Why Pramod Mittal Gets Angry

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Mumbai, January 4:: His palatial house in London costs around $17 million, and was once likened by the head of a financial institution to Indraprastha, the abode of the king of Gods. His relatively more humble flat at Carmichael Road in Mumbai boasts a fleet of expensive cars, including a Lexus, a couple of Mercedes, a Pajero and a clutch of smaller ones parked outside.

And in between haggling with lending banks and institutions to restructure his loans, he zipped off to Tokyo earlier this year in a chartered flight to watch the World Cup final live!

Meet Pramod Mittal, the steel magnate whose group loans exceed Rs 8,580 crores (end March 2002) but is having big trouble paying them back. His bankers suspect him of diverting money, and his steel plant is plagued with multi-crore cost overruns. But Mittal - noted for his political clout - isn’t worried.

“Why should I justify my deeds to the press when my balance sheets will talk for me soon?’’ an irked Mittal asked the Express Group. His bankers aren’t so sanguine. “Pramod Mittal takes a lot of risks, which is fine, but the problem is that he takes it on our money!” says a senior official of the Industrial Development Bank of India (IDBI).

The bigger problem is that the banks are letting him get away with it, a classic example (like two other steel supremos, the Sajjan Jindal group and the Essar Group) of how despite the tough new law to crack down on defaulters, it’s possible to get away. Mittal uses his clout and bank fears that classifying loans as non-performing assets (NPAs) will affect the lenders’ own credit ratings.

Like before, Mittal’s Ispat Industries is busy re-negotiating loans on the persuasive claim that steel prices in an industry gripped by a downturn have turned around in the last few months and the trend is expected to continue for a few years. So much so that lenders themselves are sold on the idea that three years down the road, India will face a shortage of steel because there are no new capacities being added.

So, when they turned their attention to India, the lending institutions fell over each other to back them.

Somewhere along the way, Laxmi Mittal broke away and took with him all the profitable overseas companies, leaving behind the Indian projects - Ispat Industries, Ispat Metallics and Ispat Profiles - that were in various stages of implementation - to Pramod and Vinod.

Ever since, Ispat has been in continuous trouble with its lenders, who did not once reassess the group’s financials after the severance of the profitable businesses. The Ispat website tells the story. 1985: A star is born with the emergence of Nippon Denro Ispat (now known as IIL) as the largest manufacturer of Galvanised steel products in the private sector, proclaims the milestone section followed by a few more entries, which end abruptly at 1998 after the launch of its “global-scale integrated steel plant”.

It is after this that the institutions finally turned tough. Global steel prices had begun to dip well below the $400 per tonne at which viability of the projects had been calculated. Prices sank as low as $180/tonne and even today, after the recovery, prices are at $230. Yet, Mittal gets away.

In 1997, Vinod Mittal had boasted to a business paper that the head of Nucor Corporation, a US steel firm that has introduced cutting-edge technology, had told him: “Mr Mittal, we are learning from you”. Mittal had said, “We will let our new hot strip mill do the talking.” Today, there’s only a grim silence.

Yet, Pramod Mittal, a non-resident Indian who conducts most of his business long-distance with bi-monthly visit to his Indian business empire, is furious when asked about the delays in building his latest plant. “Did I know India was going to make a nuclear blast at Pokhran?’’ he asks. The company blames the delay in the second phase of its project on the refusal of the International Finance Corporation, Washington DC, to disburse $122.5 million of the $130 million sanctioned to it.

Ispat’s finance director Anil Sureka says it took another two years to tie up those missing funds. The Mittals couldn’t even bring in the additional equity they had promised because the IPO market was subdued, says an institutional source. Mittal however points out that they hold 60 per cent of IIL’s equity and have the largest direct contribution. His anger also does not explain the large-scale diversion of funds to promote a variety of ambitious and opportunistic projects.

HOW THEY GOT THE MONEY
In 1994, IIL raised Rs 525 crore of easy money through a global depository receipt (GDR) issue, but according to its auditors, Singhi & Company, only Rs 333.71 crore was used for its hot-rolled coil project while the rest was diverted to group companies and through them into an expensive real estate deal (see box).

A confidential IDBI appraisal of 1998-99 available with the Express Group says that IIL had, in fact, diverted Rs 443 crores from a coil project (mainly from the GDR issue). This included Rs 119.73 crore into three joint ventures - Central India Power Co, Central India Coal Company and Hughes Ispat Ltd. Another Rs 99 crore into real estate acquisition, Rs 92 crore by way of inter corporate deposits to group companies, Rs 10 crore as promotional expenses for the Bailadila Mineral project, which has now been dropped, Rs 15 crore lost in the collapse of the CRB Mutual fund and Rs 107 crore given as an advance to Ispat Profiles.

“We have used the money exactly for the purpose for which it was taken,” Mittal argues. He claims that the GDR issue ($125 million) was never meant only for the coil project. The GDR offer document however confirms that, “The amount will be applied towards the financing of the company’s sponge iron plant and hot-strip mill project and for working capital requirements and general corporate purposes.” It is the ‘general purposes’ that Mittal is clutching at.

Today, Ispat Industries’ borrowings alone stand at Rs 6,330 crore (September 30, 2002) with overdues of Rs 343 crore to the financial institutions and a default in principal of Rs 48 crore. Sureka counters by pointing out that IIL has already paid Rs 5,314 crore towards interest and principal. The Mittals have also sold off some investments to meet lenders’ demands. Its stake in Hughes Ispat (it retains only four per cent) was sold after it was clear that there was no money to pay license fees. The tie-up with Rupert Murdoch for Direct To Home (DTH) services seems to have come a cropper. The Rs 100 crore real estate is being developed and could fetch some money. It has also shifted part of its operations to the suburbs to save costs.

When asked why he had borrowed at such extortionate rates in the first place, Mittal retorts, “That’s because I was bullish about the project that tim”. He also blames his bankers. “I have not taken any investment decision in isolation,” he says. “It’s a board decision and we have a lot of directors from FIs and also independent directors.”

Part of Mittals’ earlier successes and the reason for their brazen diversion of funds are their powerful political connections. At various times in the mid-90s they got senior leaders of France, Canada and the UK to weigh in for their coal and power projects. The story of IIL’s Dolvi plant exemplifies their local clout. On March 20, 1999 the Maharashtra State Electricity Board (MSEB) cut power supply after arrears of the Dolvi plant had mounted to Rs 80 crore. It was restored within hours after a flurry of calls between the local chief minister and his powerful brother-in-law at Delhi. This drama was repeated dozens of times over the next few years, with different politicians intervening on their behalf and arrears were allowed to mount to Rs 247 crore by September 2001. Contrast this with what happens when you don’t pay your bill of a few hundred rupees for a couple of months. There is now an escrow arrangement under which repayments are being made.

Steel industry sources allege that not making repayments (interest and principal) and defaulting on electricity bills was a deliberate strategy to keep production costs low. Today the Mittals have signed an escrow deal with MSEB for staggered repayments but the huge outstandings remain.

Ispat Industries’1.2 million tonne hot-rolled coil (HRC) project was to originally cost Rs 2200 crore; it had bloated to Rs 4,845 crores during the first restructuring when capacity was enhanced to three million tonnes and a captive power projected cost of 354 MW was added. After IIL commenced production of phase one in April 1998, manufacturing defects, technology problems and the high import bill increased the project cost further to Rs 6,050 crores even after the 354 MW power unit was spun off into a separate company called Ispat Energy.

HOW THEY GOT AWAY
It is said about the banking industry that when your borrowings are huge, it is the bankers who do all the worrying. True to the adage, bankers are working hard not to classify the Ispat group’s loans as Non Performing Assets (NPAs) because it would affect the lenders’ own credit ratings.

Mittals bankers continued to restructure its debt with some wishy-washy conditions such as the pledge of promoters’ equity and admonitions not to divert more funds. Another group company, Ispat Mettalics was also given more money on the condition that the cash-strapped Mittals would bring in Rs 134 crores - at that time the project did not even have a power sanction.

At the end of September 2002, addressing shareholders at the Annual General Meeting - Pramod Mittal was already crowing about the steel turnaround. Exports of Galvanized Steel and other products had risen 38 per cent over the previous year. He was also talking about retrofitting the galvanised line and admitted plans to “ramp up its hot rolled coils capacity to 2.4 million tonnes per annum by March 2003 on its own steam and internal accruals with the support and co-operation of lenders”. Industry sources say the cost of this expansion has been quietly worked into the restructuring that is being negotiated.

The Mittals have also no plans to abandon other expansions. Last month, this paper reported that the company hopes to get a No Objection Certificate for the 1,082 MW project soon. There is no discussion about how the cash-strapped Mittals will fund it this time.

The loss making textile company Gontermann Peipers is also being restructured. And in August 2002, at the height of its financial troubles, Pramod Mittal told a business newspaper that its jetty capacity in Maharashtra was being “increased from 3.5 million tonne to eight million tonne to make it a commercial port at minimal cost”. The Ispat energy project was also on, because it needs cheap power to reduce steel costs. Mittal expects a saving of Rs 100 crore through power, which is welcome, so long as he repays lenders. The Express Group now learns that Ispat is already using its higher steel proceeds for the following expansions without telling the institutions: It has de-bottlenecked two galvanising plants to increase capacity by 50 per cent (cost of Rs 2 to 3 crores) and added a new galvanising line costing Rs 4 crore. Another two lakh tonne galvanising line is being imported from Thermodyne at a cost of Rs 8 to 10 crore. These will double galvanising capacity from 25,000 tonnes p.a to 55,000 tonnes pa. The Mittals are now very bullish. The company is confident that it can break into the black by March 2003. They even paid a bonus to their employees this time.

Yet, the lending institutions were at their wits end over forcing repayments from the Mittals even after steel prices had firmed up in the international market, employed a new trick a couple of months ago. They approached the Tatas to check if they were interested in acquiring IIL (after all most of the Mittals equity is pledged with the lenders). Although the Tata offer was too low, it frightened the Mittals into making payments. The Securitisation Act has further strengthened the lenders’ hands. The questions is: will Mittals’ bankers take advantage of the turnaround in steel prices to draw up commercial terms for restructuring or be pressured again?