Mumbai: Sponge iron maker Vikram Ispat Ltd has received a financial guarantee of Rs500 crore from IDBI Bank Ltd, a top official of Vikram Ispat said.
The development comes after Vikram Ispat’s parent Grasim Industries Ltd agreed to sell the 900,000-tonne factory in June to Welspun Steel and Power Ltd for Rs1,030 crore.
“We expect the transaction to be completed by May,” Vikram Ispat’s business head Ravi Kastia said, without elaborating on the details of the transaction.
The deal has been delayed by at least three months due to a delay in court approval.
“The Indore high court has finished the hearing and we expect a final judgement soon,” Kastia said. Grasim’s registered office is in Indore, Madhya Pradesh.
B.K. Goenka, chairman and managing director of the Welspun Group, which also operates retail stores under the Spaces and Welhome home furnishing brands, said his firm was “awaiting court approval.”
According to the June 2008 agreement, Grasim will hive off the sponge iron plant into a special purpose vehicle and sell it to Welspun Steel and Power. Welspun promoters have agreed to invest Rs320 crore of the acquisition costs through equity, while the rest will be by debt.
The bank guarantee means that Grasim, the flagship company of the Aditya Birla Group, is assured of Rs500 crore even if the buyer is unable to pay the agreed upon sum.
IDBI Bank is also the lead lender for Welspun Steel and Power’s Rs3,000 crore steel slab project in Gujarat. This proposed factory is now being shifted moved closer to Vikram Ispat’s plant in Saval in Maharashtra because sponge iron is the main raw material for steel slabs. The Rs3,000 crore project finance includes the Rs1,030 crore Welspun has to pay Grasim.
Welspun currently asssembles steel slabs in a facility in Gujarat and exports them primarily to the US and European oil pipeline makers.
Grasim, which makes textiles, cement, chemicals and viscose staple fibre, had agreed to a so-called slump sale of its sponge iron factory. In a slump sale, a company sells a business unit on an ongoing basis—in this case the running plant and machinery, and nearly 250 acres of land. Such a sale differs from selling an actual company that attracts higher capital gains tax for the seller.
Grasim is likely to use the money from the sale to expand its core businesses, such as cement and viscose filament yarn used to make apparel, Kastia had told reporters in June at the time that the deal was announced. The group decided to sell the sponge iron unit as it did not consider it part of its core businesses.
The plant, started by group founder Aditya Birla in 1993, has been plagued by shortage of gas and facing pricing uncertainty, which has affected its capacity utilization. The global volatility in steel prices has also affected its margins. The unit reported a net profit of Rs125.55 crore on sales amounting to Rs950.09 crore in the fiscal that ended on 31 March 2008.