The outcome of the forensic audit into Bhushan Steel jointly decided by the bank consortium, which has a combined exposure of Rs 40,000 crore to the troubled steel-maker, will be key to find out the fate of the money given to the company.
About 51 banks have lent funds and bank guarantees to Bhushan Steel.
Simply put, a forensic audit is the evaluation of the financials of a company to investigate the possibilities of financial embezzlement. The results of such an audit can be used as evidence against the firm in court. It shows where the banks' money actually went and whether funds were diverted from the stated purpose.
“We should wait for the outcome (of the forensic audit) to decide the future course of action,” the chairman of a large state-run bank told Firstbiz on Monday when asked what action banks would possibly take next.
Besides forensic audit, the banks decided to appoint three directors on the board of the company and an auditor to monitor its cash flows on a daily basis.
The banks’ eagerness to save the money at risk is indeed commendable, since that money belongs to the public. The question is: would banks have been this alert if the Syndicate Bank episode didn’t actually take place?
This argument is made solely based on the fact that the current mess at Bhushan Steel and its financial woes are not necessarily because of the bribe case involving its vice-chairman and managing director Neeraj Singhal and Syndicate Bank CMD, SK Jain.
The CBI arrested Jain on 2 August shortly after he allegedly accepted a Rs 50 lakh bribe after long negotiations, but the financial degeneration of the steelmaker began several months before that.
Take a look at these numbers: The net debt on the books of Bhushan Steel, as of end-March 2014 stood at a whopping Rs 35,142 crore, significantly up from a year-ago. This also implies that the debt burden on the books saw an addition of Rs 5,000 crore in the next quarter, which came from leading state-run banks, even when the firm was under severe stress.
Banks were obviously not lending because they were impressed with the good performance of the company and its higher risk appetite. There was some amount of laxity and absence of adequate caution. Otherwise, banks conveniently ignored the deterioration of the firm’s financials over months.
For the quarter ended March, Bhushan Steel posted a net loss of Rs 19.57 crore as against net profit of Rs 280.21 crore in the corresponding period of last year. Sales declined 10.93 percent to Rs 2,399.73 crore in the quarter as against Rs 2,694.18 crore in the year-ago period.
For the full year, Bhushan Steel’s net profit declined 93.18 percent to Rs 61.96 crore from Rs 908.89 crore in the previous year and sales declined 10.05 percent to Rs 9247.82 crore.
For the June quarter, the company’s net losses widened to Rs 141.63 crore, compared with a net profit of Rs 76.26 crore in the corresponding period a year earlier. A look at the balance sheet of the company would show that Bhushan Steel has repayments of over Rs 2,000 crore due in fiscal year 2015, indicating tight cash conditions ahead. It won't be an easy task for the company to pay back its creditors and even keep the loans as standard.
The company has had sharp ratings downgrades in the recent months, not because of the bribery case, but because of its operational issues and growing stress on cash flows.
What is more important is that Bhushan Steel’s financial ill-health cannot necessarily be attributed to genuine industry issues, in which case banks must be sympathetic to the stressed borrower and lend additional help.
Bhushan Steel reportedly operated without necessary permissions, resulting in a mining ban in Odisha. Besides, the firm also faced several other operational issues. In November last year, following an explosion which occurred in the slag pit during the trial run of a blast furnace in Odisha, which killed three workers, Bhushan Steel was directed by the state pollution control board to not start operations of the furnace until further directions.
The company allegedly flouted several safety and labour laws too. According to a 7 August report in the the Financial Express, Bhushan Steel had 96 cases against it for violating labour laws under the Minimum Wages Act, Payment of Wages Act and other relevant laws. Bhushan Steel's plant didn’t have the ‘Consent To Operate’ certificate from the Odisha State Pollution Control Board.
Questionably, Bhushan Steel did not opt for a loan restructuring; instead it sought fresh loans to avoid a recast, for which banks agreed and generously offered additional loans. Why didn't the company send an SOS to the corporate debt restructuring cell for a rescue operation as in the cases of many other firms?
None of the banks paid attention to the following - first, the signals given by raters; second, the repeated rule violations committed by the company; third, the sharp deterioration in the financials of the company, to which they had several tens of thousands of crores worth of loan exposure. The banking system finally woke up only when the firm was subjected to massive media/political attention after the CBI arrested Jain on charges of bribery. They are now reaping the results of their laxity.
The situation could have, perhaps, been much less complicated for banks if the lenders monitored the end-use of the loan and operations of the company closely since the beginning itself.
The more important question is this: How many more companies are out there, where banks have taken significant loan exposure but do not have a clue on how these firms operate?
Source: First Post
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