Mumbai: Armed with Ispat Industries Ltd shareholders’ approval to convert part of a Rs7,000 crore loan into equity in the event of a payment default, 14 creditors led by IFCI Ltd, India’s oldest institutional lender, have tightened their grip on the steel maker.
At the annual general meeting in September, Ispat shareholders gave their consent to the lenders acquiring a 19.53% stake by subscribing to preferential shares worth Rs665 crore at Rs19.38 per share in case of a default. If the option is exercised, creditors will raise their stake to 30.39% from 10.86%.
High stake: Ispat Industries vice-chairman Vinod Mittal. Daniel Acker / Bloomberg
Ispat promoters—chairman Pramod Mittal and vice-chairman Vinod Mittal—have already pledged a 39.1% stake, or nearly 95% of their 41.14% stake, in the company to a consortium of banks and financial institutions that have lent Rs7,000 crore to the firm to build a 4.6 million tonne (mt) steel plant in Dolvi, Maharashtra.
Financial institutions have the option to convert some of the loans into equity shares, Ispat executive director, finance, Anil Sureka confirmed to Mint in an interview on 26 October. The Mittals, brothers of L.N. Mittal, chairman of the world’s largest steel maker ArcelorMittal, risk losing control of the Rs9,063.41 crore firm if they fail to repay the loan on time and trigger the conversion clause.
Lenders approved a second corporate debt restructuring (CDR) package for Ispat on 29 May that allowed the firm to repay their debt between 2010 and 2018. The recast came with riders requiring the promoters to pledge their shares and shareholders’ consent to convert Rs665 crore worth of loans into equity in case of a default by the company.
Companies come under CDR when they face difficulties in repaying loans, according to B. Ravindranath, executive director at IDBI Bank Ltd, one of the lenders to Ispat.
In a CDR, which requires lenders to delay the repayment schedule and convert some interest owed into principal, some promoters are required to pledge their shares depending on the financial package offered to the firm, he added.
Ravindranath declined to comment on the Ispat debt recast. The bank doesn’t comment on individual borrowers, he said.
Lenders approved a similar CDR package for Ispat Industries, JSW Steel Ltd, Essar Steel Ltd and Lloyds Steel Industries Ltd in 2002 when the firms were stricken by low demand for the alloy and their cash flows weren’t enough to repay debt. Essar, JSW and Lloyds repaid their loans and expanded their production capacities, but Ispat failed to do so.
Ispat has been especially hit hard by high production costs because, unlike rivals Tata Steel Ltd, Essar Steel and JSW, it lacks captive mines producing iron ore and coal that add up to 40% of the cost of making steel. Ispat has had to buy these raw materials from the global market.