Debt-laden Bharati Shipyard Ltd, once India’s second biggest private shipbuilder, said last week it has become a sick firm after eroding its net worth fully. Bharati has filed a reference with India’s Board for Industrial and Financial Reconstruction (BIFR).

Bharati’s sickness doesn’t come as a surprise to many in the shipping industry who believe the firm’s 2009 acquisition of the offshore oilfield services firm, Great Offshore Ltd (now renamed as GOL Offshore Ltd), after a take-over battle with rival ABG Shipyard Ltd, proved costly for the shipbuilder. The acquisition drove Bharati deeper into debt.

Prakash Kapoor and Vijay Kumar, naval architects from the Indian Institute of Technology-Kharagpur and first-generation entrepreneurs, who built Bharati from scratch, didn’t think so when the shipbuilder acquired Great Offshore under unusual circumstances.

In May 2009, Vijay Kantilal Sheth, the promoter of Great Offshore, lost control over his firm to Bharati Shipyard because of the shares he had pledged for loans, making him the first promoter in India’s corporate history to face such a situation. Sheth had pledged his shares with the promoters of Bharati Shipyard for a 240 crore loan in January 2009.

When he failed to repay the loan, the promoters of Bharati invoked the pledge and acquired the 14.89% stake Sheth had pledged with them.

Bharati then announced a public offer to the shareholders of Great Offshore, in line with India’s take-over law. Bharati’s bigger rival, ABG Shipyard, joined the take-over battle but withdrew a day before the open offer was launched, making the deal expensive for Bharati.

GOL Offshore is now 49.73% owned by Bharati and the shipbuilder had to pay 870 crore for this stake.

There were two dimensions to this acquisition. Local shipbuilders, anticipating a dearth of new orders for constructing cargo-carrying ships following the September 2008 global financial crisis, were looking at de-risking opportunities.

The offshore oil exploration industry, which was in a much better shape at the time, was an obvious choice.

Unlike the normal shipping business, which is highly cyclical, the business of running ships that supports oil exploration provides more revenue stability and, hence, is less vulnerable to cyclical changes.

Bharati reckoned that buying Great Offshore would help it quickly enter the lucrative business of supplying ships to the offshore oil industry, which otherwise would have taken them many years if they were to go it alone. The entry rules for new firms venturing into the support vessel supply business are stringent, both in India and elsewhere.

Sixteen of the Great Offshore fleet of 41 vessels at the time were capable of servicing the deep-water oil exploration market, which commands a premium in hiring rates. Moreover, a large number of ships on its fleet were to be replaced over the next five years, bringing captive business to the shipbuilder.

Bharati’s interest in Great Offshore went much deeper. Fourteen of the ships that Great Offshore owned and operated were built at the yard of Bharati. Besides, the firm was also constructing one oil drilling rig and a support vessel for Great Offshore, together worth about $220 million, at the time.

However, none of the assumptions that drove Bharati to pay a higher price for the acquisition, materialized. GOL Offshore didn’t place any order at Bharati after it was acquired by the latter. Besides, the outlook for the offshore oilfield services sector suddenly turned a bit bleak, hazy and bordering towards negative for the next five years, mainly because of where the oil price is. There will be pressure also on hiring rates as the global fleet has grown exponentially, hurting firms such as GOL Offshore.

Bharati has been struggling to raise working capital loans to fund pending ship construction orders and other operational expenses after a failed corporate debt restructuring (CDR) plan.

Bharati owes some 8,500 crore to a consortium of 23 banks led by State Bank of India (SBI), which have become non-performing assets.

After Bharati exited the CDR mechanism, 11 of the 23-member lending consortium sold their loan book comprising 60% of the total exposure to Bharati Shipyard to Edelweiss Asset Reconstruction Co. Ltd. The ARC is now looking for additional funding to help Bharati complete pending orders that can generate cash flows for revival and sustainability in operations.

But getting more funds for working capital is proving to be a tall order for Bharati in the face of a slew of winding-up petitions filed by unsecured lenders.

The reference to BIFR has the tacit support of the ARC and gives a relief to the company from such pressure tactics used by unsecured lenders. Because once a company is registered under BIFR, no case can be initiated or processed against it.

One of the many things that fleet owners consider while placing orders for new ships is the financial strength of the yard—whether it has the ability to get working capital to construct the vessels.

With bloated debt curtailing its ability to get more funds, Bharati finds itself in a weak spot in negotiating new orders with fleet owners.

Will Bharati, the shipbuilder, divest GOL Offshore to focus on its core competence, which financial experts say, has a much better success rate in nursing companies back to financial health after a failed debt restructuring exercise?

Or worse still, will Kapoor and Kumar, who are now at the mercy of the ARC, lose control of the company they co-founded in 1976 in a turn of events reminiscent of the plight of Vijay Sheth in 2009? ARCs have the same rights as banks and can sell the borrower’s assets to recover their money.

In case additional funding is not forthcoming, the ARC could strip the assets of Bharati to recover its money or bring in a new management to run the company, according to local law.

While the GOL Offshore acquisition literally broke the back of Kapoor and Kumar, experts also point to their failure to have a succession plan or put up a professional management in place to look ahead and plan in the bests interest of the company.

P. Manoj looks at trends in the shipping industry.

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