Extravagant ways, poor industrialists

Last week, a clutch of institutions (not the regular trio of development institutions and insurance companies) were hard at work negotiat...

Last week, a clutch of institutions (not the regular trio of development institutions and insurance companies) were hard at work negotiating a bail-out for the Essar’s Floating Rate Note (FRN) issue, due to mature on July 15. Why? Shouldn’t the company deal with the consequences of its reckless expansion? No, I was told. We cannot allow Essar to default, it will raise the cost of borrowing for other Indian companies and reflect badly on the nation.

Curiously the same logic is never recalled when they are recklessly borrowing foreign funds. At that time, institutions and government agencies studiously mind their own business and foreign investment bankers collect nifty commissions for placing the funds. The logic seems skewed because, foreigners who are neither dumb nor rushing to invest blindly in Indian companies will scarcely ignore a well-sold investment opportunity. And when Essar is bailed out, there are a couple of others lined up for a similar dole.

The institutions who are worrying for Essar areclearly concerned about the fate of infrastructure projects seeking foreign funds. They have even pushed Essar into agreeing, to transfer 51 per cent of the telecom company shares to them at par (to cover interest until September). This means that in the event Essar cannot find a buyer for its telecom project, the lenders automatically hold a majority stake in the company as of September.

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Is that enough? For this particular deal, maybe. But there is no evidence that this set of institutions will be tougher than the financial institutions and insurance companies who held 51 per cent in Modi Rubber but could do nothing because of the Modi’s political clout.

These are also the same institutions who admit that they can do little to recover money from the Thapars. A bailout was proposed for JCT, but fell through when Polysindo backed off. JCT’s auditors, incidentally, had drawn attention to a sum of nearly Rs 100 crores transferred by it to a private firm owned by the promoters, which has never comeback.

Nobody is saying that business houses should not make mistakes or be bailed out when there is an unexpected downturn. Indian industrialists however, have acquired immense wealth by padding up project costs and funding these through FIs, banks and the public. Their assets, now running into tens of thousand crores, have bled their lenders and public investors while the companies too are floundering. One thus expects tough action rather than tough talking from the financial institutions. Professional managers should come along with bailout packages and not after a further default.

A sample of some promoters’ spending plans even as lenders are agitatedly discussing bailout plans for them:

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The Essar group while seeking a bail out on several fronts, is simultaneously negotiating the purchase of a second-hand cracker from Indonesia. Institutions in the know, call it a small investment, but hasn’t the group solemnly promised not to make fresh investments? Incidentally, IDBI in a separate deal isplanning to hike its exposure in Essar Steel and Essar Minerals from Rs 554 crores to Rs 946 crores.

IDBI also plans to increase its exposure to the Mittals of the Ispat group from Rs 1261 crores to Rs 1678 crores. At the same time, Pramod Mittal, who is in the process of turning into a NRI has acquired a house near London for 12 million pounds (over Rs 67 crores). Is it part of the cost overrun? All institutional heads know of this acquisition. The Mittals had similarly acquired a Rs 75 crore property in Mumbai at the height of the real estate boom – a group which had started out with a Rs 12 crore project just 12 years ago.

The Jindal Vijaynagar steel project, whose promoters have a penchant for private planes will see IDBI’s exposure increasing from Rs 551 crores to Rs 702 crores while they sort out technical problems in the project.

Minor steel companies in for a bailout include Usha Ispat, where IDBI’s exposure is set to soar from Rs 375 crores to Rs 690 crores; SJK Steel, whichwill see its exposure increasing from a mere Rs 93 crores to Rs 197 crores. The Lloyds group is another in line for a similar hand out.

These details do not include the on-going real estate scam. In a booming property market, industrialists diverted funds to their private firms to acquire property. Now that the values have halved, this property is being transferred to the publicly listed companies.

Reading a leading economic paper is the easiest way to spot these deals. Every few days, the paper reports such large transactions by public limited companies as an indication of the real estate market revival. Two years of such reports have seen no revival! Is it not fair then to say that threats of tough action and the pledge of equity are probably inadequate? Action should clearly precede bailout packages.

Tailpiece: The romantically inclined would probably be thrilled to know at a young first generation industrialist, presented his beloved wife a Rs 18 crores Chopard necklace on Valentines day. Yes, Rs18 crore. Why does everyone insist that it is the US and not India is the Mecca of entrepreneurship?

The author’s email: suchetadalalyahoo.com