His palatial house in London costs around $17 million, his relatively more humble flat at Carmichael Road in Mumbai boasts a fleet of expensive cars, including a Lexus, a couple of Mercedes, a Pajero and a clutch of smaller ones parked outside. And in between haggling with lending banks and institutions to restructure his loans, he zipped off to Tokyo earlier this year to watch the World Cup football final live! Meet Pramod Mittal, the steel magnate whose group loans exceed Rs 8,580 crore (end March 2002) but is having big trouble paying them back. His bankers suspect him of diverting money, and his steel plant is plagued with multi-crore cost overruns. But Mittal — noted for his political clout — isn’t worried. ‘‘Why should I justify my deeds to the press when my balance sheets will talk for me soon?’’ an irked Mittal asked The Sunday Express. His bankers aren’t so sanguine. ‘‘Pramod Mittal takes a lot of risks, which is fine, but the problem is that he takes it on our money,’’ says a senior official of the Industrial Development Bank of India (IDBI). The bigger problem is that the banks are letting him get away with it, a classic example (like two other steel supremos—the Sajjan Jindal group and the Essar Group) of how despite the tough new law to crack down on defaulters, it’s possible to get away. Mittal uses his clout and bank fears that classifying loans as non-performing assets (NPAs) would affect the lenders’ own credit ratings. Like before, Mittal’s Ispat Industries is busy re-negotiating loans on the persuasive claim that steel prices in an industry gripped by a downturn have turned around in the last few months and the trend is expected to continue for a few years. So much so that lenders are sold on the idea that three years down the road India would face a shortage of steel because there are no new capacities being added. But Ispat did not end up in a sprawling mess of big borrowings because of the global downturn in steel. Like the other steel magnates, their big spending habits and large-scale diversion of funds to other projects was at the root of their problems. When the Mittals launched their furious growth and diversification plans in India, they were a joint family comprising M.L.Mittal and his three sons Laxmi Nivas, Pramod and Vinod. The group had acquired a reputation of acquiring a sick steel mill in Trinidad cheap and turning it around. They were also reputed to have powerful political friends in all the countries where they worked their magic. MITTALSPEAK ‘‘Did I know India was going to make a nuclear blast at Pokhran?’’ Hinting that delay in the phase II of Ispat project was because of IFC’s refusal to grant further loans in wake of US sanctions ‘‘We have used the money exactly for the purpose for which it was taken’’ On IDBI charges that the group had diverted the $125 m raised through a GDR issue to fund other projects ‘‘That’s because I was bullish about the project that time. It’s a board decision and we have a lot of directors from FIs’’ On why he had borrowed huge sums at extortionate interest rates So, when they turned their attention to India, the lending institutions fell over each other to back them. Somewhere along the way, Laxmi Mittal broke away and took with him all the profitable overseas companies, leaving behind the Indian projects — Ispat Industries, Ispat Metallics and Ispat Profiles — that were in various stages of implementation to Pramod and Vinod. Ever since, Ispat has been in continuous trouble with its lenders, who did not once reassess the group’s financials after the severance of the profitable businesses. The Ispat website tells the story. 1985: A star is born with the emergence of Nippon Denro Ispat (now known as IIL) as the largest manufacturer of Galvanised steel products in the private sector, proclaims the milestone section followed by a few more entries, which end abruptly at 1998 after the launch of its ‘‘global scale integrated steel plant’’. It is after this that the institutions finally turned tough. Global steel prices had begun to dip well below the $400 per tonne at which viability of the projects had been calculated. Prices sank as low as $180/tonne and even today, after the recovery, prices are at $230. Yet, Mittal gets away. In 1997, Vinod Mittal had boasted to a business paper that the head of Nucor Corp, a US steel firm that has introduced cutting-edge technology, had told him: ‘‘Mr Mittal, we are learning from you’’. Mittal had said, ‘‘We will let our new hot-strip mill do the talking.’’ Today, there’s only silence. Yet, Pramod Mittal, a non-resident Indian who conducts most of his business long-distance with bi-monthly visit his Indian business empire, is furious when asked about the delays in building his latest plant. ‘‘Did I know India was going to make a nuclear blast at Pokhran?’’ he asks. The company blames the delay in the second phase of its project on the refusal of the International Finance Corporation, Washington D.C., to disburse $122.5 million of the $130 million sanctioned to it. Ispat’s finance director Anil Sureka says it took another two years to tie up those missing funds. The Mittals couldn’t even bring in the additional equity they had promised because the IPO market was subdued, says an institutional source. Mittal however points out that they hold 60 per cent of IIL’s equity and have the largest direct contribution. HOW THEY GOT THE MONEY In 1994, IIL raised Rs 525 crore of easy money through a global depository receipt (GDR) issue, but according to its auditors, Singhi & Company, only Rs 333.71 crore was used for its hot-rolled coil project while the rest was diverted to group companies and through them into an expensive real estate deal. A confidential IDBI appraisal of 1998-99 available with The Sunday Express says that IIL had, in fact, diverted Rs 443 crore from a coil project (mainly from the GDR issue). This included Rs 119.73 crore into three joint ventures — Central India Power Co., Central India Coal Company and Hughes Ispat — another Rs 99 crore into real estate acquisition, Rs 92 crore by way of inter-corporate deposits to group companies, Rs 10 crore as promotional expenses for the Bailadila Mineral project (now dropped), Rs 15 crore lost in the collapse of the CRB Mutual fund and Rs 107 crore as advance to Ispat Profiles. ‘‘We have used the money exactly for the purpose for which it was taken,’’ Mittal argues. He claims that the GDR issue ($125 million) was never meant only for the coil project. The GDR offer document however confirms that, ‘‘(T)he amount will be applied towards the financing of the company’s sponge iron plant and hot-strip mill project and for working capital requirements and general corporate purposes.’’ It is the ‘general purposes’ that Mittal is clutching at. Today, Ispat Industries’ borrowing alone stand at Rs 6,330 crore (September 30,2002) with overdues of Rs 343 crore to the financial institutions and a default in principal of Rs 48 crore. Sureka counters by pointing out that IIL has already paid Rs 5,314 crore towards interest and principal. The Mittals have also sold of some investments to meet lenders’ demands. Its stake in Hughes Ispat (it retains only four per cent) was sold after it was clear that there was no money to pay license fees. The tie-up with Rupert Murdoch for Direct-To-Home services seems to have come a cropper. The Rs 100 crore real estate is being developed and could fetch some money. It has also shifted part of its operations to the suburbs to save costs. When asked why he had borrowed at such extortionate rates in the first place, Mittal retorts, ‘‘That’s because I was bullish about the project that time’’. He also blames his bankers. ‘‘I have not taken any investment decision in isolation,’’ he says. ‘‘It’s a board decision and we have a lot of directors from FIs and also independent directors.’’ Part of Mittals’ earlier successes and the reason for their brazen diversion of funds are their powerful political connections. At various times in the mid-90s they got senior leaders of France, Canada and the UK to weigh in for their coals and power projects. The story of IIL’s Dolvi plant exemplifies their local clout. On March 20, 1999, the Maharashtra State Electricity Board (MSEB), after arrears of the Dolvi plant had mounted to Rs 80 crore, had cut off supply. It was restored within hours after a flurry of calls between a local politician and his powerful relative in Delhi. This drama was repeated dozens of times over the next few years, with different politicians intervening on their behalf and arrears were allowed to mount to Rs 247 crore by September 2001. Contrast this with what happens when you don’t pay your bill of a few hundred rupees for a couple of months. There is now an escrow arrangement under which repayments are being made. Steel industry sources allege that not making repayments (interest and principal) and defaulting on electricity bills was a deliberate strategy to keep production costs low. Today the Mittals have signed an escrow deal with MSEB for repayments but the huge outstandings remain. EXPERT-TAKE ‘‘There are enough statutes and regulations that extend protection (without actually intending to do so) to the defaulters — wilful or otherwise. (With the new Securitisation Act) the table has turned now. Now, we have to see the actual implementation before we can arrive at a conclusion’’ P K Choudhury, MD, ICRA Ispat Industries’ 1.2 million tonne hot-rolled coil (HRC) project was to originally cost Rs 2200 crore; it had bloated to Rs 4,845 crore during the first restructuring when capacity was enhanced to three million tonnes and a captive power projected cost of 354 MW was added. After IIL commenced production of phase one in April 1998, manufacturing defects, technology problems and the high import bill increased the project cost further to Rs 6,050 crore even after the 354 MW power unit was spun off into a separate company called Ispat Energy. AND HOW THEY GOT AWAY Working hard not to classify the Ispat group’s loans as Non Performing Assets (NPAs), Mittals’ bankers continued to restructure its debt with some wishy-washy conditions such as the pledge of promoters’ equity and admonitions not to divert more funds. Another group company, Ispat Mettalics was also given more money on the condition that the cash-strapped Mittals would bring in Rs 134 crore — at that time the project did not even have a power sanction. At the end of September 2002, addressing shareholders at the Annual General Meeting — Pramod Mittal was already crowing about the steel turnaround. Exports of Galvanised Steel and other products had risen 38 per cent over the previous year. He was also talking about retrofitting the galvanised line and admitted plans to ‘‘ramp up its hot-rolled coils capacity to 2.4 million tonnes per annum by March 2003 on its own steam and internal accruals with the co-operation of lenders.’’ Industry sources say the cost of this expansion has been quietly worked into the restructuring that is being negotiated. The Mittals have also no plans to abandon other expansions. Last month, Express reported that the company hopes to get a No Objection Certificate for the 1,082 MW project soon. The loss-making textile company Gontermann Peipers is also being restructured. And in August 2002, at the height of its financial troubles, Pramod Mittal told a business daily that its jetty capacity in Maharashtra was being ‘‘increased from 3.5 million tonne to eight million tonne to make it a commercial port at minimal cost.’’ The Ispat energy project was also on, because it needs cheap power to reduce steel costs. Mittal expects a saving of Rs 100 crore through power, which is welcome, so long as he repays lenders. The Sunday Express now learns that Ispat is already using its higher steel proceeds for the following expansions without telling the institutions: It has de-bottlenecked two galvanising plants to increase capacity by 50 per cent (cost of Rs 2 to 3 crore) and added a new galvanising line costing Rs 4 crore. Another two lakh tonne galvanising line is being imported from Thermodyne at a cost of Rs 8 to 10 crore. These will double galvanising capacity from 25,000 tonnes p.a to 55,000 tonnes pa. The Mittals are now very bullish. The company is confident that it can break into the black by March 2003. They even paid a bonus to their employees this time. Yet, the institutions were at their wit’s end over forcing repayments from the Mittals even after steel prices had firmed up. They employed a new trick a couple of months ago and approached the Tatas to check if they were interested in acquiring IIL. Although the Tata offer was too low, it frightened the Mittals into making payments. The Securitisation Act has further strengthened the lenders hands. The questions is: will Mittals’ bankers take advantage of the situation to draw up commercial terms for restructuring or be pressured again?
