Mumbai/New Delhi: One of the mysteries of the unravelling coal scam in India is how relatively unknown and small-time companies managed to acquire the balance sheet strength required to apply for captive coal blocks.
The answer, well known to most people who move in banking and finance circles, is that some non-banking financial companies (NBFCs) played a crucial role by lending their net worth to the coal block applicants for augmenting their own—for a fee. Later, these NBFCs exited the consortium.
“It is a common, but reprehensible practice,” said Anish De, chief executive of Mercados EMI Asia, an energy consulting firm.
The IL&FS Group’s IL&FS Infrastructure Development Corp. Ltd (IIDC) and IDFC Ltd are two NBFCs that seem to have done this, although the first denied it had and the second declined to comment.
According to an advertisement placed in several newspapers (including Mint ) by Jas Infrastructure and Power Ltd , a subsidiary of the Abhijeet Group, its application for the Mahuagarhi block in Jharkhand “was jointly submitted on 11.01.2007 in partnership with Inertia Iron and Steel Industries Pvt. Ltd (IISPL), a company of Abhijeet Group and IL&FS Infrastructure Development Corp. Ltd, of the IL&FS Group”.
“The company was allocated the Mahuagarhi coal block jointly with another company CESC Ltd with equal share of both,” the advertisement added.
Paritosh Gupta, chief executive officer of IIDC, denied jointly applying for the block and said in an email: “The application to the ministry of coal was submitted by Jas Infrastructure Capital Pvt. Ltd (JICPL), that was a 100% subsidiary of the Abhijeet Group and its individual promoters. Prior to the application, Inertia Iron & Steel Pvt. Ltd, a subsidiary of the Abhijeet Group, proposed to partner with IL&FS Infrastructure Development Corp. Ltd for the joint development of a power plant along with a captive coal mine. Accordingly, an MoU (memorandum of understanding) was signed between IISPL and IIDC on January 8, 2007, for the development of an integrated power plant with a captive coal mine.”
At some stage after this, this MoU seems to have translated into a stake in JICPL.
“The IL&FS Group exited its holding in JICPL in early 2011,” Gupta added.
While applying, the Abhijeet Group added IIDC’s net worth to its own, to meet the criteria for applying for coal blocks.
Questions emailed to an Abhijeet Group spokesperson on Wednesday remained unanswered at press time.
Mint couldn’t independently verify several media reports that claimed the Abhijeet Group similarly added IDFC’s net worth to its own while applying for coal blocks. In response to a detailed questionnaire, K.V. Venkatraman, senior vice-president (corporate communication) at IDFC, declined to comment.
To be sure, as Mercados’s De pointed out, the practice appears a common one.
“NBFCs give certificates, sign MoUs and charge money to give credentials. There is no intent or commitment to invest,” said a power industry expert who spoke on condition of anonymity.
“The instance of NBFCs tying with private power producers to form SPVs (special purpose vehicles) is a common practice to boost private power producers’ eligibility to secure projects,” said Amol Kotwal, associate director (energy and power systems practice) for South Asia and the Middle East at consulting firm Frost and Sullivan. “In such instances, the NBFC partnership assists in enhancing the net worth of the SPV, to enable it to meet the eligibility criteria. Once the project takes off, the NBFC would exit the SPV. NBFCs get paid a fee.”
Last week, the Central Bureau of Investigation (CBI) booked five companies—Vini Iron and Steel Udyog Ltd, JICPL, AMR Iron and Steels Pvt. Ltd, JLD Yavatmal Energy Ltd and Navabharat Power Pvt. Ltd, a unit of the Essar Group—that had been allotted coal blocks allegedly on the basis of misrepresentations and false claims.
JICPL, JLD Yavatmal Energy and AMR Iron and Steel, three of the five companies named by CBI in its first wave of bookings—the agency has said there will be more, with five expected shortly—have a common director, Manoj Jayaswal.
Executives at NBFCs weren’t exactly willing to discuss this practice. “We don’t have any knowledge of any such instances. We have neither come across such situations or been involved in any such deals. Our mandate does not allow us to finance such projects because we are permitted to finance only government-operated and approved proj-ects,” said S.K. Goel, chairman and managing director of India Infrastructure Finance Co. Ltd.
Sunil Kanoria, vice-chairman of Srei Infrastructure Finance Ltd, an NBFC, said, “Srei is not aware of NBFCs giving letters of comfort to companies seeking captive coal blocks. We don’t think that this is a common practice. We have not given any such letter to any company nor do we have any such tie-up with any company.”
Suneet K. Maheshwari, chief executive of L&T Infrastructure Finance Co. Ltd, didn’t respond to emailed queries.
In February 2010, the Reserve Bank of India (RBI) created a separate category for NBFCs in the infrastructure sector. Such companies have a minimum 75% of total assets deployed in infrastructure and net owned funds of Rs.300 crore or more.
More importantly, it gives these companies the ability to borrow up to 20% of their net worth from banks versus 15% of the net worth for non-infrastructure NBFCs. The increase in capital allows infrastructure NBFCs to lend more funds while staying within limits stipulated by RBI, currently at 15% of equity while lending to a company and 40% for lending to a group.
Ruchira Singh in New Delhi contributed to this story.