Lenders want forensic audit of Bhushan Steel

LIC, ICICI Bank, PNB to have nominees on board; firm asked to sell non-core assets

A consortium of lenders headed by Punjab National Bank (PNB) has decided to conduct a forensic audit of debt-laden steel maker, Bhushan Steel, and appoint three nominee directors on the company’s board. The forensic audit, to be carried out by an external audit firm, is aimed at checking if there was a diversion of funds and if the loans were used for the purpose those were extended. Life Insurance Corporation, ICICI Bank and PNB will each nominate a member on Bhushan Steel’s board.

The decision comes within days of Neeraj Singal, the steel company’s vice-chairman & managing director, being arrested by the Central Bureau of Investigation (CBI) in connection with a case of allegedly bribing S K Jain, Syndicate Bank’s now-suspended chairman & managing director. CBI had arrested Jain for the alleged graft.

In total, 35 banks have a combined exposure of around Rs 40,000 crore to the troubled steel maker — both in working-capital loans and term loans. These loans, however, are still standard on the books of the lenders.

Bankers say the operations continue to be satisfactory, but the company has been facing liquidity issues. The banks are, therefore, acting swiftly to resolve the issue so that their loans do not turn non-performing. This is in line with the Reserve Bank of India’s emphasis on early detection and quick action on stressed assets to avoid NPA creation.

PNB, the consortium leader for working-capital loans, on Monday convened a meeting of lenders in New Delhi. The steel company’s representatives were also present at the meeting. Bankers decided to appoint an audit firm as concurrent auditor to monitor the cash flow on a daily basis and an independent engineer to monitor the operations of the company and the projects under ramp-up.

“The Company (Bhushan) confirmed the professional management of the company was intact as on date and the operations of the company were normal,” PNB said in a statement.

The banks noted there had been an improvement in production volume and the performance in value terms was in line with estimates. “The bankers reviewed the performance and took cognisance of the hitherto satisfactory operations of the company,” the statement said.

The banks also asked the borrower to deleverage by equity infusion. But Bhushan said that would take time. So, the steel maker has been asked to liquidate some of its non-core assets. “We have asked (the company) to sell assets that are not critical to its operations,” said a banker.

Bhushan Steel is among the country’s most indebted steel makers, with a debt-to-equity ratio of 3.5 as at the end 2013-14. The ratio rises to nearly four if deferred tax liability and other liabilities are included. In 2013-14, Bhushan Steel’s net sales declined 10 per cent from the previous year, while its operating and net profit declined 18.3 and 93.2 per cent, respectively. By comparison, its interest cost rose 29.2 per cent to Rs 1,663 crore and ate 60 per cent of its operating profit. In the past three years, the company’s net sales have grown around 50 per cent, while its interest burden has more than tripled. At this rate, the company is expected to run out of cash to service debt by the end of the current financial year.