How to ‘steel’ deals and forge partnerships (7 October 2001)  

INDIAN financial institutions (FIs) are pumping money into the steel sector in a never-ending cycle. Every year, the mega-steel projects approach the FIs for a basket of concessions such as the conversion of debt to equity, rescheduling of loans and interest waivers. And every time, the FIs produce detailed reports which analyse their demand, express the pious expectation that the companies would turn around after one more infusion and justify the bailout. They also go through the motion of imposing ‘stringent conditionalities’ which seem to have had little or no effect over the past eight years.

This mindless exercise has allowed every steel company to gobble up thousands of crores of rupees without any sign of recovery. Why do FIs continue to bail out steel companies? Simple. If they don’t, they would have to write them down as non-performing assets (NPAs) and this may force them to seek a bailout themselves.

The government knows this, but it has refused to intervene. Typically, the finance ministry will wait for a collapse before finding a solution. This allows the Finance Minister to claim the problem was ‘not brought to his notice’ and provide dole from the exchequer.

This column aims to bring the steel issue to the finance minister’s notice, assuming he has failed to notice the problem. It is also to point out the government is running out of time.

Let’s put together a few recent new reports to prove the point. The only action by the FIs has been in connection with Malvika Steel, where the Kulwant Rai group has been asked to give up management control. The next few months will show whether the Rais have truly relinquished power or if it is only a cosmetic move. Moreover, this is only one of the Usha group companies, which have large borrowings. The three major FIs have together lent a massive Rs 1,200 crores to Usha Ispat and have recently decided to recall those loans. The second case is Lloyds Steel, where the FIs now plan to acquire a 51 per cent stake after the previous restructuring plan fell through.

The next in the queue is Ispat Industries which owes even its electricity supplier a whopping Rs 270 crores. Just one part of Ispat’s massive bailout request is to convert a Rs 310 crore loan to equity at a straight loss of an incredible Rs 280 crores to the institutions. That is because its shares are trading at 90 paise while the proposed conversion is at Rs 10.

Jindal Vijaynagar wants a similar conversion of loan to equity at par — again at a hefty loss to the institutions. It recently got the institutions to pick up a 32 per cent stake in Jindal Tractabel just to ensure continued access to cheap electricity. It now wants the FIs to stand guarantee for Rs 1,200 crores of foreign loans on its books because it can’t pay interest.

Essar Steel, which had claimed that it was out of the woods after the previous bailout has now approached FIs and FRN bond holders with a ‘standstill’ agreements which will freeze all repayment for a limited period. As usual, it is all packaged to look good.

The audit firm KPMG has been hired to prepare the financial restructuring. But take a look at Essar Steel’s latest balance sheet, and you’ll see that, strictly speaking, 50 per cent of its networth is already eroded. Its auditors have made qualifications, which total up to a huge Rs 852.68 crores.

In a recent article a former IDBI chairman argues that the high cost of funds and NPAs have pushed provisioning needs to alarming levels. He also seems to suggest that the lack of access to cheap funds after liberalisation has eroded margins and increased NPAs.

This is interesting. It suggests that the FIs have poor appraisal and project assessment skills. For instance, it is indeed true that the economy is in the doldrums and the steel situation has deteriorated badly. But the FIs could clearly have seen it coming.

The irony is that several steel sector industrialists want to use the events of September 11 to justify the next bailout. One industrialist pointedly told me that even the developed countries have sprung to the defence of their ailing airlines so why not India? Is there a comparison between a sudden and unforeseen event and a saga of deliberate bailouts over 8 years, which are the result of mismanagement and profligacy?

Certainly not. But it will still be used as an excuse to avoid tough action. Why else would a proposal to merge eight large steel units languish without discussion? Maybe because it would down-size units, streamline operations and eliminate luxuries such as private aircraft that are lent to politicians, super-luxury cars, expensive houses and the ability to divert funds for sundry activities such as art foundations and lobbying.