By Vidit Garg
Bhushan Steel is one of the largest producers of steel in India, with highly leveraged financing as compared to equity proportions. The company is headquartered in Delhi, and Brij Bhushan Singal serves as the chairman of the company. In 2008, the company celebrated its successful venture in Odisha with further investments in Australia to mine coal and ore. The period of rapid expansion and merrymaking ended in July 2017 when India’s most extensive public-sector bank, State Bank of India (SBI), alleged that the company had failed to repay loans worth thousands of crores. If some media reports are to be believed, the company is said to be under scrutiny by the Serious Investigation Office (SFIO). Bhushan Steel has been labelled as a Non-Performing Asset (NPA) by SBI. The company stakeholders attribute the defaults to the international global recession and jinxing by evil powers. However, the rapid and unprecedented rise of Bhushan Steel is indicative of the NPA crisis that is plaguing the banking sector in India.
The rise of Bhushan Steel
It was in the year 1987 that Brij Bhushan and his sons acquired a sick and debt-ridden setup in Sahibabad. This was a period when state-owned companies dominated the steel industry. The Bhushans rapidly transformed the structure into a profitable business by importing and employing technologically advanced Japanese machinery. The period was marked by increased optimism in the performance of the steel industry sector, and thus the banks were also willing to lend money to companies with impressive performance track record. The Bhushan Steel plant began its construction in Odisha in 2005, and the first phase was completed in 2009-10. Even after the parting of ways by one of the sons from the business, the prospects for the company remained bright.
However, by 2012, the steel industry, in general, was slipping behind on interest payments and banks were increasingly faced with the dilemma of having to choose between lending to companies or continuing to hope for the sector to revive. Bhushan’s lenders were optimistic about the Odisha venture and hence decided to support the company further. Unfortunately, the plant never was able to reach its full capacity, and in 2013 during the trial, the plant’s furnace exploded, thereby causing multiple injuries. By 2014, it became clear that the steel company was in trouble. Despite this, the lenders displayed continued confidence in the company and then finally, in 2014, the CBI exposed Bhushan Steel as having defaulted on INR 100 crores loan repayment to Syndicate Bank. There were also reports of Bhushan steel’s top management bribing the bank officials to extend the credit timeline and limit.
Evergreening and the fall of Bhushan Steel
Evergreening refers to the process wherein banks transform old loans into new ones and thus ignore the acknowledgement of a new default. This has been prevalent in the functioning of the Indian banks, which truly reflects the sorry state of affairs. To substantiate, we can look observe the March 2014 period when SBI and a consortium of lenders came to the rescue of Bhushan Steel by issuing fresh loans. Even after all the havoc, in 2017, SBI asked Deloitte India to conduct a forensic audit and recommend some more restructuring.
The reasons as mentioned above, coupled with the poor management and obsolete human resource practices, are primarily responsible for the fall of Bhushan Steel. The lack of magnetic leadership, combined with the absence of a clear direction, further added to the woes of the company.
Tata as interested parties for Bhushan Steel
There are various reasons as to why Tata Steel is bidding aggressively for the Bhushan Steel company. First, it is in the interests of the first mover to take advantage of acquiring Bhushan Steel now as it is expected that there will be no greenfield steel capacity that may come up in the near future in India. Second, Bhushan Steel has some invaluable assets in Ghaziabad as well as in Khopoli, which are profit-generating and very active in the automotive sector and other allied markets.
Third, taking into the considerations the dwindling threat of Chinese competition, the steel cycle has become profitable, both in volume and size. Fourth, it is also possible that Tata Steel is trying to leverage and copulate the synergies of raw material linkage, logistics, procurement, and marketing into one unique ‘fit’, thereby gaining competitive advantage. Lastly, the possible buying will help Tata Steel firmly establish itself in the eastern Indian market. Moreover, Tata Steel will get access to Bhushan Steel’s portfolio of products such as pig iron, precision tubes, cable tapes and special alloy steel.
Tata Steel’s ongoing expansion plans
The board of Tata Steel has started to flex its muscles to usher in the next level of expansion in the company. The company is optimistic about aggressively expanding in India as the company has grown both organically and inorganically. The company has submitted bids for three stressed steelmakers, namely: Bhushan Steel, Electrosteel Steels Ltd, and Essar Steel India Ltd. Tata Steel is also trying to re-finance its offshore obligations by the sale of unsecured bonds in the overseas markets. The rapid expansion strategy of the Tata’s is also drawing its energy from the increased investments in infrastructure by the Indian government.
Some of the critical expansion plans in the pipeline are as follows: Tata Steel India is proposing an expansion project in the company’s Jamshedpur plant. The project includes setting up a plant with a capacity of 6 million tons per annum, a new blast furnace with a capacity of 3 million tons per annum, a new LD shop and a thin slab caster and rolling mill of 2.54 million tons capacity to produce hot rolled coils. The plans also entail the modernisation and operationalising of the Noamundi and Joda iron ore mines.
Tata Steel is trying its best to modernise and reconstruct the blast furnaces by employing technology from leading international suppliers. The rebuilding of the blast furnace is expected to boost productivity with an increased inner volume and diameter. New types of equipment, such as gas cleaning plant and cycloning techniques, are aimed to reduce emissions and make the unit environment-friendly.
Commonly known as FAMD, the Ferro Alloys and Minerals Division unit is the most massive steel business unit of Tata Steel. This Tata Steel division works in close collaboration with TSKZN, South Africa, and Tata Steel Asia Hong Kong to cater to the customer demands effectively and efficiently. By the use of latest technology and modern pieces of equipment, FAMD completes the requirement of high carbon manganese alloys of the South East Asia region.
The Greenfield expansion project of Tata Steel at Kalinganagar, Odisha is touted to provide added capacity to the production of steel. The execution of the plan is in full progress with significant environmental approvals obtained. The completion of the project will enrich the company’s portfolio of goods and products thus enabling the unit to produce high end galvanized coil and cold rolled coils for general engineering purposes.
RBI’S take on Electrosteel Steel Ltd
With the introduction of the Insolvency and Bankruptcy Code (IBC), the Reserve Bank of India got sweeping powers to deal with the NPA situation of the banks. RBI has been exercising the powers with force and moving the banks to move from NPA recognition to NPA resolution. Electrosteel Steel Ltd has been consistently posting losses for the past few financial years. The company has had a negative net worth of INR 568 crores. RBI has announced the insolvency of the company in reaction to which Electrosteel Steel’s shares declined by 14.5%.
RBI is cognisant of the situation, as the problem of NPA in the banking sector has long plagued the Indian economy and has become akin to a monster. In furtherance of their efforts, RBI has directed the banks to take the defaulting companies to bankruptcy courts over nonpayment of loan amounts. To resolve the NPA crisis, RBI has advised banks to refer to select cases under the IBC. Individually, companies are to be targeted (which include Electrosteel Steel and Bhushan Steel). The combined debt of the 12 companies amounts to INR 2.5 lakh crores. These companies have been given a time limit of six months to agree upon an agreeable and viable repayment solution.
Featured Image Source: Wikimedia Commons
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