The importance of being on PM's advisory council (17 March 2002)  

Last week the Prime Minister’s advisory council on Trade and Industry was reconstituted to include one new industrialist and two representatives of industry associations.

The chosen industrialist was Shashi Ruia, Chairman of the Essar Group. The news report in The Financial Express last week tells us that Ruia was chosen out of a potential line up which included Rahul Bajaj of Bajaj Auto, Azim Premji of Wipro, Jamshyd Godrej of the Godrej Group and D.S.Brar of Ranbaxy.

This would surely suggest that the Prime Minister (PMO) chose him for such a singular honour because of some significant contribution to Indian industry or to society? Well, let us see why Ruia’s companies have recently been making newspaper headlines.

• On March 8, Essar was in the news because Bank of America threatened to invoke a $ 108 million guarantee provided by ICICI to Essar Steel because it was delaying interest payments. Essar Steel’s debt liability is Rs 4,400 crore and the institutions are working hard at finalising yet another restructuring package for it. This means that ICICI will probably help Essar pay Bank of America through an interest cut for Essar and such other handouts.

• Bank of America’s action follows Union Bank of Switzerland’s decision to invoke a $ 24 million guarantee by the same ICICI against an export advance to the company. ICICI honoured the guarantee and recovered part of the money through a back-to-back guarantee with the export Credit Guarantee Corporation. This means that the financial system ultimately pays for the private company’s default with no questions asked.

• The Gujarat High Court is currently hearing a winding up petition filed against Essar Steel by one of its international bond holders (Gramercy Advisors LLC and Spinnaker of the UK) who together hold $ 30 million out of the $250 million Floating Rate Note (FRN) issue which was India’s first private sector default. Essar has tried to fix this by appointing the auditing giant KPMG to negotiate fresh terms, but the case goes on.

• Essar Steel liabilities at the end of March 31, 2001 stood at a whopping Rs 7,777 crore. The break up: secured loans Rs 2,803 crore, unsecured loans Rs 1,660 crore, current liabilities Rs 1,286 crore, advances from customers Rs 980 crores, Letters of credit and bank guarantees Rs 308 crores, lease finance Rs 200 crores and other variations in interest which are unaccounted Rs 540 crore.

• These are just a fraction of the groups’ total borrowings. Although a full tabulation is not available, we learnt on March 12 that the twice-bailed out Unit Trust of India (UTI) has a Rs 1,700 crore investment in the Essar Group and was forced to commission a detailed audit of these investments.

The audit follows the S.S.Tarapore committee’s stricture that UTI’s decision to invest in Essar Oil, Essar Steel and Hy-Grade Pellets was imprudent and had turned out to be wrong.

• A few weeks ago, it was reported that financial institutions (FIs) had demanded a complete restructuring of the Essar Oil board before lending more money to its Rs 8,000 crore refinery project.

This project is languishing since 1998 and its viability remains uncertain due to competition and frequent cost and time overruns. One of the FI’s conditions was that Shashi Ruia would step down as chairman of Essar Oil and the company would repay a Rs 100 crore borrowing by the profit making Essar Power.

Incidentally, Essar Oil’s bonds have a default rating and are traded at a fraction of the issue price of Rs 105.

A week after the report, we learnt that institutions had dropped their conditions and their tough talk — IDBI has in fact agreed to open a Rs 600 crore Letter of Credit (LC) and ICICI a Rs 550 crore LC.

When contacted to confirm this, top IDBI officials refused to discuss individual cases. They merely insisted that the LC had not yet been opened and that a few conditions were still attached to it. This is not the first time that institutions have failed to following through on tough conditions imposed on Essar before a restructuring exercise.

Will the FIs dare to ask Shashi Ruia to step down from Essar Oil now that the Prime Minister has chosen to honour him and seek his advice? The question needs no answer. If the groups’ defaults continue, lending institutions can always be bailed out by levying a “Ayodhya surcharge” on honest taxpayers next year.

Interestingly, decisions such as these never create a ruckus in parliament. Bailing out defaulting companies through nationalised banks and institutions is such a secular issue that no political party faults government for such largesse, not even when the common man ultimately bears the burden.

But what is it that got Shashi Ruia chosen for the PM’s advisory council? It is difficult to believe that the long list of Essar headlines has impressed India’s top executive. Essar’s trump card, say informed sources, is a powerful Swadeshi ideologue who incessantly pleads its case and justifies fresh financial assistance to the group.

Let us not kid ourselves that the Prime Minister actually needs or seeks the advise of this advisory council – these are merely a decorative appointments to make industrialists feel good and give them access to top officials. In fact, the advisory council into whose ranks Ruia has entered had started out with a semblance of seriousness.

The group was split into smaller sub-groups and each had submitted an exhaustive report on infrastructure, capital markets, simplification of legal and administrative procedures etc. The reports were promptly mothballed after the mandatory photo opportunity, which marked their presentation to the PM.