IDBI, ICICI, IFCI, SBI too keen to help Ispat promoters who have grossly mismanaged the company   

December 2, 2010

Documents with Moneylife show that top institutions are too keen to side with promoters of Ispat Industries, despite gross mismanagement, rather than make a serious attempt to get their money back. Why this strange generosity?

Over the past five years, Ispat Industries Limited (IIL) has defied every threat by its lenders to force a change of management and has continued to raise fresh funds. This happens because the combined lending to IIL is Rs7,000 crore and even declaring ILL a defaulter will have serious implications for lending institutions. Ispat’s promoter-managers Pramod and Vinod Mittal have used this to their advantage to extract fresh funds, even when the company was on the verge of closure.

Earlier today, Moneylife reported how IIL was sanctioned Rs 130 crore by the State Bank of India (SBI) just before its plants at Nagpur and Dolvi in Maharashtra shut down for a month. (Read: http://www.moneylife.in/article/4/11832.html )

Moneylife now has details of the terms agreed to at the lenders’ meeting on 22 October 2010. The stunning aspect of the Mittals’ brazenness is that the debt to their companies has been restructured twice (2003 and 2009) already against all prudent lending norms. Yet, neither the Reserve Bank of India (RBI) nor the government has even questioned the lenders about their continued largesse to this rogue company. In these days of unraveling scams, it is only a matter of time before some litigation is filed to hold the banking regulator accountable for the repeated flouting of Corporate Debt Restructuring (CDR) norms.

According to documents from the meeting, the Mittals’ hold on IIL is extremely tenuous. If they had the will, it would have been extremely easy for lending institutions (the biggest in the country, including SBI, ICICI Bank, IFCI–the lead institution–Punjab National Bank and IDBI Bank) to change the management and recover their dues, while IIL remains a ‘going concern’ and is not vandalised by unpaid employees and creditors when the plant stays shut.

As things stand, “the accumulated losses of the company on 30 June 2010 exceeded its peak networth of the preceding four years by more than 50% and hence IIL is potentially sick under the provisions of the SICA (Sick Industrial Companies Act) 1985”.

Consider this. The entire promoter holding of the Mittals was to be pledged to the lending institutions, but far from getting tough with the promoters, the lenders agreed with their plea to reduce this to 95% of their holdings and not create a ‘pledge’ in favour of the lenders. Instead, they were merely asked to submit a non-disposal undertaking (for shares) and this was accepted by the lenders. This relaxation of conditions smack of complicity, rather than any serious attempt at loan recovery.

In addition, the Mittals were allowed a preferential issue of equity share warrants to the promoters not exceeding 5% of the voting capital. A condition for the issue of these warrants was that this would bring in Rs215 crore by 31 October 2010. Needless to say, the promoters have failed to fulfill this condition, despite splitting the payment into two tranches and giving time until 31 December 2010.

The lenders have a charge on the entire fixed assets of IIL; in addition, a corporate guarantee has been provided by Peddar Road Property Limited (PRPL), a privately-owned company of the Mittals which owns extremely lucrative apartments in one of Mumbai’s poshest areas (next door to Mukesh Ambani’s new home Antilla). The seven duplex flats and 35 car parking spaces owned by PRPL have all been mortgaged to lenders and should be worth over Rs255 crore if the lenders have the will to sell them or acquire them for their own senior management.

Also, there are personal guarantees by Pramod and Vinod Mittal. The Mittal brothers have huge assets overseas and have even bought a Bulgarian football team. (A former chairman of IDBI was in raptures while describing the Mittal residence in London to the writers). No attempt has been made to get the Mittals to liquidate any of these assets and bring the funds to India.

Here are some more facts from the 22 October meeting.
•    Ispat Energy Limited which is setting up a 110MW captive power plant has still to achieve financial closure, although the issue has been dragging from 2003 and has received repeated extensions.
•    The sale of flats is pending since 2006, when they would have fetched Rs105 crore. Sources in the realty business say the flats would have been snapped up, but for the fact that the owners want a huge component in cash. If the flats are pledged to the lenders, it is pertinent to ask why the lenders are not selling the flats directly to maximize realisation of outstanding loans.
•    Ispat’s 1 mtpa coke oven plant costing Rs1,110.66 crore has also sought and received an extension for completion by December 2010. Here too, it is struggling to raise a part of the finances.
•    A 2 mtpa pellet plant has also not been commissioned as was scheduled.

Institutional documents minute in detail how IIL has not adhered to repayment schedules, approved expenditure and cash flow norms and that there were irregularities in the use of working capital. IIL has defaulted on payments since July 2010. The lenders then decided to convert loans into equity. — Sucheta Dalal & Debashis Basu