Banks increase control, scrutiny of Bhushan Steel - Livemint

Lenders have also asked the company to reduce debt and bring in more equity. The company was also asked to monetize its non-core assets as part of the deleveraging exercise.

New Delhi: Lenders to Bhushan Steel Ltd have effectively taken charge of the company, and asked for three director posts on the company’s board (which will then have 14 members) apart from conducting a forensic audit of the company’s books and a concurrent one of its cash flows.

The first audit will find out whether the company hid something or has indulged in any malpractice, while the second will simply keep track of its cash.

Mint couldn’t immediately ascertain whether Bhushan Steel has agreed to induct three nominees of the banks into its board.

The move is a radical one for Indian banks that aren’t usually as aggressive, but it indicates a desire on their part to get tough on bad loans (or loans that run the risk of turning bad) in the banking system.

It also comes amid recent moves by the Central Bureau of Investigation (CBI) which has been investigating the issue of bad loans on the books of banks.

In early August, the federal investigating agency arrested S.K. Jain , chairman and managing director of Syndicate Bank, for demanding and receiving bribes to increase the credit limit of two companies—Bhushan Steel was one of them.

A consortium of 51 lenders has an exposure of around Rs.40,000 crore to Bhushan Steel and met on Monday to decide on ways to protect their exposure.

The lenders have asked the company to reduce debt and bring in more equity. The company was also asked to monetize its non-core assets within a definite time frame as part of the deleveraging exercise.

The bankers will also appoint an independent engineer to monitor the operations of the company and the projects, said a statement issued by Punjab National Bank, the lead lender.

Monday’s meeting was also attended by Brij Mohan Singhal , chairman of Bhushan Steel, and the company’s CFO. Vice-chairman Neeraj Singhal was arrested by CBI earlier this month.

Bhushan Steel, the sixth-largest Indian steel maker by capacity, produces about 2.2 million tonnes (mt) of mostly flat steel products at plants in Uttar Pradesh, Odisha and Maharashtra. Bhushan Steel has a net debt of Rs.31,754.09 crore as of 31 March, 12% higher than the Rs.28,356.23 crore debt it had a year earlier. The company’s debt-to-equity ratio, one of the highest in the industry, stood at 3.46 as on 31 March.

In the meeting, banks took stock of the performance of Bhushan Steel—production volume, turnover and the management. The company is said to have assured bankers that it is financially stable and there is no cause for worry.

Big lenders such as State Bank of India (SBI) and Punjab National Bank have sought representation on the board of the steel company, one of the bankers who attended the meeting said, speaking on condition of anonymity. He added that one of the big four firms will be asked to conduct the forensic and concurrent audit though the banks were, in general, satisfied with the operations of the company.

Bhushan Steel has asked for more time to cut its debt and bring in equity. Meanwhile, the company has agreed to monetise its non-core assets, the statement said.

Lenders were considering appointing a management agency to focus on the Odisha unit of Bhushan Steel in Dhenkanal, Arundhati Bhattacharya , SBI chairman, had said earlier in the month, adding that the bank had an exposure of around Rs.6,000 crore to the steel company, but that there was no fear of it turning into a non-performing asset.

Analysts said that Bhushan Steel Ltd’s troubles can be traced to an ambitious capacity expansion in Odisha for a 5 million tonne (mt) integrated steel plant in 2007.

In November, there was an explosion near a blast furnace after which its phase III expansion operations of the Odisha plant were stopped on the direction of State Pollution Control Board, according to a Care Ratings report in March.

The production loss impacted sales and by the time the Pollution Control Board gave its consent in January to restart operations, the delay hit profitability and cash flows, the report added.

“There have been reported cost overruns on phase III project with the company spending Rs.7,515 crore (including exchange fluctuation of Rs.777 crore) on the project up to 31 December as against the estimated project cost of Rs.6,583 crore,” Care said.

Ananda Bhoumik, senior director at India Ratings, said there is a sense of urgency in Bhushan Steel’s case given the large exposure of the banking system to the company.

“If the banks actually manage to get the board seats, which is traditionally reserved for shareholders, it can be considered a good progress for creditor rights,” he said.

As of 31 March, the 40 listed banks had gross NPAs of Rs.2.42 trillion, up from Rs.1.8 trillion a year ago.

remya.n@livemint.com