Massive support by development finance institutions and banks, lack of accountability to the investor and a supportive ruling dispensation through crony capitalism spawned many entrepreneurs. Quite a few of these were brilliant in conceiving and implementing big projects. These worked well in a protective environment and for a few years through liberalisation, but crashed soon. The story of Essar group is an exemplary illustration of the ability of the Ruia brothers to soar high and also to crash big.
Shashikant Ruia and Ravikant Ruia were brought up in Chennai. Their father was a civil contractor. If old timers find a few hills around Pallavaram in Chennai vanished over a few decades, they could relate it to civil contractors and suppliers shifting these as boulders to Chennai Port for the construction of the breakwaters. The senior Ruia evolved as a civil contractor with expertise in port construction.
Alert in seizing emerging opportunities
The Ruias took such jobs for construction in other ports in the eastern and western coast. They also gained proficiency in servicing ships. This expertise came handy when ONGC discovered oil at Bombay High off the Maharashtra and Gujarat coast in the 1970s. In a short time ONGC expanded production of crude oil to around 20 million tonnes per annum. This pot of gold demanded a lot of support services. The Ruias were alert in seizing the opportunity; they specialised in supplying victuals to those working in the oil platforms. This expertise grew in sophistication by Shashi-Ravi (SR-Essar) for laying under-sea pipelines to transfer the crude and gas from the platforms to the shore and a vast range of connected techniques.
The Essar empire started expanding to construction and shipping. In quick time Essar acquired an ailing Karnataka Shipping Corporation and later the South India Shipping Corporation. Using this experience, they acquired ships at low cost with easy payment, expanded big going for large capacity tankers and other vessels. Assisted by the brilliant banker, S V Venkatesan and alert use of emerging opportunities, Essar soon expanded into iron and steel.
Lowest cost steel plant
Essar came across a large sponge iron facility with 720,000 tonne capacity lying dormant at Emden in Germany was on sale. This plant, along with several others, was closed due to the steel policy of the European Community to limit production among members to align with total demand. The sparsely operated gas based plant was considered viable. It was offered at less than Rs 20 crore! Essar got the condition of that plant evaluated by independent experts, retained Voest Alpine, the renowned steel giant of Austria, to re-engineer and upgrade the plant to a capacity of 880,000 tonnes of hot briquetting iron. The total cost of the plant, its upgradation, dismantling, freight, re-assembly and erection at Hazira and getting it ready for production was just Rs 300 crore.
Brilliant integration…
Essar set up a captive power plant, constructed its own gas pipeline and made significant expenditure on port facilities for easy transportation of raw materials and finished products and erected up the steel plant at Hazira.
Initially Essar procured pellets from the Kudremukh Iron Ore Company (KIOC) which was ditched by Iran resiling on the original contract. But KIOC could not continue with the supplies for long. Essar conceived even bigger. It located cheap iron ore fines available with NMDC at Bailadila in Madhya Pradesh. Using the facilities at nearby Visakhapatnam port, Essar set up a 3 million tonne pellet plant at the port, transferring the iron ore fines through slurry pipelines. Its strength in shipping was leveraged to feed the Hazira plant with these pellets.
Essar in quick time expanded the Hazira plant with a 2 million tonne hot rolled coil plant, supported by a 510 MW capacity power plant. Accessed a few steel rolling mills in western India for the conversion of hot rolled coils into cold rolled plates and sheets. These were in great demand by the consumer durable sector (appliances), manufacturers of pipes and automobiles. Thus, Essar Gujarat created a handsome capacity for steel in the west coast at a fraction of the cost of established integrated steel producers like SAIL and Tata Steel.
Dizzy heights in profits…
The going was great thanks to the boom in demand and to liberalisation: total income of the company zoomed from Rs 74.7 crore in 1989-90 to Rs 751.7 crore in 1993-94; net profit shot up during this period from Rs 14 crore to Rs 182.2 crore. This related to a paid-up capital of Rs 196.8 crore at the end of March 1994. In 1994, less than a decade, Essar had emerged as the fourth largest industrial house in the country with striking presence in steel, shipping, oil and gas and construction. It conceived of expansion into petroleum exploration and oil refining involving huge investments on borrowed money. By the end of the 1990s Essar had interests in steel, oil, shipping and securities and in unlisted companies engaged in telecom, minerals, projects, trading…
Growth on unsustainable loans
The Ruias quickly expanded in other non-related sectors with huge investments. It failed to consolidate and expand in a range of sectors on loans, debentures and other instruments. The cyclical nature of different sectors landed the group in a mess.
By 1999 the group’s total debt stood at Rs 10,000 crore with FI’s exposure at Rs 8312 crore. The group’s net worth was already deeply eroded.
The group collected Rs 1822 crore through public issues in the 1990s on which returns of shareholders were zilch. The Ruias channelled funds from the group’s listed companies to unlisted ones.
The expansion continued for a few years after 2000. Essar Oil set up a 13.5 million tonne refinery at Vadinar in Gujarat. But unlike Reliance in neighbouring Jamnagar, Essar could not ensure large refining margins and assured, profitable exports. The highly controlled sector also denied private companies to market refined products through domestic petrol stations on par with public sector companies. The investment made in distribution infrastructure became infructuous. Essar sold off the oil business to the Russian oil major Rosneft.
Essar battled with mounting losses for close to two decades in the new millennium. Its innovative and imaginative foray into the steel sector described above ended with the acquisition by Arcelor Mittal and Nippon Steel, luckily not at the most distressed price. -SV
A tale of a take-off – twists, tricks, turns and a tumble!
The Ruia brothers’ promoted Essar group of companies, valued around US $ 8.9bn in 2013, shrunk to a mere $1.9 bn in 2021, even while the conglomerate of Reliance Industries, which they were wanting to replicate, had spiralled from a market cap of around $40bn in 2013 to about $240 bn now!
The Essar Group had its humble origins in the unlikely city of Chennai in 1969 as a trader and a contractor. It made giant strides building a conglomerate of mega industries that involved big investments. Typically these were in highly regulated spheres involving significant government discretion in permissions and approvals.
The investments were driven with a strong ambition, a clear vision and focussed on areas where an entrenched few had managed to obtain sufficient government patronage and protection from competition. The ventures necessitated big dozes of capital investment which was not easily accessible without the right connections.
The first big foray was in the 1990s in the domain of steel-making, which had a big public sector presence and provided for automatic state intervention against competitive compulsions.
HELPFUL DFIs…
The existence of the development financial institutions where project economics commanded equal respect with political patronage for funding, made it feasible to make big commitments with the limited capital contribution of the promoters.
It was widely believed that the group was fortunate to enjoy the goodwill of IDBI which was a government-owned DFI.
The financials of the steel venture for the early years are not accessible. The ones available for the later periods give a hint that the banks and the institutions were quite liberal in underwriting and lax in assessing the viability of the projects of that magnitude; they were more participating in an entrepreneurial capacity than as banks lending public money raised through deposits!
In fact, when IDBI was to be given a burial as its existence had become unviable and was to be merged into the newly setup IDBI Bank in 2004, the government made a donation of Rs 9000 cr to the stressed asset stabilisation fund to fill the breach caused by its imprudent lending.
While correlating this to the exposure to the Essar group may be anecdotal, it perhaps is not entirely apocryphal! But those were still early days for the group in terms of acknowledged stress and they were supposed to be growing and investing in bigger and riskier assets.
LITTLE CONCERN FOR DEBT-EQUITY RATIO…
The investments were very pro-cyclical; neither the group nor its lenders had any serious concern about
metrics like debt-equity ratio or debt service coverage ratio and the assets were leveraged cleverly to find funds for newer ventures.
As an example, the balance sheet of Essar Oil Ltd as on 31 March 2013 had an equity base of about Rs 1000 cr and the loans and liabilities were Rs 26,000 cr! This excluded current liabilities that were matched by current assets. The EBIDTA was Rs 3650 cr and the finance charge Rs 3423 cr. A balance sheet that resembles the financials of a book-maker than that of a 13.5mn tonne refinery!
The traditional approach of Indian family business of borrowing against the assets in the operating company and also pledge shares of the same company and raise funds at the level of a holding or an investment company, was clinically followed by Essar as well. Somewhere, the credit worthiness of the brothers was a new bench mark even by the sordid standards of underwriting in the banking sector.
Practically, all ventures were seeded with monies raised for some earlier venture and the group had a typical maze of cross investments and inter corporate loans that characterise the funding in most family-run conglomerates.
The period of late 1990s till the break out of the financial crisis was anyway a period of major loosening in the bank balance sheets across the globe and especially in India. It was the halcyon days of the group in terms of going on a borrowing and an investment spree. But the group set up good assets that have remained operational till date thanks to its hiring high calibre professionals!
Extensive use of GDRs
The group had extensively used the global depository receipts route which was quite popular post the liberalisation in the 1990s to raise funds off shore. Over a period, the ownership was artfully migrated off shore. The group’ holding structure underwent seminal changes and took residence in Mauritius with an active business address in Dubai, places that were most sought after then by businessmen who wanted to live in the cover of regulatory darkness!
(Essar is a company organised under the laws of Mauritius and majority owned by the Ruia family. The address of the principal office of Essar is P.O. Box 61078, Jebel Ali, Dubai, United Arab Emirates.)
Essar was a forerunner for moving ownership off shore, which model was emulated by many more and continues to be in fashion till date.
Progressively, companies like Essar Steel and Essar Oil were delisted from the Indian exchanges as the promoter group managed to conveniently corner the GDRs off shore and marginalised the holdings of domestic institutions.
The operations remained predominantly in India, though the group did make acquisitions overseas in metals and oil. The sources of funds are beyond public scrutiny as these overseas companies, especially in the tax havens, are opaque.
The group did many corporate restructuring exercises over time and in the era when the regulatory scrutiny was minimal with highly accommodative accounting practices; with the boards and auditors largely captive to the promoters, enough was achieved in window-dressing and marginalising the outside investors in the group.
COMPETENT PROFESSIONAL MANAGERS…
A noteworthy aspect of this group has been the fact that almost all companies were headed by a professional CEO and the owners were in a non-whole-time position in the board. Thus, the common practice of Indian family groups planting family members irrespective of capabi-
lity in the driver’ seat was eschewed by Essar.
But a lot has changed for the group in the recent years with the precipitous fall in its fortunes. The highly
leveraged position of the group with both global and local borrowings and the crack down on non-performing loans by the RBI during Dr Raghuram Rajan’s stint as Governor, made the position untenable.
The relief came in August 2017 when the oil refinery in Vadinar and a few associated assets were sold to a consortium of buyers led by the Russian oil company Rosneft. A big deal by any standards; the US $ 12.9 bn helped the group to pare down a large chunk of debt.
Despite this fortunate turn, the lenders under threat by the RBI, referred the prized asset of Essar Steel to the Insolvency and Bankruptcy (IBC) process in August 2017. Essar Steel was an acknowledged defaulter and headed the table of the ‘dirty dozen’ famous defaulters identified by the RBI for debt resolution through the IBC process.
HELD OFF LENDERS from DRASTIC ACTION…
Essar had turned a defaulter as early as mid 2015 but was holding off the lenders from any drastic action. Many more such cases that surfaced in quick succession reflected badly on supervision by the RBI; thus began the end of the practice of banks to do ever-greening of loans to avoid recognising the NPA.
The financial creditors’ claim of Rs 9553.55 cr was restricted to 7237.30 cr by the IRP and that of the OCs from Rs 3781.73 cr to Rs 284.76 cr. The contingent liabilities of Rs 2701.49 cr was fully rejected. In effect this company should have attracted a lot of criticism with liabilities of almost over Rs 15,000 cr though the admitted portion was slightly lower.
The resolution applicant was an overseas private equity investor who, after forfeiting the security deposit, never showed up to buy the company!
On 7 May 2021, the NCLT has ordered liquidation. No prizes for any guess of how much the liquidation of a services company would yield to pay the claimants, after paying the lawyers and resolution professionals!!
As per the balance sheet of 31 March 2017, the company had bank borrowings of almost Rs 55,000 cr on an equity of Rs 429 cr! The equity is reckoned on the back of recognising deferred tax assets of Rs 4766 cr on the business losses.
The company was hopelessly bankrupt with this financial condition and had overdue loans on which repayment had been defaulted of more than Rs 10,000 cr, since 2015. Public sector banks which had lent almost all of the amount were dormant till the whip was cracked by RBI.
THE BEST RECOVERY THROUGH NCLT
The IBC process of Essar was among the most contested and fraught and much of the initial jurisprudence established in IBC law arose from this case. Out of the admitted bank liabilities of about Rs 50,000 cr, SBI alone had an exposure of Rs 13,220 cr, demonstrating the sway the group had over the premier bank of the nation!
There were significant claims of operational creditors like the suppliers of goods and services, utilities, employees, tax authorities and the like which on the face of reading the 160-page order it is difficult to quantify. However, some estimate in public domain indicated that the total liability of the company was of the order of Rs 82,500 cr.
Ultimately, Arcelor Mittal, the global steel giant, made the winning bid to pay a total sum of Rs 42,000 cr to acquire the company. Arcelor was also to fund another Rs 8000 cr for working capital purposes but that is beyond the resolution payments.
Many claimants had hotly contested the approach of the financial creditors to predominantly appropriate the Rs 42,000 cr amount to themselves, leaving the operational creditors in the lurch. The NCLT finally recommended the committee of creditors to sympathetically deal with the OCs and allocate 15 per cent the bid amount to distribute among the claimants.
Assuming about Rs 36,000 cr was settled to the bankers who had a claim of about Rs 50,000 cr, the recovery is a tad over 70 per cent, which till date is one of the best for a resolution of this scale.
Many a lawyer and law firm’ fortunes were put on a firm footing thanks to this case which spanned over twenty months!
Will the group be able to bounce back? Will the lenders and investors trust them with more loans? They have lost their top assets of oil refining, steel and mobile telecom. They do have a few left behind but their current performances are not known as they are mostly overseas and unlisted. Also the brothers who had the vision but were in a tearing hurry to achieve much in a short time, are growing in age. – V Ranganathan
