The troubles of debt-ridden steel-maker Bhushan Steel only seem to be increasing. A consortium of lenders, headed by state-owned Punjab National Bank and State Bank of India, has asked the company to sell and lease back some of its critical assets to reduce debt. This comes a day after the lenders decided to conduct a forensic audit of the steel-maker to ascertain if it used the loans for the purpose they were given or if the funds were diverted. They have also agreed to appoint three nominee directors on the company’s board of directors.
Bhushan Steel Vice-chairman & Managing Director Neeraj Singal was arrested by the Central Bureau of Investigation earlier this month for allegedly offering a bribe of Rs 50 lakh to Syndicate Bank Chairman & Managing Director SK Jain (he has since been suspended) for extending the company’s credit limit. A few days before his arrest, Arun Agarwal, the chief financial officer of another group company, Bhushan Power & Steel, was taken into custody. In the first information report filed in the case, Agarwal has, however, been described as the CFO of Bhushan Steel and not Bhushan Power & Steel. A case of mistaken identity is how Bhushan Power & Steel is viewing Agarwal’s arrest. While Bhushan Steel is listed on the stock exchange, Bhushan Power & Steel is unlisted. The two companies, however, share a tenuous link and that’s the reason why, many believe, CBI went after Agarwal.
Not long ago, Bhushan Steel and Bhushan Power & Steel were part of the ‘united Bhushan group’ led by patriarch Brij Bhushan Singal who has two sons: Sanjay and Neeraj. Brij Bhushan started out modestly with a manufacturing unit for door hinges and rail track fasteners in the 1970s. By 1980, he had set up a rolling mill at Chandigarh under Bhushan Power & Steel. “The turnover then was Rs 1 crore a year,” recalls his elder son, Sanjay, who joined the family business around that time. Younger son Neeraj followed shortly after.
The first big opportunity that came the family’s way was Jawahar Metal Industries which had a manufacturing unit for cold-rolled steel strips and steel ingots at Sahibabad (Uttar Pradesh) in the outskirts of Delhi. The father and sons took over the management of the company in 1987 and got down to setting up a new plant to manufacture wide-width cold-rolled steel strips with integrated facilities. The company was later renamed Bhushan Steel & Strips (now Bhushan Steel) and was listed in 1993. The going was good. The Singals had installed Hitachi steel mills at the Sahibabad factory and the quality of its output was known to be good. “They (Bhushans) were one of the first to cater to the high-grade automobile sector,” an industry source points out.
The next phase for setting up a new galvanising line adjacent to the existing facility was on the drawing board as was a proposal to set up an integrated steel plant at Odisha. But at this point, the group’s plans started to falter. “Towards the end of 2002, we split,” says Sanjay without going into the details. Ask him the reason and “differences in business strategies,” is all that he is willing to say. “No one really remembers what caused the dispute. It’s true that their business strategies were different,” adds an industry source.
Between 2002 and 2011 (when a family settlement finally took place), the very public spat between Brij Bhushan and Neeraj on one side and Sanjay on the other took many ugly turns. In 2005, Brij Bhushan claimed that he was illegally removed from the board of Bhushan Power & Steel by Sanjay. Brij Bhushan moved the Company Law Board which wanted the Singals to maintain status quo. This meant that Sanjay would manage Bhushan Power & Steel, while Brij Bhushan and Neeraj would take charge of Bhushan Steel. In 2011, the family settlement saw the formal disentangling of the crossholdings. Sanjay got control and ownership of Bhushan Power & Steel, while Brij Bhushan and Neeraj took charge of Bhushan Steel. “My father and Neeraj have two-thirds of the group; I have one-third,” says Sanjay, hastily adding that that’s the way it was supposed to be.
Bhushan Power & Steel and Bhushan Steel had their own growth plans chalked out. The two companies had decided to set up integrated steel plants in Odisha. In spite of the recent developments, Sanjay is confident of the expansion planned for Bhushan Power & Steel. “We have a capacity of 2.3 million tonne now. By 2016, we will have a capacity of 3.5 million tonne,” says he. In a market facing scarcity of raw material, Bhushan Power & Steel has full security for its project. The company has two iron ore mines with estimated reserves of 224 million tonne and a coal mine with reserves of 250 million tonne. Bhushan Steel, on the other hand, has a capacity of 2.5 million tonne and is in the process of commissioning another 5 million tonne. The company was allocated a coal mine, but got embroiled in the coal allocation controversy. That block was de-allocated on the recommendation of the inter-ministerial group.
Neeraj might have landed in a mess with the bribe-for-loan case, but he has many supporters in the steel sector which is going through troubled times. “It’s just bad luck. He has been going through a rough patch,” says a competitor. Last year, one of Bhushan Steel’s blast furnaces at its Odisha plant blew up, killing one person and injuring 19. It was sealed. Earlier this year, the company finally got permission to start a new blast furnace and now the Syndicate Bank incident has dragged it down.
With a total debt exposure of around Rs 40,000 crore, Bhushan Steel is among the country’s most indebted steel makers. It had a debt-to-equity ratio of 3.5 at the end 2013-14. If deferred tax and other liabilities are included, this ratio rises to nearly 4. A competitor, however, feels that the colossal debt is hardly unusual, given the problems facing the sector. “So many banks have sanctioned loans. Surely they must have done so after due diligence.” An agitated steel producer adds, “The entire sector is under pressure. Capacity utilisation is around 60 per cent. On top of that, iron ore and coal are not made available. This is a systemic failure.”
Raw material linkages have been a contentious issue for most steel projects. The clampdown on iron-ore mines in states like Karnataka and Goa has had a far-reaching impact on the steel sector. Many small and mid-sized companies have shut shop, while some projects have been rendered unviable. “We should have raised equity, but we were first handicapped by the Company Law Board verdict sometime in 2007 which ordered status quo on capital,” says Bhushan Steel Director (finance) Nittin Johari. “That ultimately got resolved by the family settlement in 2011. But the markets have not been good since.” The company has recently passed a resolution to raise equity up to $ 1 billion by way of qualified institutional placement or rights issue.
Bhushan Steel isn’t the only company facing the problem of high debt. Bhushan Power & Steel’s debt is around Rs 29,000 crore, says Sanjay. The company, he adds, will end the year with a topline of Rs 13,000 crore. “In the next financial year, our topline will be Rs 14,000 crore.” What’s the way out? “The Bhushans have not put in equity. But in a good equity market, it would not be difficult to deleverage,” says a source in the sector, referring to the recent bull run on the stock market. All said, few appear to doubt Bhushan Steel’s product quality, its reputation or its state-of-the-art plant. Even Sanjay is on Neeraj’s side. “In this crisis,” he says, “we are together.”