MUMBAI, July 18: The Ispat group seems to have mastered the art of breaking promises and making advances. Ispat Industries Ltd - the flag ship of the Ispat group run by the Mittals - has diverted Rs 34.95 crore to five unlisted companies in the group as advances at a time when the company needed huge funds for its expansion and floated a mega rights issue of around Rs 800 crore.The company also shocked investors by breaking the promise on profits within a month after making it. Ispat which projected a net profit of Rs 91 crore in its offer document actually reported a lower net profit of Rs 78.8 crore for the year 1996-97, that too within a few days after the mega issue was floated in May.The company itself has gone on record in the annual report (under the heading Project Promotional Recoverable Dues), saying that it has invested Rs 34.95 crore in five Ispat group companies (Central India Power Company Rs 12.25 crore, Central India Coal Company Rs 9.32 crore, IMIL Rs 2.38 crore, Bailadila Mineral Development Company Rs 7.71 crore and Hughes Ispat Rs 3.28 crore). The annual report doesn't give any reasons for the investment in these unlisted companies. Bailadila and the coal company are yet to start operations as they are facing various hurdles. ``This is the money spent for development of new projects. There is nothing illegal about it,'' says Vivek Sett, Director (Finance), Ispat Industries.It may be noted that this money was diverted by the company even as it needed huge funds (Rs 4792 crore as per the issue offer document) for its ongoing 3 million tpa hot rolled (HR) steel coil project along with a captive power plant located in the Raigad district of Maharashtra. The company raised Rs 800 crore through a rights issue last month and it has planned another public issue of Rs 335.71 crore in the future.The moot question is how can the company divert funds to other group companies when it needed money for expansion of its ongoing projects. How will Ispat recover this money if the group companies fail to take off or show considerable time and cost overrun. What is the guarantee that the money raised through the recent rights issue will not be diverted to group companies in a similar manner? This is not the first time a business group is diverting funds to other group companies. Manu Chhbaria was one businessman who used the funds of Shaw Wallace to acquire other companies. CRB Capital also diverted funds to unlisted associate companies on private placement basis.Moreover, the company also resorted to some clever accounting practices to boost the profitability. For the financial year 1996-97, it transferred Rs 30.87 crore from general reserves to bring down the depreciation charges. Otherwise, the company's net profit would have come down to Rs 48 crore from the reported level of Rs 78.83 crore (even this is below the projected level of Rs 91 crore).``I invested money in the company based on their profit projections in the offer document. What is the guarantee that the company will make a net profit of Rs 333 crore for the year 1999 and Rs 753 crore for the year 2000 as projected in the offer document? The company has gone back on its promise soon after the issue was floated,'' said a small investor.Similarly, the company had invested Rs 15 crore in CRB Mutual Fund which is now under an administrator appointed by the court. Market sources say that this money was used by CRB for the purchase of Ispat shares in the stock market. Over 90 per cent of the Rs 230 crore corpus of CRB was contributed by some big corporates. It is unlikely that Ispat will get back Rs 15 crore invested in CRB MF. ``We did invest Rs 15 crore in CRB. It is mentioned in the balance sheet of the company,'' Sett of Ispat said.Corporate sources were also surprised by the approach of financial instititions when it comes to Ispat. Institutions converted thei loans into 8.70 crore equity shares of Ispat Profiles (another group company) at the rate of Rs 10 per share. Institutions have suffered a heavy loss of nearly Rs 70 crore as the Ispat Profile share is now quoting at Rs 2 per share on the stock exchange. However, Sett points out that the company has already cut down the losses (Rs 118 crore in 1995 to Rs 24.34 crore in 1996) and it is expected to fare well in the coming year. Ispat Industries has now drawn up plans for new projects where investments to the tune of Rs 18,000 crore are needed.
