Restructuring (CDR) mechanism, a system to deal with cases involving multiple lenders, after it reported its first quarterly loss and expressed its inability to clear dues to employees and property owners. The lenders invoked the CDR provisions on January 23 and the case was admitted on January 31.

A few months ago, the Reserve Bank of India [Get Quote] (RBI) allowed lenders to take up cases from the services sector.

Confirming the development, Subhiksha founder and managing director R Subramanian said: "Our accounts are audited up to March 31, 2008. A review has been sought in view of the asset impairment, especially inventory impairment, which could have arisen in the last three or four months due to strained operations. Since we are in the food retailing sector, the shelf life of products is low and low scale of operations for three or four months can cause inventory impairment."

Lenders said discussions are yet to start, but they will consider increasing the repayment period and convert a part of debt into convertible instruments. "In an extreme situation, we have to take a haircut," said a banker.

On its part, the Chennai-headquartered retailer wants additional funding of Rs 300 crore (Rs 3 billion) and a moratorium on interest and principal for two years. Beyond that, Subramanian said, Subhiksha wants lenders to lower interest rates for two years.

The company, which has a net worth of Rs 260 crore (Rs 2.60 billion) with an equity base of Rs 32 crore (Rs 320 million), has borrowed three times its net worth to scale up operations. The company's gross debt was estimated at Rs 700 crore (Rs 7 billion). The average cost of debt rose from 9 per cent to 13 per cent in the first half of the year. RBI's measures to cut rates and infuse additional liquidity have helped the retailer lower the average cost of debt to 12 per cent in the third-quarter ending December 2008.

The Chennai-based retailer, which said yesterday that around 600 of its stores and warehouses across the country were vandalised in the past few days by "unidentified elements", has seen its monthly turnover drop to a fourth, or Rs 100 crore (Rs 1 billion), in the last two months as it did not have money to stock the shelves.

"The extent of leverage (debt as a proportion to equity) is high and prima facie there is also an element of asset-liability mismatch. The CDR mechanism gives us flexibility to deal with large accounts like Subhiksha," said a public sector bank executive.