Firstly because, the FIs were considering a bail-out of unsecured FRN investors and would increase their already grossly bloated exposure to the group which was already in default to the tune of Rs 206 crores in February 1999 itself. Secondly the FI were undeterred by the fact that just a day earlier, ESL had announced a whopping loss of Rs 500 crores. Thirdly, the IDBI appraisal had categorically told Essar to fund the FRN redemption without recourse to institutions. This was not only endorsed by the expert committee on steel set up by IDBI in February, but the committee was led to believe that Essar had `initiated steps in this regard'.

So why were FIs ready to mothball the expert committee's view in less thantwo months? Institutional circles murmur something about political prodding.

Finance ministry sources claim that since Essar had come up with a new proposal to raise funds by divesting more equity, it merited discussion. The problem is Essar needs funds before July 13 and the sale proceeds are unlikely to be realised by then. This means that FIs will increase their exposure to the group even more, that too for unsecured, foreign FRN holders; and on the basis of mere assurances or a MoU.

What was Essar's new proposal? According to newspaper reports in it included a complete divestment of its holding in the power project (Enron and Marathon are supposed to be in the race, but Enron appears to have had a change of heart) and to divest 30 per cent of its stake in Essar Minerals to the public sector National Mineral Development Corporation (NMDC) and a foreign trading company. It also seeking a $ 100 million refinance facility from State Bank of India.

However when The Indian Express asked Essarabout its new proposal, it would not commit itself to any of the details splashed in news reports, just before the FI meet a week ago. It claimed that the names of the potential buyers were covered by a confidentiality agreement and refused to put a time-frame on completion of the sale, beyond saying that it would be `consummated in a short time frame'.

As for the merits of the fresh proposal, Essar says that its divestments would `significantly reduce exposure of the financial institutions to the group, as the debt would be taken over by the prospective buyer/joint venture partner'. It argues that the FI funding is based on completely exposure-neutral financing and that it would be within prudential norms.

As for its problems, it attributes them to the global fall in commodity prices, the nuclear tests, the Asian downturn and not to its own rapid expansion/diversification and diversion of funds raised for one project into another. This raises a couple of issues.

FIs say that the will not release freshfunds until the power and pellet plant stakes are sold; but that is hardly the point. IDBI's exposure to the group exceeds 25 per cent of its net worth and the need to reduce it drastically is no longer in debate. The funding of the FRN redemption will ensure that FIs continue to remain dangerously over-exposed to the group and this cannot be in their interest. There are other issues as well.

For instance, NMDC is government company already facing controversy over the sale of certain mines to the Mittal group. Instead of the government divesting its own holding in NMDC, it is seeking to invest in a private company. What is NMDC's long term advantage in acquiring a tiny stake in Essar Minerals, except to help the group? A major public sector oil company is also being induced to acquire a stake in Essar Oil.

A set of questions sent to Essar elicited no reply with regard to its default in repayment to FIs. The company asserts that steel assets are normally financed for a 10 to 15 year period; hence the FIsfive-year loans were expected to refinance after five years. But this claim only calls to question the imprudence of the FIs in allowing and funding reckless diversification of the Essar group into a host of unrelated businesses.

Essar seems to see the FIs refinancing of its loans as a matter of right, it makes no mention of bloated project costs due to overrun, expansion and diversion of funds to finance other projects and claims that it has submitted a `comprehensive debt programme' to institutions.

The Indian Express has copies of the IDBI appraisal of ESL and the expert sub-committee set up by it to look at steel company bailouts. Both these report indicate worry on the part of institutions and an insistence on reduction of their exposure by forcing Essar to divest some of its unmanageable diversification projects. If public financial institutions plan to fund the group any further, its investors, which includes provident fund and retail investors, ought to have some details about thiscomprehensive financing plan. So far, the only details about the true state of affairs at beleaguered groups such as Essar are those exposed through secret and confidential reports obtained by the media.

Author's email:suchetadalal@yahoo.com