When their defaults aren’t NPAs enough

While Sajjan Jindal’s Jindal Vijaynagar Steel (JVSL) and Jindal Iron & Steel Company (JISCO) are far from being BIFR companies, their borrowings stand at a worrying Rs 6,600 crore at the end of March 2002 with massive interest overdues and relatively smaller overdue of principal.

JVSL is the bigger problem. Its borrowing of Rs 4,600 crore includes overdues of Rs 623 crore mainly in interest. Like other steel majors, Jindal too is confidently awaiting yet another restructuring package, which will lead to a substantial reduction in interest rates but no change in Jindals’ own ostentatious style of doing business.

The Jindals are, however, different from other corporate defaulters, say, the Mittals. Jindals don’t blame lenders, they praise them. They are never angry; they are conciliatory: “The role of the FIs is worth appreciating. The financial markets have changed so rapidly that even the bankers and institutions never envisaged the interest rates will come down to a level of 5 to 6 per cent. Hence they (FIs) are taking time to adjust to the scenario and pass on the reduction to us.

And they are fast to point out how much they have already paid (Rs 392 crore since April 2001) back. This attitude has always helped them get loads of money from lenders and allowed them to maintain their expensive lifestyle without being asked uncomfortable questions.

One of Sajjan Jindal’s first acquisitions in the 1990s was the fabulous white Jindal Mansion at Peddar Road, Mumbai. The massive lobbies, expensive art, crystal and paintings are all part of Jindal’s corporate headquarters — their residences are equally expensive.

When they planned the JVSL project using Corex technology in the remote Bellary district of Karnataka, they first put in place an airstrip and acquired a five-seater aircraft, apparently to fly to and from the plant. That way the luxury was immediately billed as a necessity.

His group is also earning brownie points among Mumbai’s richie-rich crowd with his wife’s patronage of art. They have a school at Jindal Vidyanagri in Maharashtra that gets them approval from its workers. For instance, The Indian Express spoke to Ismail Sheikh, a machine operator at Jindal since 1984 and found that he is oblivious to the fact that ‘‘Jindal Saheb’’ owes a few thousand crores to institutions. Similarly, Ganesh Ramchandra is happy at his annual bonus of 20 per cent, and unconcerned about the galloping project cost and financial problems.

Like the Mittals, the Jindals too started out as a single empire under father O.P. Jindal, a former MP from Hisar in Haryana. O.P. Jindal started with a single unit at Hisar in 1970, but the big growth came in early 1990s when the steel sector and the primary capital market were liberalised. All the group companies were financed by banks and institutions as part of a single empire.

The promoter funding of JVSL came mainly from money diverted from JISCO (directly or through a subsidiary called Sun Investments), Jindal Strips and Saw Pipes though a series of cross holdings. However, in the 1990s, his four sons carved the business empire among themselves, with Sajjan Jindal drawing the troubled JVSL and JISCO as his share. The institutions never ever assessed the business risks of all four groups separately. Even today, the Jindal website lists almost a dozen companies — all under one umbrella but run by different brothers.

But an influential parent wasn’t the only thing that the Jindals had on their side. Their Executive Vice Chairman Dr. S.K.Gupta has been on the board of the IDBI during the group’s entire phase of heavy borrowing. Take for instance, this claim from a steel industry website (www.JPCsteel.org) ‘‘It is encouraging to mention that the combined operating profit margin of the entire conglomerate of JVSL, JISCO, JTPCL, JPOCL & VMPL is now higher than that of Tata Steel, which is a combination of all these manufacturing units.’’

When the JVSL project was appraised in October 1994, the 1.25 million-tonne integrated steel plan was to cost Rs 3,300 crore and included an oxygen plant and a captive power plant. It has now ballooned to Rs 6,495 crore, even after the two projects being spun off to separate companies.

JVSL had a long struggle with the Corex technology. When the Jindals opted for Corex technology it had not proven its profitability anywhere in the world, but it released Corex gas (or flue gas) that formed the raw material for the project, lowering tariffs and reducing input costs.

But Sajjan Jindal prefers to draw attention to the high interest component (Rs 1,722 crore) they are paying. When asked about his plans to meet the debt obligations, Jindal remarked: ‘‘When we borrowed, the interest rate regime was at the highest at 20 per cent. We hope our negotiations will lead to reduction of interest rates to 12-14 per cent. The FIs have also agreed to that.’’

He added that with these measures JVSL can reduce its interest burden from Rs 600 crore to about Rs 400 crore.‘‘The steel industry is on a revival path and markets are looking up. We have started discharging our liabilities towards interest and principal.

Today rupee debt is locked at an average of 17.44 per cent, which is unreal given today’s low interest rate regime. We are requesting the FIs to bring the rates to today’s market rate, thereby increasing our ability to pay debt faster,’’ he said.

It must be remembered that both the lenders and the borrowers showed astonishingly poor judgement when they drew up elaborate ten-year projections to show that all steel projects were viable at an interest rate of 20 per cent.

In September 1998, at the Heads of Institutions (HIM) meeting it was decided that completion of projects by the Jindals was of paramount importance and they should be given fresh funds (Rs 492 crore in addition to the total exposure of Rs 2,076 crore of nine institutions) subject to certain conditions.

‘‘Sajjan, as part of promoter commitment in JVSL, is yet to bring in Rs 108 crore,’’ said an FI official. JVSL Director (Finance) Seshagiri Rao said that the amount of Rs 108 crore will be brought in a time-bound schedule.

But there were other ways in which the lenders continued to help JVSL. The company had invested Rs 180 crore in Jindal Tractabel Power Company (JTPC) as a 50:50 joint venture with Tractabel, which was carved out of what was originally the captive power unit. JVSL and Tractabel fell out over the supply pricing of power and raw material. ICICI then used its financial muscle to persuade Tractabel to exit. It further joined up with other lenders to acquire 38 per cent of Tractabel equity, giving Sajjan Jindal full control.

Another Rs 85 crore went into Jindal Praxair Oxygen and Rs 60 crore in Vijayanagar Minerals Private limited (VMPL) — a JV with a Karnataka government company. After some initial troubles, most of these are now profitable.

The new year will see another round of restructuring which is expected to increase the project cost further to Rs 7,160 crore. Sajjan Jindal expects institutions to reduce his rate from 20 per cent to around 12-14 per cent which will lower JVSL’s interest burden by anywhere between Rs 400 to Rs 600 crore.

An FI official said categorically, ‘‘We will give them some breathing space in terms of longer tenure and a small cut in rates, which will be recovered later.’’ But the lenders don’t even acknowledge that Jindals, like Mittals and Essar are already into minor expansions. For instance, JISCO has ordered a galvanising line from Flat Products India for Rs 15 crore.

A colour coating plant that was to have been set up with British Steel a few years ago has been revived and Jindal is setting it up alone with equipment ordered from Dubai. But these costs too will be rolled into the restructuring, probably with the benign support of lending institutions.