Sucheta Dalal :MSEB & Ispat: The anatomy of a corporate default (16 September 2001)
Sucheta Dalal

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MSEB & Ispat: The anatomy of a corporate default (16 September 2001)  

The MSEB, which is badly in the red and under intense global scrutiny over to its highly publicised battle with Enron, is under tremendous pressure to improve performance and recover arrears. Like all State electricity boards, large chunks of MSEB’s payment arrears are due to subsidies to farmers, theft and distribution losses. But the most embarrassing defaults on its books are those of the private corporate sector—especially when unpaid bills have been allowed to mount to a few hundred crores.

MSEB’s worst account is probably Ispat Industries. This private sector steel company has had its power switched off and re-connected several times over the last few years, even while the arrears have continued to mount to Rs 247 crore in September. Each time that MSEB planned stringent action against the company, powerful politicians who interceded on Ispat’s behalf forced it to back off. Even this time when MSEB planned to switch off power on September 1, Maharashtra Chief Minister Vilas Rao Deshmukh called MSEB chairman Vinay Bansal asking him ‘to give them a last chance to come back to the promised schedules by postponement of disconnection by 10 days’. In a hand written note scribbled on a letter from Ispat’s joint managing director Vinod Mittal, the no-nonsense Bansal ordered that if Ispat failed to keep up its repayment schedule then power should be disconnected on September 11. Thus, on the same day that terrorists attacked the World Trade Centre in New York, the MSEB finally acted tough and disconnected power supplied to Ispat Industries’ Dolvi Plant in Maharashtra.

Bansal was quoted by Economic Times saying: They (Ispat) are our biggest consumer with an average annual bill running into around Rs 400 crore. But they are our biggest corporate defaulter as well. Ispat Industries’ arrears total a staggering Rs 247.75 crore but Ispat continued to pretend that it had not problem. It told Economic Times that MSEB has not cut-off power supply, but that the plant had merely been shut down for annual maintenance. A bunch of documents available with this writer however tell a different story. They show a badly cash-strapped and mismanaged company pleading for time and offering to pay even its monthly dues in three installments. On April 5 this year, after a series of negotiations MSEB worked out a repayment package with Ispat. It allowed the company to repay arrears (Rs 173.13 crore) and its Security Deposit (Rs 32 crore) in 36 equal installments along with a full payment of the current monthly bill. Thus meant a payment of Rs 4.95+ 0.75 crore in addition to its monthly bill.

Each time that MSEB planned stringent action against defaulters, politicians including the chief minister interceded on Ispat’s behalf, and forced it to back off

Though Ispat’s current bills were fully paid until April, it had run into problems in May and was in no position at all to pay arrears on schedule and wanted four months grace to come back on schedule. However, under pressure from MSEB, the company paid up Rs 6 crore in July towards the May bill (which totalled Rs 30.44 crore). On July 12, Vinod Mittal wrote to Vinay Bansal proposing to pay up the balance in three installments before the end of the month. He promised to pay the June bill in two tranches on August 16 and 31 and the July and August bills and the September bill by October 31st in multiple tranches. As for the huge arrears of over Rs 200 crore, he wanted their repayment installments deferred until after November 2001.

Mittal also offered a letter from his bankers ‘conveying their concurrence to remit proceeds of export bills directly to MSEB’ and said that the company would provide additional security in the form of a bank guarantee/Letter of Credit, which could be encashed in case of a default and the same be reinstated immediately there after. He told MSEB tat the bank guarantee would have a 12-month validity.

While Bansal has switched off Ispat’s power, the question is for how long will this last? There is little doubt that he will face tremendous political pressure to restore the connections. There is also little doubt that Ispat will raise funds and make another payment to buy more time and have the connection restored.

But it is not a question of short-term payments. Ispat’s arrears are huge (at Rs 247.75 crore) and if MSEB fails to collect it will have little moral right to collect from farmers, ice manufacturers and slum dwellers who form part of its delinquent subscribers who refuse to pay or steal its power. Bansal’s assessment will have to depend on a clear assessment of Ispat’s future viability and its ability to achieve a turnaround. In order to do that he may even have to look at the financial institutions’ assessment of the steel sector.

It is now common knowledge that the biggest blotches in the books of financial institutions is due to their reckless lending to the steel sector. It is also no secret that Ispat is among the half-a-dozen large steel projects that are badly in the red. Malvika Steel has already seen the FIs force the Kulwant Rai group out of management. They have threatened similar action against Lloyd Steel. A couple of months ago, the financial institutions discussed at their senior executives meeting, a radical proposal to amalgamate the steel companies of four industry groups. Ispat Industries and Ispat Metallics were part of the list. The others were—Jindal Iron and Steel and Jindal Vijaynagar, Essar Steel and Essar Minerals, Lloyds Steel and Lloyds Metals.

Arguing in favour of such a merger, the institutions’ background paper had said that the cost overrun in these projects has been to such an extent that in some cases the units by themselves have now become marginally viable, despite proposed restructuring of liabilities which envisage huge sacrifice on the part of the institutions by way of conversion of loan to equity, reduction in interest rates and rescheduling loans. It further says that in some cases, even after completion the debt servicing capacity is not visible in the current market scenario.

It is surely something for MSEB to think about before it re-connects Ispat’s power. Otherwise, it has a public duty to invoke some of the drastic remedies available under the Companies Act to recover its money.

-- Sucheta Dalal