April 09, 2000

Essar Steel and its unconditional loans

ESL international debt is a huge $625 mn. It includes a $40 mn syndicated loan which failed and export credit advances of $335 mn. The latter have been guaranteed by Indian FIs who are quietly paying up when Essar defaults

Even as the debate over the burgeoning non-performing assets (NPAs) of banks and financial institutions (FIs) rages on (Rs 58,000 crore last March) and the Finance Minister thunders that banks should get tough on debt recovery, our financial institutions continue to dole out several hundred crores of rupees to loss making business groups who repeadetly fail to keep implementation schedules or fulfill loan conditions. The best example is Essar Steel (ESL). With monotonous regularity, The Industrial Development Bank of India (IDBI) works out new proposals to allow ESL to redeem the $ 250 million unsecured Floating Rate Note (FRN) issue on which it defaulted in July 1999 and to give the group fresh funds.

Confidential papers of the IDBI available to this writer create an amazing track record of failed promises and slipped deadlines. Yet, projects costs increase in every document and some money is invariably released to the group at these meetings. IDBI has already quietly agreed to fund the redemption of unsecured FRNs and more. Here is the latest proposal.

Over a year ago, a pelletisation plant which was originally part of ESL was spun off into Essar Minerals (and is now called Hy-Grade Pellets). When this plant appeared in an ESL prospectus for the first time, several years ago, it was to cost just over RS 300 crore. It slowly ballooned to RS 997 crore in 1998 and around July 1999 had shot up further to RS 1,121 crore as consideration for spinning off Essar Minerals.

The payment was all on paper RS 488 crore of equity/preference shares to be issued to ESL, a simple transfer of RS 113 crore of loans from ESL to Essar Minerals (EML) and payment of RS 520 crore to ESL. No, EML had no funds to pay the RS 520 crore either. This was a fresh loan from the institutions and through a couple of book entries the money was to go back to them and help them avoid book ESL as an NPA in their books. The FIs would lend to Essar Minerals, which would give it to ESL as transfer considerations as ESL would pay back its institutional loans. Even this simple entry is not happening. The money has moved to Essar Steel and the group now wants to keep it.

They call it a 'temporary' arrangement whereby ESL will take the RS 520 crore and use it to repay unsecured FRN investors. The document does not mention how Essar will find the money to repay FIs when it is already in default, but they have agreed to the scheme. That too is not enough. So Essar has asked a further RS 131 crore to part finance the FRNs. It also wants FIs to fund interest for the six-month period from October 1999 to March 31,2000 and reschedule due from April 1999.

Incidentally ESL, international debt is a huge $ 625 million. It includes a $ 40 million syndicated loan which failed and export credit advances of $ 335 million. The latter have been guaranteed by Indian FIs who are quietly paying up when Essar defaults. If all this sound incredible, believe me, it is documented.
Now let us look at Essar Minerals, which is now called Hy-Grade Pellets (HGP). This company, after the spin-off, has a 51 per cent holding by Stemcor Holdings Ltd. a global trading company which went into production. ESL holds 49 per cent of the equity. Now HGP has added a slurry pipeline (RS 586 crore) to the project and the cost has increased further to a whopping RS 1,677 crore. Fresh loans of RS 319 crore have already been disbursed to it. Stemcor was to bring in RS 184 crore as its share in the equity, so far, it has brought in a mere RS 10 crore and documents available with me say that another RS 82 crore was expected by February 2000. Yet, IDBI which has demanded answers about the management change in ACC, has allowed the reconstitution of the HGP board bringing in three Stemcor directors.

Let's look at the fulfillment of previous loan conditions. Out of 19 percent of the Ruias' personal equity pledged with various banks and creditors, ESL has managed to release only four per cent and pledge it with IDBI. Though each company in the group is in arrears on repayment, IDBI says that they have "met with conditions regarding raising of promoters' contribution (RS 200 crore) and retrieval of RS 141 crore unsecured loans from Essar Power". Essar Power itself is a defaulter because ESL and others cannot pay for the Marathon group of the US which is to take over the project is on extension time (upto June 30).

In the meanwhile, all Essar companies have revised their costs upward by a few hundred crore rupees. Essar Shipping's project for handling and storage of crude oil and petroleum (hived off form Essar Oil) has increased from 1,435 crore to RS 1,899 crore. It was to be completed by March 1999 and is scheduled for September 2001. FIs will fund the increased cost.

Essar Oil's project cost has gone up from RS 6,725 crore to RS 7,356 crore. Its attempt to find a strategic investor has not fructified as yet. It has gone ahead and promoted Vadinar Power company to set up a Rs 430 crore, 77 MW captive powerplant with the finance yet to be tied up. The documents show that every single company of the Essar group is in default. A table, helpfully provided by IDBI shows that its exposure to the Essar group alone is RS 2,275 crores and it has overdues of a hefty RS 450 crore.

At no time do the institutions question the project implementation capability of the promoters, or question the huge and frequent increase in project cost. No change in management is contemplated. In fact, the institutions do not so much as demand a serious cost cutting and streamlining exercise. The Ruias, despite their entire holding in most group companies pledged against loans, have among the most lavish lifestyles among Indian industrialists. All courtesy Indian banks and financial institutions.

Updated weekly.

The author's e-mail address is: suchetadalal@yahoo.com

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