Wednesday, Aug 17, 2022

Defaulters Inc.

Case studies of companies/promoters who have not repaid their loans to financial institutions and may well have to pay up because of the new Securitisation Act that allows FIs to take over assets of NPAs.

Lloyds Group

The Lloyds Group was founded by the late R.N. Gupta, who started as a trader of iron and steel, scrap and steel tubes. In the early 1970s, he graduated into manufacturing. By the late 1980s, the group was planning ambitious ventures, specially after the two sons, Mukesh and Rajesh, began to run the businesses.

In 1986, Lloyds Steel came out with a public issue and, three years later, the company took loans from financial institutions to expand its engineering facilities. Using a mix of debt and equity, the group expanded into newer areas like HR/CR coils, sponge iron and GP/GC sheets by the early 1990s.

However, many of these new businesses got into trouble after initial success. Specially the entry into areas like real estate and non-banking financial services.

Today, the group owes nearly Rs 3,500 crore to the institutions and its flagship, Lloyds Steel has run into problems due to the downturn in the steel sector. In due course, lenders refused to support the promoters and approached the courts to recover their dues.

Before they could initiate any action, two of the group companies, Lloyds Steel and Lloyds Metal, became BIFR cases. All attempts to restructure the existing debt with the BIFR have been refused by the lenders. The new Act may now help them to put additional pressure on the Guptas.

Calcutta Electric Supply Company

Power is one sector that has witnessed some of the biggest scandals worldwide. Enron may have grabbed the headlines, but smaller Indian stories are no less colourful.

The R.P. Goenka group's CESC began building a new unit in 1994 to cater to the needs of Calcutta. And immediately, there were allegations that the cost of this 500-MW plant had been inflated.

Compared to a similar-sized unit being built by BSES in Gujarat around the same time, its costs were much higher. Both the plants were of the same capacity, the equipment for both came from BHEL and IDBI was the principal lender for the two units.

In fact, the construction for the two units began in 1994, got completed in 1997, and the two projects had the same debt-equity ratio of 70:30. Surprisingly, while the BSES plant cost Rs 1,200 crore, CESC claimed a cost of Rs 2,880 crore.

No one really cared until, in 2000, CESC asked for a tariff hike. The Bengal Electricity Regulatory Commission (BERC) decided that it would not clear the seemingly-inflated costs, even though the figure had been cleared by the Central Electricity Authority and IDBI.

BERC decided it had the power to re-assess capital costs and stated that the project shouldn't have cost more than Rs 1,680 crore. This was a historic decision that the regulator could consider a certain figure, even if the lenders had agreed to a higher figure.

Obviously, CESC went to courts and the state High Court struck down the regulatory commission's action in 2001. It said that the BERC did not have the power to re-look at the costs once the CEA had passed them.

But by now, a number of consumer groups in Calcutta went to the Supreme Court that struck down the lower court's order.

Essar Power

The story of Essar Power is all about power politics, claims the PIL filed against the company by the Gujarat Congress politician Chimanbhai Mehta in 1997. The story starts in the late 1980s, when the Ruias-owned Essar group decided to build a captive power plant for Essar Gujarat's steel unit.

Equipment purchase started in 1989, and the cost of the combined steel and power units was revised from Rs 3,250 crore to Rs 3,525 crore. But the business environment changed in the early 1990s, when the government opened up the power sector for private players.

Suddenly, it made better sense for Essar to become an Independent Power Producer (IPP) rather than build a captive unit. The reason: while captive plants can sell surplus power to the Gujarat Electricity Board (GEB), the tariff they would get would be in the range of Rs 0.85 and Rs 1.20 per unit.

However, when it came to IPPs, the rules allowed tariffs to be fixed on the basis of the cost of project, which was benchmarked as slightly over Rs 3 crore per MW.

In the latter case, Essar realised that if it could convince the state government that its tariff should be calculated on the basis of a project cost of over Rs 3 crore per MW, it could demand a tariff as high as Rs 3.50 per unit. On that basis, Essar floated a new subsidiary, Essar Power, which was later converted into an independent company.

At this stage, the company had no permission to become an IPP, nor had it chalked out any agreements with the GEB. But Essar was so confident that it will get its way that it informed its shareholders that the now 510-MW IPP would be operational by 1996.

But trouble started when several bureaucrats, like the additional Chief Secretary and Chairman of GEB R.N. Das, raised objections saying Essar's project cost seemed too high. That's because another plant built by GEB itself three years after Essar imported its plant and equipment cost a mere Rs 2.37 crore per MW. The capacity of the GEB unit was only a third of Essar's and, therefore, energy experts maintained that the latter's cost should be cheaper because of economies of scale.

There were other problems with Essar's project. For one, as officials pointed out, the company had not gone in for competitive bidding to procure its plant, which was mandatory for all IPPs. Two, while negotiating with its lenders, Essar had showed the costs at Rs 1.5 crore per MW in 1989, it was now claiming that the figure was Rs 3.15 crore per MW.

Further investigations revealed that the equipment was negotiated through two sister concerns, Essar Global incorporated in Mauritius, and another one based in the Netherlands. Based on such apprehensions, the state Congress government rejected Essar's cost estimates of Rs 2 per MW.

But then BJP assumed power in 1996.

Suddenly, the Keshubhai Patel-led BJP government brushed aside all these objections and approved a tariff of Rs 3 per unit. Key officials like Das were transferred. And a decision was taken to grant IPP status to Essar Power and GEB was asked to sign the power purchase agreement (PPA) with Essar. That's when a PIL was filed against the PPA. The state High Court struck down the PPA, and the Supreme Court too upheld the order.

The only consolation was that the apex court instructed GEB to buy power from Essar, but not at the approved price. So, it was left to the state regulatory authority to fix the new tariff. By the time, things started moving, Essar's tariff had gone up to Rs 4.45 per unit, which was refused by the regulators.

Later, Essar itself scaled down the tariff to Rs 3, and further to Rs 2.50 (by switching to a cheaper fuel, natural gas). The negotiations are still on as GEB continues buying the power but pays only the fuel and other O&M costs to Essar Power.

While all this was happening, Essar Steel, the flagship, too got into trouble due the slack demand and low global prices. In fact, almost all the domestic steel companies incurred huge losses. So, when Essar Steel asked the financial institutions to restructure their loans, the lenders reasoned that when the group has diversified into areas like power through cashflows from the steel venture, it could have repaid some of its loans when the going was good.

Also, the profitable Essar Power was carved out of Essar Steel. And, when the Essar promoters wanted to sell a stake in Essar Power to a strategic partner, the institutions FIs intervened saying they should get a share of the profits from resale.

Essar's response from J. Mehra, resident director, Essar Group: "The only business of ours that is in trouble is Essar Steel because of the global downturn. We are not asking the lenders for any concessions or waivers. We are only asking for an extension of the loan repayment period, and conversion of rupee loans into foreign ones or a reduction of interest rates on domestic debt based on global rates. Our steel plant has produced at 92% capacity, but prices of steel had fallen from $400 to $180 a tonne globally and from Rs 16,500 to 14,400 per tonne domestically. Besides, when the loan was approved the import duty was 55% per cent, which has now come down to 25%. So when we have an expensive loan how can we compete with cheaper imports? International loans are far cheaper. Because of the high duties, even though we are among the most competitive producers, we can export just 10 per cent of our produce when 30% is the norm in the industry.

"Essar Steel has already paid Rs 2,129 crore as interest to its lenders which amounts to a rate of 11% per annum. So we have displayed an intention to pay. Lenders can see the condition of the steel industry and are looking at it. This allegation that we have siphoned off money is a motivated campaign by our competition."

Essar's response to the PIL filed against Essar Power: "Essar Steel had obtained permission from GEB for setting a captive power plant but the same was not pursued further with Central Electricity Authority for approval since by then (June, 1990), Government of India had announced the policy of private sector participation in the power sector. At that point of time, Essar Group decided to set up an independent power plant of 515 MW. Essar Power started importing machinery only in 1994. Out of 515 MW, 215 MW is supplied to Essar Steel under a contract identical to the one signed with GEB for 300 MW. Your information that project was initiated at a cost of Rs.1.5 cr per MW is not correct. As far as PIL is concerned, it was filed way back in 1995 and the High Court is yet to start the hearing.

"Even at the rate of Rs 3 per unit, we are the cheapest of all the IPPs. We are looking at pre-paying our loan in Essar Power" (about Rs 600 crore). (Now, the state government is reviewing all IPPs and believes that prices need to be re-negotiated in the favour of the buyer.)

PAL Peugeot (PPL)

In 1994, Automobiles Peugeot of France entered into a joint venture with Premier Automobiles Ltd (PAL). A year later, the new company, PAL-Peugeot Ltd. (PPL) came out with a public issue with a combination of equity shares and partially-convertible debentures, which were underwritten by the financial institutions.

The FIs are now claiming that PPL borrowed Rs 136 crore from them, while the fact is that the former had to pay up to buy the debentures they had underwritten due to under-subscription.

Things started going wrong for the company, which was manufacturing the 118NE and the 309 Peugeot models, almost immediately. To begin with, the Indian promoters, the Doshi family that owned PAL, didn't have cordial relations with their foreign partner. The Doshis had a similar arrangement with Peugeot's competitor, FIAT of Italy, which further complicated the interaction between the two partners in PPL.

In 1997, Peugeot pulled out of the venture without giving a notice to either the lenders or the trustees to debenture holders or the minority shareholders. The foreign partner sold out its stake to the Doshis at a nominal price.

The company began to default on its payments the same year and, in June 1998, it stopped production due to legal action by one of the lenders, Standard Chartered Bank. A year later, ICICI (now ICICI Bank) too filed a suit in its capacity as a trustee for debenture holders and, subsequently, a court receiver took possession of the company's assets in March 2002.

Company's Defence by L. Krishnamoorthy, vice-president and company secretary, PAL: "PAL, as a co-promoter, did its utmost to revive the operations and submitted several proposals to ICICI. The revival plans were discussed for over two years but, contrary to such plans where all the major shareholders bring something to the table, the institutions refused to inject any additional funds in PPL.

"One of our plans was that PAL would procure all components required for the assembly of the proposed multi-utility vehicle at cost from PPL. Obviously, the parent would be responsible for marketing the vehicles. The idea was to meet the twin objectives of creating a cash flow for PPL whose assets were lying idle and to ensure that the plant is maintained well. To further improve the viability of the project, we arranged for several concessions: An agreement with the labour union to reduce and rationalise wages; concessional octroi; delay arrears to MSEB; and deferment of other arrears.

But ICICI refused our proposal and the assets are now under auction. The best offer received for them is less than what we had proposed."

 JK Udaipur Udyog Ltd (JKUUL)

On Dec 2, 2002, ICICI Bank issued a notice to JKUUL, promoted by Hari Shankar Singhania's JK Group, under the new securitisation ordinance to recover dues of Rs 70 crore. (The company owed another Rs 52 crore to institutions like LIC, UTI and SBI. Due to the downturn in the cement sector and inefficient management, the company starting facing financial constraints and was declared an NPA in November 1999.

In January 2001, the lenders re-structured the loans with the rider that the cement business would be merged with the parent company, JK Corp. However, the company continued to be a defaulter and hasn't repaid any money since December 2001. Finally, in March 2002, JKUUL's manufacturing facilities were closed, and the promoters too reneged on their merger commitment.