Nagarjuna Fertilizers & Chemicals Ltd (NFCL) that set up about four decades back a major plant to produce urea in Kakinada and counts among its former chairmen, a certain Field Marshall Sam Manekshaw, has piqued one's curiosity by the notice to the shareholders for its upcoming annual general meeting (AGM) on 15 September 2023.
The item that torched the interest, being the decision of the board and submitted for the shareholders' approval, is the sale of all its manufacturing apparatus at Kakinada and elsewhere, lock, stock and barrel, for a consideration of Rs1,365 crore in cash and 19.7% in equity in the buyer.
The buyer has a call option available on the 19.7% equity to be exercised within one year for Rs335 crore with a premium of 12% per annum. In other words, the deferred consideration is about Rs375 crore, payable (if able) after 12 months.
The buyer is not any known name in the fertiliser industry nor a marquee private equity fund and not even the one that seems to enjoy a first right of refusal to buy anything that is up for sale in the country!
It is a company named AM Green Ammonia (India) Pvt Ltd with its registered office at Module No. A1, 4th floor , Cyber Towers, Madhapur, Shaikpet, Hyderabad, Telangana.
What makes it more worthy of a chase by some investigative mind is that it is a freshly minted company, incorporated on 25 July 2023 with an authorised capital of Rs10 lakh and a paid-up sum of Rs1 lakh.
The two directors, named in a public document, are Anil Kumar Chalamalasetty and Mahesh Kolli.
None of this should cause any concern if the company had clearly set out these details in the notice together with the basis of arriving at the sale price and supplemented with some information on whether a process of competitive bidding to discover the approximate market value was undertaken.
Maybe the company and its board did some or all of these but omitted to provide them in the explanatory notes.
Though the sale requires a special resolution to be passed, with the promoters holding about 57% and the institutional holding being almost nil, the apathy of the other individual shareholders may help the resolution go through in all likelihood.
Ideally, such situations should mandate voting only by the non-promoter shareholders.
NFCL has been in the throes of a serious financial crisis almost since 2012-13 and its lenders being IDBI Bank, State Bank of India (SBI), ICICI Bank, Punjab National Bank (PNB), UCO Bank, Bank of India (BoI), and Indian Overseas Bank (IOB) have been grappling with different arrangements to find a salutary solution; the details of the same, will overburden this article.
But to help the reader understand the vital statistics, the financial position as of 30 June 2023 reflects an accumulated loss of Rs4,692 crore, a net worth at a negative Rs2,874 crore and overdue debt to banks of about Rs3,000 crore.
Despite the tell-tale sign of bankruptcy, the financial creditors have strangely not knocked at the doors of the national company law tribunal (NCLT) to trigger the process under the Insolvency and Bankruptcy Code (IBC) at any stage since the inception of IBC in 2016!
On the contrary, they seem to have hawked the loans to an asset reconstruction company, Asset Care and Reconstruction Enterprise Ltd (ACRE) on 28 March 2023.
The date of 28th March fits snugly with the practice of the banks sprucing up their balance sheets at the year end and this case must have fitted nicely to that end.
It is reasonable to conjecture that the said banks had written off a large portion of the dues as part of the mega mela of write-offs of over Rs14.56tn (trillion) in the last nine years.
And by selling the loans to the ARC they may have booked big profits in 2023 which most in the media are perceiving as the great turnaround of the Indian banking sector!
The inescapable question at this juncture is how was it possible for a urea manufacturer to go under the pump with the liberal subsidy that compensates even the most inefficient producer?
NFCL was in good financial health till about 2010, and its earned reserves were quite healthy at Rs1,100 crore and the debt-equity ratio was less than 1.
But sometime around 2007, the group was bitten by the 'bullish' bug to dream big! It ventured into an oil refinery project initially planned for 6MT and later doubled in Cuddalore, Tamil Nadu.
By 2011-12, it had diverted almost Rs1,000 crore, about Rs780 crore for the refinery project and the rest some miscellaneous ones, that hung heavy on its head and the signs of incipient financial stress loomed.
To window dress the fertiliser business, the group conceived of a jugglery termed as a composite restructuring scheme to primarily shed its dud investments in oil and others.
NFCL's fertiliser business merged with another shell company called Kakinada Fertilizers and was renamed to its original one.
Though about Rs1,000 crore of dud investments was spun off to another special purpose vehicle (SPV) termed Nagarjuna Oil Company, the entire loan liabilities that were on the balance sheet had to be absorbed in the new company, renamed NFCL. Therefore, to square the circle, the value of the fertiliser assets was jacked up significantly to fill the hole.
The land value alone was hiked to Rs1,100 crore, which is still carried in the books.
Added to the woes of funds so diverted from the core business, a few operational issues like non-availability of gas choked the company, which has now fallen into a deep hole, as described in the earlier part of the article.
While some attempt at rescheduling the debt payments (constant default rate -CDR) was worked out by the lenders, their combined apathy to trigger the insolvency process defies understanding.
In fact, an offshore operational creditor approached the insolvency tribunal and secured a verdict for settlement of their claim. Banks did not think it necessary to join these proceedings to work out a composite package to maximise their recovery.
The company's current plan to sell the entire productive assets for a price of Rs1,700 crore, Rs1,365 crore immediate cash and the rest in equity investment appears a shrewd move to wrest the assets out of the clutches of the lenders and ARC.
It should be noted for the record that almost 90% of the promoters' holding is under a lien.
There is no basis given for the price negotiated. To form some perspective on the potential valuation, just the land alone was valued at Rs1,100 crore about 12 years back!
The company's own estimate in 2013 for a new 1.3MT urea plant at the same location was Rs4,500 crore! This, of course, didn't happen.
There is no known case of any fertiliser plant being mothballed in the country, irrespective of the vintage. With the subsidy regime that offsets the full cost, plant efficiency is not an economic impediment.
Is the plan for selling its plant of 1.6MT with such a large parcel of land for Rs1,365 crore plus some future cash flow that is uncertain to an 'unrelated third party' a great act of generosity, if not outright charity?
More than the above, the origin of the buyer gives a disquiet on the intentions. There is an inescapable doubt, which the company can rebut with adequate data, if the promoters are engineering this to secure the business for themselves but letting the company sink.
Is anyone likely to squeal seeing this? Looks most unlikely!
The ARC that must have bought the loans from the banks at a steep discount would see profit in settling the dues for Rs1,365 crore immediate cash. Its investors will jump for joy at such handsome returns in less than a year!
The same banks may now fund AM Green Ammonia for the purchase of the plant, as the fertiliser industry is a priority sector lending!
These statistics may help the government claim that the private capex cycle is revived and that the banks are increasing the credit-deposit ratio as mentioned in the last budget speech, etc!
If everyone is happy in this process, why cavil and complain can be a question that only the regulators of the land can answer if they choose to!
It is not clear as to why the purported new investor cannot come into the existing company.
A counterpart of NFCL in Tamil Nadu, Southern Petrochemical Industries Corporation Ltd (SPIC), which landed in an identical financial mess by the year 2010 caused by more than Rs900 crore diverted to an aborted petrochem project, was rescued by the banks and through fresh promoter infusion than adopting a convoluted scheme like NFCL.
Thus, the Nagarjuna group that originated exactly half a century ago when the founder set up a cold rolling mill, which made heavy weather of a non-banking finance company (NBFC) business in the 1990s, may reinvent itself in the third generation of the owners as a new fertiliser company that the owners will need to wait some years before putting their name to!
Post Script: Nagarjuna Oil Refinery, conceived as a port-based refinery at Cuddalore, had its swift end (Bālāriṣṭa ) when it was ordered to be liquidated in December 2018 with the admitted dues to the bankers of Rs9,864 crore.
Based on public information, the liquidation is still on, cases are being fought and adjournments daily taken. The bankers say they have not seen a rupee yet, and only some professionals are feeding off the carrion!
is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies)