MUMBAI, March 22: Among the biggest and most controversial bailout packages under consideration by the Steel Committee of the financial institutions is the one for the fund-strapped Essar group. Essar Steel (ESL), the first group company seeks Rs 1,625 crore to pay back foreign loans and to complete work on its plant, as well as permission to hive off and transfer its pelletisation plant to a new company called Essar Minerals at a hefty price of Rs 997 crore. The company which made its maiden issue last April at a premium of Rs 30, is today languishing at Rs 7.75. The saga of cost overruns and diversion of funds, capacity increases and hiving off projects to new companies for fresh borrowing is outlined in the frank appraisal note prepared by the Industrial Development Bank of India (IDBI) and obtained by this paper.The note also demonstrates how SEBI's requirement regarding promoters' funding was always met by simple diversion of funds, leading to cost overrun in the original projects which is hiddenthrough expansions. In October 1998, the financial institutions flatly refused to fund the repayment of foreign currency loans requested by the group it has since been approaching others for funds. It also asked the promoters to bring back Rs 245 crore diverted from Essar Steel in the form of unsecured loans to group companies such as Prime Hazira, to fund investment in its power project. Prime Hazira, a Mauritius-based company owned by the Ruias, is a co-promoter of the power project.Worse, Prime Hazira owns 49 per cent of Essar Power, but has still not paid for it for close to two years. It promised to pay this, after adding an interest of 15 per cent, by placing its equity abroad, but this hasn't happened so far. ESL's own holding in Essar Power is 40 per cent (Rs 217 crore), and this is, hopefully, to be recovered through divestment. Essar Power was completed at a cost of Rs 2,315 crore in 1997, after a major controversy over how it was constructed without requisite permissions being in place. Thefunds hoped to be raised by Prime Hazira are to help Essar repay money diverted from Essar Steel and Essar Oil into the power project and also invest in the Vadinar Power project - a captive unit hived off from Essar Oil's refinery at Hazira.This is not the only bleeding of Essar Steel to benefit the promoters. According to IDBI, Essar steel divested its holding in Essar Oil and Essar Projects in favour of Essar Investments - the main promoter of the Essar group. This company has, however, yet to pay the Rs 16-crore it was supposed to give Essar Steel. Essar Steel, is now so strapped for funds that it is unable to pay for power purchased from EPL (overdues Rs 94 crore) with the result that EPL, though a running project, has interest overdues of Rs 34 crore. ESL meanwhile has invested Rs 50 crore in a cold ruling unit in Indonesia and elsewhere.Essar Oil, started out in a blaze of controversy over the promoters funding in its public issue which was originally estimated at Rs 5,350 crore for agreenfield refinery in 1994. Even after hiving off two units which were part of the original project, the raising of capacity to 10.5 million tonnes led to a cost hike to Rs 6,725 crore.The group has already invested a hefty Rs 555 crore - got from loans raised by its `holding companies' - in their telecom project. It hoped to get this back by divesting part of its holding but at the time of going to press, Essar's bank guarantee for payment of licence fee is on the verge of being encashed and its foreign partner, Swisscom, which holds 32.5 per cent in Sterling Cellular and 10 per cent in Aircel Digilink, had decided to pull out of the Indan and Asian businesses.The pelletisation plant at Vishakapatnam started out as a Rs 430-crore unit, not appraised by any institution. The money came from Essar Steel and a few banks. As usual, some changes have doubled the cost to over Rs 997 crore and the entire project is now proposed to be transferred to a new company called Essar Minerals Ltd at the inflatedvalue. The project cost will then rise further to Rs 1,553 crore (due to the slurry pipeline to be added) and fresh loans of Rs 892 crore are sought from institutions. This money will be used to transfer Rs 520 crore to Essar Steel apparently as an inflated consideration for its stake and paid back to the institutions by ESL. Is this is just an arrangement for greening of bad loans by the institutions which in the process benefits the promoters of Essar?The Industrial Development Bank of India alone has an exposure of Rs 2,205.69 crore to Essar group with overdues of Rs 206.15 crore at the end of February 1999. The company has also raised huge funds from other institutions in 1998, including guarantees from ICICI and short-term funds of Rs 300 crore from Standard Chartered and Deutsche Bank pending the crucial restructuring package and non-convertible debentures from the insurance companies of Rs 150 crore.It should now be clear why the group has lobbied so hard with former Finance Ministry advisorMohan Guruswamy for a comprehensive bailout package.
