The multinational corporation Essar Steel has reportedly offered new terms to its lenders to restructure its loans. Under the terms, Essar is allegedly offering equity worth Rs 4,500 crore in return for a concession, and is promising that it will pay about 20 per cent of its loans after 15 years. Currently, Essar Steel has bank loans of about Rs 40,000 crore. In 2015, Krishn Kaushik, a staff writer at The Caravan, investigated the vast industry of influence Essar had built by currying favour with politicians, bureaucrats and media persons. Despite its sway, the company is facing severe financial distress. However, a senior financial analyst told Kaushik that Essar’s owners, the Ruias, were well aware of how bank loans worked. They knew, the analyst said, that the “upside is theirs, downside is the banks.” In the following excerpt from his August 2015 cover story, Kaushik explores the financial situation of the Essar conglomerate.
A former senior official with Atal Bihari Vajpayee’s NDA government told me a story from Vajpayee’s time in office—an anecdote about how promoters such as the Ruias understand the function of banks and the restructuring of loans. In 1999, Essar, unable to meet its interest payments, was being hounded by several banks, mainly the State Bank of India and IDBI Bank, both PSUs. When the group approached the government for help, the NDA’s deputy prime minister, Lal Krishna Advani, called up the former official to try and figure out a solution.
“They were in bad trouble,” this person told me. “Ambanis had them cornered. Their Jamnagar refinery was not moving. Their steel-making business was bad.” The official studied the issue and came up with an industrial restructuring plan. “Basically, I said, you sell your refinery; so much money will come; you put it here; the banks will give you loan.” The NDA’s finance minister, Yashwant Sinha, took a look at the deal and declared himself satisfied, the official said.
Then Shashi Ruia saw it. “Shashi came to my room and said, ‘You’ve done to me what even Dhirubhai Ambani couldn’t have.’ He said, ‘You’re asking me to hive off businesses.’” The official was taken aback, and said that this was, after all, what restructuring entailed. Then Shashi allegedly told him, “No. In India it’s not hiving off, it’s giving me more money.” The official told me, “He was so blunt. ‘Mujhe aur paisa chahiye. You get me more money.’” The official said he told Shashi Ruia, “For that you have to go to the politicians.”
Around this time, a senior SBI banker asked the official to tell the Ruias to bring some money they had abroad back to India. “Inko bolo bahar se paisa laye. Yeh bol rahe hain paisa nahi hai, bahaut paisa hai,” the official said he was told—Tell them to bring in money from outside. They say there’s none, but there’s so much.
The official says he duly asked Shashi Ruia how much money he had parked outside the country. Shashi asked him to take a guess. “So I said 200 million.” “‘You are downgrading me so much’,” Shashi allegedly said, and then proceeded to draw up a list of his companies. “Yeh kiski company hai? Yeh meri company hai.”—Whose company is this? It’s mine. “I’m worth 1.5 billion abroad.”
The monsoons had just hit Mumbai when I landed there, and after the first day of the resulting floods—a seasonal ritual—the city mostly resumed its routine. I spoke to over a dozen people connected with the city’s financial services industry, trying to piece together a picture of how Essar was doing, and how it was viewed in the markets.
Indian promoters have historically relied on debt to grow, and the chief executive of a bank that has lent to Essar in the past told me that the Ruias were no different. But, he added, Essar does not have “the best possible reputation as a borrower.” Almost all the bankers I spoke to repeated an old quip, accompanied with either a scoff or a nervous laugh: Borrow a hundred rupees from a bank, it’s your problem. Borrow a hundred million, it’s the bank’s problem.
Almost everybody I met took a dim view of the company’s financial health. A senior analyst with a large international financial services firm said that, like many promoters of large corporate houses, the Ruias were “fairly savvy,” and “very clear: upside is theirs, downside is the banks.” Businesses have, largely, three sources for raising funds: borrowing from banks or institutional lenders, selling shares, or selling bonds that promise buyers a particular form of return. Essar has a history of unfavourable returns with all three sources.
Around 2005 and 2006, most Essar companies with assets in India—such as Essar Steel and Essar Oil—moved their parent companies outside the country, to places such as Mauritius, the United Arab Emirates, the United Kingdom and Cyprus. According to a note by Greenpeace, corroborated by a Directorate of Revenue Intelligence notice, these companies now come under the ownership of a holding company named Essar Global Fund Limited, owned in turn by two trusts based in the Cayman Islands. These two trusts are managed by the corporate trustees of two more companies based in Cayman Islands. Each of these companies has five beneficiary companies. Eight of these ten companies are wholly owned by the Ruia family.
Such structural complexity is not unique to Essar, and many international corporate groups are based in tax havens such as the Cayman Islands or the British Virgin Islands. These tactics discourage transparency: a researcher or an observer has no way to gauge the company’s overall financial health unless the company volunteers access to its books. Information about Essar’s finances, I was told by the chief executive of a bank that has lent to Essar, “is only available with the lenders.” Taking all of Essar’s companies into account, there are probably well over 20 banks lending to the group. Each bank gets access to company accounts relevant to their due-diligence procedures, but no more.
For this reason, it is impossible to definitively calculate the group’s total debt. For the 2013–14 financial year, a senior researcher with a credit-rating agency that tracks some of Essar’s companies put the figure above Rs125,000 crore, or $20 billion. The bank’s chief executive put it at Rs145,000 crore, or nearly $24 billion. “Debt is at every level” of the Essar group, he told me; the holding company alone owes more than $3 billion.
This tallied with the figure that an investment banker who has studied Essar’s books, including those of the holding company, shared with me. This investment banker told me that as of 2011–12, the holding company’s debt amounted to approximately Rs20,000 crores or $3.7 billion He also calculated in 2013–14, Essar’s steel units in the United States were in a combined debt of Rs15,000 crores, and the holding company’s “stand alone” loans were nearly Rs25,000 crores for the 2013–2014 financial year. In 2013, the ratings agency CARE termed Essar Steel a defaulter. Some credit rating agencies in India and abroad have now stopped rating a number of Essar companies altogether, because Essar does not provide them sufficient information to do so.
In response to my questions about the company’s debt, Kedia sent me a break-up of the debt for four of the group’s largest companies in India, which he claimed were the actual figures for the 2014–15 financial year. (Everyone I met in Mumbai was calculating from Essar’s 2013–14 financial declarations; their 2014–15 declarations will only be widely released in their annual reports by September.) For Essar’s steel, oil, power and ports businesses in India, the total debt is now Rs70,921 crores. If true, this will be a reduction of nearly Rs10,000 crore from the previous total debt of these companies, which, I learned, was over Rs80,755 crores ($12.7 billion at current rates).
If the group’s debt is worth more than $20 billion, even the annual interest payments to service it, assuming a rate of 10 percent per annum, add up to at least $2 billion. Essar’s largest exposure in India is to the State Bank of India. ICICI is another major domestic lender. Among foreign banks, the London-based Standard Chartered and VTB Bank of St Petersburg have large exposures to the group. If Essar fails, the bank’s chief executive said, and specifically so for its Indian lenders, “banks can’t afford to hold the problem.”
The chief executive also said that the group’s equity value—determined by whether it can honour its debt commitments even if it was to sell its assets—is now “questionable.” A Credit Suisse report released this June states that Essar Steel “has been recognized as NPA”—a non-performing asset, or a loan on which no payments have been made for 90 days— by two banks, HDFC and Bank of India. An earlier Credit Suisse report, from April, said Essar Steel’s debt was worth 16.2 times its equity—well over four times the ratio for other large steel concerns such as Bhushan Steel, with a reported figure of 3.8, and Monnet Ispat, with 3.7.
The total value of declared NPAs for India’s nationalised banks has risen steeply, from Rs75,000 crore in 2011–12 to Rs2.6 lakh crore by December 2014, according to a Press Trust of India report. But bankers and analysts believe that these figures do not represent the rise fully. It is neither in the businesses’ nor in the banks’ interest to declare an asset an NPA. Large NPAs not only stress banks’ books, they also affect the value of their shares in the capital markets. The NPA’s of nationalised banks pose a particularly huge risk for any economy, and India is now at “an inflection point,” according to the chief executive. “India can’t keep kicking the can down the road,” he said. “It will impact growth.”
Once a bank loses hope of recovering a loan, it can either write it off, or sell its exposure at a discount to an asset reconstruction company. Earlier this year, HDFC sold its exposure to Essar Steel, worth Rs550 crore, to the Edelweiss Asset Reconstruction Company at a 40-percent discount—taking on a loss of Rs220 crore. The chief executive said HDFC could afford to take the haircut, but other banks could not. “Debt compounds very fast,” he told me. “The longer they take”—to pay it back—“the bigger the problem.”
Krishn Kaushik was formerly a staff writer at The Caravan.