The debt-laden Bhushan Steel limited despite posting negative working capital, had been given an extended loan limit by their lead banker Punjab National Bank (PNB). The working capital facilities was enhanced by PNB to the tune Rs11,390 crore over the one year period (fund based limit of Rs 5,390 crore and non-fund based limit of Rs6,000 crore), despite Bhushan Steel having posted negative working capital of Rs2,351 crore as on March 31, 2014.
The company is in the midst of a crisis following the arrest of its Vice Chairman and Managing Director Niraj Singhal, in the Syndicate Bank bribery case for allegedly getting loans sanctioned without permissible limits.
A negative working capital is a sign of managerial efficiency of a business and shows how quickly a company can generate cash by selling it inventory and fund their business operations. It is still not clear that the company which is generating cash so rapidly, will be requiring more working capital loans for regular business operations.
Mehra Goel & Company, the auditors of Bhushan Steel said, “We are under client confidential agreement. Why don’t you please check with the bank those who have extended loans.” Although the numbers are from the company annual reports, Bhushan Steel management denies the veracity of the numbers.
Experts believe the fact that the consortium banks have increased limits and extended loans towards regular business operations, raised red flags on banking credit appraisal system. Several reminder emails and queries sent to Punjab National Bank did not solicit any replies.
Many chartered accountancy firms believe that the banks must have violated the ‘Chore committee guidelines of working capital financing norms’ while sanctioning loans and increasing credit facility. For instance, banks must have violated a norm that “no frequent sanction of ad hoc limits of borrowing from the banker” a senior Chartered Accountant said, who wish not to be named.
Various loan syndicators or middlemen point out that the lack of regulatory framework has left enough room for window dressing of Credit Monitoring Aggregate (CMA) data required for credit appraisals. “There are no Reserve Bank of India guidelines or accounting and financial norms for preparation of CMA reports. The loan syndicators take this opportunity and manipulate numbers easily,” an official of credit rating agency said on the condition of anonymity.
Significantly, Bhushan Steel is already burdened with loan of around Rs40,000 crore to various banks, including State Bank of India (SBI), Punjab National Bank with its debt-equity ratio hovering around 3.5:1, which is considered to be highly leveraged. This is in contrast with the average debt-to-equity ratio of other steel companies which is just 1.7:1.
Meanwhile several lenders have invoked pledged shares by promoters to recover their money. The promoter has pledged 22 per cent of the equity against loan against securities (lAS). In last one month, the promoter holdings have come down from 70 per cent to 64 per cent.
Despite having taken Rs11,390 crore working capital loan, Bhushan Steel is currently cash starved and plans to sell its non-core steel assets to prevent default on interest payments and continue its business operations. The company needs around Rs 1,000 crore immediately for meeting its current working capital requirements to increase the capacity utilisation of its 2.5 metric tonnes per annum Odisha steel plant.
The steel plant in Odisha was shut for around 6-7 months and is currently running at around 50-55 per cent capacity, and would take at least four months to ramp up production.
“We are not able to run this plant at full capacity due to shortage of iron ore. We had entered in agreement with Odisha government for raw material linkages. However, we have not been allotted any mines till date,” the company official said.