Drastic solutions for steel projects needed

The steel companies are perfectly awareof this and can virtually demand a bail out. To their credit the FIs have attempted to talk tough this time. They have addressed the issue of diversion of funds (particularly by the Jindal group, the Mittals of Ispat and the Ruias of Essar) into group companies and real estate and asked for the money to be brought back. They have also asked for a pledge of promoters equity, but given their experience with the Modis, this hardly constitutes a real threat. But the tough talking institutions are being ignored even before new money is released. While they’ve said that no new projects be undertaken without their clearance, Essar has finalised purchase of an Indonesian cracker which does not figure a in the appraisal note. Vinay Rai of the Usha group, (with a highly dubious track record of implementation) has announced investment plans of Rs 550 crore in software and information technology. Where will the money going to come from, except by diverting it from existing projects?

In each case, the FIs have demandedthat the promoters bring in fresh funds. But in the one instance where they have asked the Mittals to bring back Rs 99 crores diverted into real estate, they have flatly refused, arguing that the property market is in the doldrums.

The biggest problem is that the appraisals is refuses to address basic questions relating to the promoters. For instance, the Mittals first embarked on mega projects running into several thousand crores each, on the basis of their evaluation as a successful international group running profitable overseas companies. Today all the profitable foreign companies are part of the Laxmi N. Mittal stable, but the FIs have not reassessed the group’s clearly weakened finances. Instead they have allowed diversion of funds into ambitious power and coal projects which are far from takeoff. The note does not even recollect past write offs through the conversion of massive debt into equity, in the still loss making Ispat Profiles.

The Jindal case is similar. Media reports, quoting theJindals, clearly state that the beleaguered Jindal Vijaynagar as well as Jindal Iron are part of the Sajjan Jindal stable while the more profitable Jindal Strips and Saw Pipes belong to Ratan Jindal. The polo-crazy Navin is responsible for “steel and power” and Pritvi Jindal is in charge of overseas projects. If this division is clearly laid out for the media, why does the institutional appraisal not mention it? Similarly, there is a good case for the FIs to study the sale of products and their prices from Jindal Iron to Jindal Vijaynagar and vice versa to look at how profits are shifted around.

Internationally, lenders have dealt with recalcitrant managements by bringing in top audit funds to track their projects and spending. Ashok Wadhwa, Managing Director of Ambit Corporate Finance Pte.(formerly of Arthur Andersen) says that such corporate recovery assignments’, where the audit firm becomes the financial controller, are among the most profitable activities of the big accounting firms. He points outin India too, this had been successfully used in case of Nirlon in 1987 at the behest of Hong Kong bank. According to Wadhwa, this is probably the best way to help companies realise the correct price for divisions to be hived off (as is required in most bailout cases) and improve profitability.

E.A.Kshirsagar, senior partner of A.F.Ferguson & Co. also agrees that drastic solutions are possible. However he is personally in favour of a creative use of the receivership’ to get the same results. So far, he says, receivers have been appointed only when a company has to be taken into liquidation, but it does not have to be the last resort. In the UK, putting companies under receivership have actually helped them improve performance and safeguard assets, he says.

Others in the banking sector also agree that the total exposure of lenders to several of the large groups and the alarming level of NPAs calls for new solutions . The highly controversial and politically sensitive steel loans are clearly a goodstarting point for fresh thinking and drastic action and compulsory accountability on the part of managements. It will also provide a much needed kickstart to corporate governance by industry in general.

The author’s e-mail is: suchetadalalyahoo.com