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Bhushan Steels Case Study
Bachelor of commerce (B.com)
Mangalore University
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NPA crisis: The rise and fall of Bhushan Steel into the great Indian debt trap
Bhushan Steel’s spiralling journey from an expanding steel mill to one of India’s biggest loan defaulters reveals how risky corporate gambles have hobbled our banks.
In 1987, Brij Bhushan Singal and his sons - Neeraj and Sanjay - acquired an ailing steel factory in Sahibabad, at a time when steel was dominated by state-owned companies. The group grew quickly by importing sophisticated Japanese machinery to make steel for India’s nascent automobile industry. But “Bhushan Steel’s control over availability, quality and cost of input steel was very limited,” Neeraj Singal explained in the company’s 2009-10 annual report. So in 2003, they decided to build an integrated steel plant in Odisha.
This was a time of great optimism for the steel sector. Banks were eager to lend to a company with an impressive order book of clients like Maruti Suzuki, Mahindra and Mahindra, and Tata Motors. “Banks were getting into project finance for the first time,” a lender seeking anonymity to speak freely. “If anyone questioned a project’s viability, bosses would say - India will always need cars, or there are millions of Indians who still don’t have electricity.” Plant construction in Odisha began in 2005, and the company was promised a ready supply of iron-ore and coal needed to make steel. The first phase of construction was complete by 2009-10.
In May 2008, Neeraj Singal, managing director of Bhushan Steel Ltd, threw a birthday party. It had been a good year; company profits were up, world steel prices at a record high and order books bulging. Tabloids splashed photographs of the party attended by industrialists and film stars Saif Ali Khan and Kareena Kapoor who took the stage in a black sequinned bodice and danced to pulsating Bollywood music. The celebrations mirrored the playful arrogance among big businesses in India, enriched by the opening up of mining, power and infrastructure sectors. Meanwhile, the western world was about to plunge into a crippling credit crisis triggered in the United States.
Next year, elder brother Sanjay, broke away from the family business, but Bhushan Steel’s prospects were bright. For the Singals, one of India’s largest steel producers, this was a time of frenetic expansion of their steel plant in Odisha, while their quest for coal and ore took them as far as Australia. But steel is a cyclical business, and as Chinese demand tapered after the 2008 Olympics, prices plummeted as fast as they had once peaked.
The golden run ended in July 2017 in a bankruptcy courtroom where a lawyer for State Bank of India (SBI) said Bhushan Steel had failed to repay loans worth thousands of crores. The company’s total debts stand at Rs. 46,062 crore; about the same as India’s budgetary outlay on school education in 2017 to media reports, the company is under investigation from the Serious Fraud Investigation Office (SFIO). “The banks need to get their money back,” the SBI lawyer said. “Is the company able to pay the debt or not pay the debt?”
Bhushan Steel is part of the “NPA crisis”, shorthand for Rs 8-lakh crore worth of loan defaults or Non-Performing Assets, that have choked India’s banking system and pushed lending, the lifeblood of the economy, to its lowest point in 20 years. Company promoters blame these defaults on a global recession, poor regulation and sheer bad luck. But the dramatic rise and fall
of Bhushan Steel reveals the NPA crisis is equally about public sector banks backing risky bets of promoters accustomed to growing their businesses on borrowed money.
And when these businesses floundered, banks threw good money after bad, often through third- party transactions. In the on-going court case of Bhushan Steel and Syndicate Bank, the Central Bureau of Investigation alleges in a First Information Report (No. RC AC1 2014A0004, August 1 2014), a bank official purportedly demanded bribes to ignore defaults. Nittin Johari, Director Finance at Bhushan Steel, declined to comment on any ongoing investigations, but said the company had not broken any laws.
For Bhushan Steel, it was a gust of headwind. “The whole house of cards came tumbling down,” said a financier seeking anonymity to speak freely. “In a slowdown, steel demand in India doesn’t drop. Prices do,” said the lender to Bhushan Steel. “With debt you grow big fast, but when bad times come, the debt suddenly becomes a massive burden.”
By 2010, Bhushan Steel was already shouldering loans worth Rs 11,404 crore. Still, the company went on a borrowing spree to finance the next phase of construction. By 2012, the steel industry was slipping behind on interest payments as steel prices fell to $300/tonne that December from a 2008 peak of $1265/tonne. “It was obvious that companies were borrowing from one bank to pay off another,” the lender said.
Banks were conflicted: pull the loans and book a loss, or keep lending and hope the sector revived. Bhushan’s lenders pinned their hopes on the Odisha plant reaching full capacity. It never did. In November 2013, the new plant’s furnace exploded during testing, three workers were killed and 29 injured. The accident was widely covered in the press. By March 2014, it was clear the company was in trouble. Profit had shrunk to a mere Rs 62 crore, while the company was spending more than Rs 1,600 crore a year in interest payments alone, according to Bhushan’s 2014 annual report.
The banks doubled down. “Despite these challenges, your company’s bankers have demonstrated continued confidence on the company,” the annual report stated, noting that banks had extended almost Rs18,000 crore in fresh loans and working capital. “Many loans were secured against the company’s stock,” said the financier, noting that the Singals owned 70% of the stock. This allowed lenders to pretend that their loans were sufficiently collateralised.
Then on August 1 2014, the Centre Bureau of Investigation, acting on a tip-off from a bank insider, said Bhushan Steel allegedly defaulted on a Rs crore loan repayment to Syndicate Bank and allegedly bribed the bank chairman, S. Jain for a credit extension. “Fresh credit was extended to M/s BSL by Syndicate Bank and as a token an illegal gratification of Rs 10 lakhs was paid to Shri Sudhir Kumar Jain,” said the CBI’s FIR.
When Neeraj was arrested on August 7 2014, Bhushan stock, trading at Rs 380, went into free fall.
EVER-GREENING
changer in solving the crisis. Coming to Bhushan Steel this company was the largest defaulter in RBI’s first list for IBC before NCLT.
On Friday, Tata Steel announced that they have successfully completed acquisition of controlling stake of 72% in Bhushan Steel in accordance with the approved Resolution Plan under the corporate Insolvency Resolution Process (CIRP) of IBC. Tata Steel highlighted that, the admitted CIRP cost and employee dues have been paid, as required under IBC. Further, settlement of the amounts equivalent to Rs 35, 200 crore towards financial creditors of BSL is being undertaken as per the terms of resolution plan and corresponding transaction documents.
Further, Rs 1,200 crore will be paid to the operational creditors of BSL over a period of 12 months as per their admitted claims and terms of approved resolution plan. Post announcement on Friday, the share price of Bhushan Steel soared by 4% to Rs 27 per piece on BSE. However, Tata Steel share price ended on a negative note to Rs 591 per piece down by 3%.
Following this development, Finance Minister Piyush Goyal tweeted saying, “Congrats to PM @narendramodi ji & @arunjaitley ji for a historic breakthrough in resolving legacy issues of Banks. Lenders recovered almost entire principal loan of Bhushan Steel through Rs 36,400 cr transparent bid by Tata Steel and also got 12% stake in the company.” This does reflect the sign of recovery in NPA crisis via IBC as it RBI and government’s important tool currently.
Even the Economic Survey 2018 said the new Insolvency and Bankruptcy code (IBC) was helping improve the health of banking sector despite the fact that the banks', especially public sector banks (PSBs), asset quality remained stressed in the current financial year.
Among the first list of RBI, now focus will shift to other defaulters. The top five defaulters were
- Bhushan Steel, Essar Steel, Lanco Infratech, Bhushan Power & Steel and Alok Industries as they had debt of Rs 57,200 crore, Rs 51,700 crore, Rs 49,100 crore, Rs 47,800 crore and Rs 30,200 crore respectively, as per JM Financials. Recently a total of 20 banks have so far announced their results and this includes 11 private and 9 public sector banks.
As per data of Care Ratings, NPAs for the combined set of banks have increased to 8% in March 2018 from 7% in March 2017. Overall NPAs increased from Rs 2 lakh crore in March 2017 to Rs 3 lakh crore in March 2018, which is an increase of 32%. Total advances on the other hand increased at a lower rate of 14%.
Bhushan Steel, with a large amount of debt in proportion to its equity (3 times more), is a highly leveraged company. The company’s consolidated debt stands at 31,839 crore, ha₹ ving risen 18 per cent from a year ago.
Over the years, the debt has risen steadily, sometimes at a faster pace than in the last year, as the steelmaker added production capacity. For instance, three-fourths of its Odisha plant’s 19,400₹ crore expansion programme (phase III) was debt-funded.
In the past, debt repayments did not matter as much for Bhushan Steel because its operations generated cash well in excess of what it had to pay by way of interest and loan repayments.
For instance, between financial years 2006 and 2010, while debt repayments ranged between 55 crore and₹ 316 crore a year, cash from operations (profit after tax plus non-cash₹ expenses) was much higher, at around 400 crore each year.₹
These were the years when Bhushan Steel clocked net profit growth at a compound annual growth rate of 53 per cent.
So, why has debt repayment become such a problem now?
The company’s problems began in 2010-11, when its debt repayment obligation more than trebled to 1,118 crore. This was probably because a part of the loans taken₹ for capacity expansion, including for phases I and II of the Odisha plant, became due. Bhushan Steel’s operating cash flows of 994 crore, fell short of its debt-repayment obligations.₹
Problems on every front
The situation worsened in 2013-14, with more loans becoming due. The company repaid 3,384₹ crore in 2013-14, double what it had the year before. Debt repayments apart, Bhushan Steel’s rising interest burden, too, had become a nagging problem, shooting up eight-fold in four years to 1,663 crore in 2013-14. The company’s profit shrank 93 per cent to₹ 59 crore during the₹ same period. A fall in global steel prices from their 2008 highs amid a glut did not help.
Bhushan Steel was consequently reduced to a position where its profit (before interest and tax payments) was just about enough to meet its finance cost. Together, these factors played into the company’s desperation to prevent its loans from being converted into non-performing assets. Ultimately, they may have resulted in the bribery charges being framed against its top management as well as Syndicate Bank CMD SK Jain.
Questions:
Identify the causes for the crisis in Bhushan Steels.
Document the 5 lessons that you learnt from this case.
What is ever-greening of loan?
Do you think banks as lending institutions were equally responsible for the mess in Bhushan Steels?
What actions can be taken by the Indian Government to avert similar crises in the future?
Bhushan Steels Case Study
Course: Bachelor of commerce (B.com)
University: Mangalore University
