Banks remain benevolent despite bribe-for-loan charge
In August 2014, Bhushan Steel hit the headlines when the Central Bureau of Investigation (CBI) arrested its vice-chairman, Neeraj Singhal, on charges of bribing SK Jain, chairman of Syndicate Bank, in a bribe-for-loan scandal. We are not sure what happened to the CBI investigation; but once the accused was out on bail in October 2014, it was back to business as usual for Bhushan Steel, in less than a year. This was despite reporting bigger losses for seven straight quarters and a crash in its stock price from around Rs400 (August 2014) to Rs43.70 (23 September 2015).
The chain of events since August 2014 raises serious questions about the extraordinary power that large borrowers seem to exert over lenders and the absence of any checks on the creation of new doubtful loans. Bhushan Steel has obtained a massive restructuring of its loan, without a murmur from the Reserve Bank of India (RBI) or the ministry of corporate affairs (MCA—which now supervises the draconian new Companies Act 2013) about the quality of the company’s management.
Immediately after the arrest of Bhushan Steel’s vice-chairman, its 51 lenders put together a joint lenders forum and even talked about a forensic audit of the company’s accounts. There are no reports about any forensic audit, but lenders talked tough until November 2014. The Mint had then reported that lenders were asking Bhushan Steel to sell its integrated steel plant at Orissa to repay Rs15,000 crore and reduce its massive debt which stood at over Rs35,000 crore at the end March 2014.
There was also talk about forcing the company to bring in a strategic investor. None of these actions materialised, despite Bhushan Steel’s declining financials. An explosion at the Orissa plant had led to cost overrun and delay in commissioning the third phase of expansion. The company was bleeding and reported a net loss of Rs297 crore in the second quarter of 2014.
By March 2015, the lenders (mostly public sector banks) were only looking for ways to ever-green their loans. RBI’s 5:25 scheme was a boon for them. This scheme has made it easy for lenders to refinance large ‘infrastructure’ projects, apparently even when the management is facing CBI action. Under the 5:25 scheme, companies are allowed to extend the term of their debt to 25 years with flexible restructuring options. By June 2015, lenders had restructured the massive Bhushan Steel loan allowing tenure of 25 years; all approvals were in place by July. The company now feels so confident that, on 24th August, The Mint reported that it was engaged in talks with Monnet Ispat to purchase its 35% stake in Orissa Sponge Iron & Steel Ltd and, by September, it announced fund-raising plans by issuing redeemable cumulative preference shares worth Rs547 crore.
Not once was there any mention of further action in the bribe-for-loan issue, let alone any reference to action by MCA against the company’s management caught bribing a bank chairman. The demand for asset sales also vanished; all that the company did was a sale and lease-back of its oxygen plant. Meanwhile, losses continued to mount. The stock price chart shows that investors are not at all impressed by the lenders’ and company’s action.
When it comes to doing business in India, it is clearly different strokes for different folks. On the one extreme, we have the case of Pyramid Saimira Theatre Limited (PSTL) which was forced into liquidation as part of SEBI’s (Securities and Exchange Board of India) action against stock manipulation by the promoters. We have no idea why a profitable company with thousands of employees was made to pay the price for the actions of its promoters. Thousands of PSTL employees became jobless and over 200 entities suffered collateral damage. A ban imposed on the company in 2008 was finally revoked in September 2015. SEBI also auctioned promoter PS Saminathan’s home to recover the fines imposed on him.
Here, too, it is noteworthy that there has been very little action against Nirmal Kotecha, the other promoter of PSTL, who was accused of inducing a SEBI official to forge a letter in the regulator’s name and plant it in the media. The same regulator (SEBI) has allowed innumerable powerful companies to walk away from gross violations with just a warning or by filing consent terms and paying up some money. And then there is Bhushan Steel whose vice-chairman is caught bribing a banker; but it does not matter. The lesson: If you have the connections and your borrowing is large enough, the lenders dance to your tune. Even the draconian Companies Act 2103 is no headache for the biggest of companies.