Sucheta Dalal :Banks vs Ispat: A Farcical Spat
Sucheta Dalal

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Banks vs Ispat: A Farcical Spat  

September 21, 2010

Indian banks and lenders have figured out a nice way to keep lending to  Ispat Industries Limited, managed by Pramod and Vinod Mittal. For the  second time in five years, we see the charade of a threat to change  management by selling off their holding to a competitor. A 14th September  report in The Economic Times suggests an exact repeat of what happened in  July 2006. On 15th September, Ispat shares soared in the foolish hope of a  lender-blessed takeover, but fell immediately when the company denied as  'baseless' a report claiming that lending institutions had threatened to  sell Ispat's debt-converted-to-equity to rivals such as Arcelor Mittal or  Tata Steel. The Mittals claimed in a statement that "the lenders have  reposed tremendous faith in the company since its incorporation"-a fact  that ought to trigger a full-fledged government investigation.

A change in management at Ispat Industries is clearly what any sensible  lender would insist on, and it will not be difficult, since the promoters  have pledged 39% of their 41% shareholding. But it is unlikely to happen.

Consider history. In July 2006, when Ispat wasn't repaying lenders, a  media report said that ICICI Bank wanted to force Ispat's merger with  Jindal Steel. At that time, it was already clear that the Mittals had  squandered an excellent opportunity to ride the commodity boom and take  advantage of the massive write-offs granted to all steel companies under  what was to be a one-time corporate debt restructuring (CDR) exercise.  Within hours, the Mittals denied the report and the lenders didn't  attempt to change the management either. Instead, they quietly cleared an  unprecedented second CDR, which was officially disallowed under the  Reserve Bank of India (RBI) rules unless it was accompanied by a change  in management. Those were the days when it required some serious  arm-twisting to get the company to even pay for the electricity consumed  by its Dolvi plant in Maharashtra. In the same year, the lenders watched  silently as Ispat's losses continued to mount but the Mittals splurged 14 million euros to acquire a Bulgarian football club.

An informed source says, a representative of IFCI threatened to declare  Ispat Industries a non-performing asset (NPA) at a recent meeting, but  the Mittals remained sanguine since they know that lenders are more  worried about how the provisioning will affect their own performance  record and stock prices. Ispat Industries owes over Rs7,200 crore to 15  lenders and had overdues exceeding Rs400 crore as on 30 June 2010. Its consolidated loss stood at Rs323 crore for a 15-month period on that day. Their overseas ventures at  Bulgaria (closed), the Philippines and Nigeria are also facing problems,  says a source with an inside track.

Are the lenders building a case for a third CDR? Our sources say that  talk about a lender-led acquisition of Ispat Industries is mere eyewash.  Neither Tata Steel nor Arcelor Mittal is keen on acquiring the Ispat  Industries mess for various sensible reasons. The question is: When other  steel companies who got into a serious financial mess in the 1990s have  made a smart recovery, why wasn't Ispat Industries monitored more  closely? It clearly warrants a full-fledged investigation. Instead, the  Serious Frauds Office, operating under the ministry of corporate affairs  has stayed the investigation it had begun in 2004. —
Sucheta Dalal

-- Sucheta Dalal