The rights issue was meant to part-finance the second phase of the hot-rolled (HR) coils project being set up next to the sponge iron plant at Dolvi in Raigad district of Maharashtra.

The financial institutions led by Industrial Development Bank of India and ICICI have jointly decided not to lend any more funds to Mittals of the Ispat group due to heavy cost overrun in their Dolvi Steel project. The Mittals are setting up a Rs 6,000 crore power project in Maharashtra for which it has recently signed a power purchase agreement with the state government.

Ispat Industries has sought more funds from the FIs to keep it floating in view of a sagging steel industry. The FIs have rejected this demand. Industrial Finance Corp of India, while sanctioning funds to coverinterest payments by Ispat Industries, had specified in its October 1998 appraisal note that Ispat's promoters -- M L, P K and V K Mittal -- and associates have to bring in the entire call money against their subscription by November 1998.

The issue, which drew only Rs 6 crore from the public, had two parts. Part I (Rs 449 crore), with a coupon rate of 17 per cent per annum, is compulsorily convertible into equity shares of Ispat within 18 months from the date of allotment at a price to be arrived at based on market price, with a floor of Rs 15 and cap of Rs 30 per share.

Part-II (Rs 350 crore), with a coupon rate of 10 per cent per annum, is optionally convertible within 19 to 60 months from the date of allotment at a price to be arrived based on market price with floor price at which conversion under option-I takes place and cap price of Rs 30 per share.

The Mittals subscribed to the second part/ option.

IFCI had also specified that the Mittals will have to raise Rs 250 crore via unsecured,interest-free loans or internal accruals. It made it clear that the unsecured loans already brought in/ to be brought in shall not be repaid during the currency of the institutional assistance.

The sources said the FIs do not expect the Mittals' to come up with their share, and this belief had prompted them to take the hard decision of not funding any new non-steel project of the Ispat group.

In its October 1998 appraisal note, IFCI had said: "M L Mittal, P K Mittal and V K Mittal shall undertake not to take up any new project without prior approval of IFCI".

IFCI also believes that Ispat may not get any further loans from International Finance Corp, the Washington-based multilateral funding agency. IFC has so far disbursed only $7.5 million, against its promise of $45 million from its own resources and $85 million from a syndicated loan.

"In view of backing out of the participants in the `B' loan as also concern about non-bringing in promoters' contribution in time, tying up of further finance tomeet expected overrun, utilisation of funds by IIL in unrelated projects, depressed domestic and international steel market etc, the availability of the balance loan from IFC(W) is unlikely," IFCI noted.

As on March 31, 1998, Ispat's promoters had extended to loans and advances worth Rs 119.73 crore to group companies. Of this, Hughes Ispat Ltd got Rs 62.16 crore, Central India Power Co Ltd Rs 35.13 crore and Central India Coal Co Ltd Rs 22.26 crore.

IFCI has asked the Mittals to recover the entire amount in phases -- half by March 1999 and the rest by September 1999.