The recent order of the Supreme Court may finally end one of the
ugliest chapters in the corporate history of independent India. With sale of
Essar Steel Limited to ArcelorMittal S. A., the new paradigms in the Indian
corporate business and financial market spheres that had been taking shape
since past few years may get formalized and gain wider acceptance.
The businessmen shall accept that they may no longer remain in
control of their businesses if they fail in honoring their debt commitments;
and shareholders shall realize that if lenders of a business lose money,
nothing shall be left for the equity shareholders.
There is a lesson for the small investors who buy stocks of
defaulter companies because they are trading at very low price. Under the new
paradigm the equity shareholders should expect to get anything only and only if
the lenders are able to realize full value of their loans. The theoretical
definition of equity shares (Upon liquidation of a business, the equity
shareholders are entitled to receive the value left after satisfying all the
liabilities) may stand true under the new paradigm.
In this context, it would be pertinent for the readers to rewind
the story of Essar Steel
Promoted by the Bombay based Ruia family, Essar Steel initially
commenced operations of as a construction firm in 1976 as Essar Constructions.
Its name was changed to Essar Offshore & Explorations in May '87 and later
to Essar Gujarat in Aug.'87. It became Essar Steel in 1995. It was supposed to
be one of the most modern steel plants
in the world at that point in time. The company issued equity shares to the
public at a huge premium.
However, despite getting huge amount of interest-free money
through share premium, the company consistently reported huge losses, (while
the main competitor Tata Steel was showing good profits) resulting in erosion
of the entire networth of the company. The company became sick and went for a
CDR (corporate debt restructuring) program. 40% equity capital was written off
under the CDR scheme. The CDR package of Essar Steel was popularly termed as
the worst ever from lender/shareholder point of view and best ever from
promoter point of view. Many lenders had not only to forego all interest
amounts but had also to compromise on principal amount.
Post CDR, company started showing profits but, much lower than
market expectations considering very low interest cost and highest ever
realization in steel. The company had a paid up capital of over Rs. 500 crore,
book value of over Rs. 25 and a net profit of over Rs. 700 crores, but it did
not pay any dividend after 1997 thus managing to keep the share prices
suppressed. The Promoters subsequently increased their stake in the company to
over 74%.
It is interesting to note that promoters did not infuse any
fresh capital to revive Essar Steel but kept on increasing their share holding
in the telecom venture Hutch, which was sold later to Vodafone at very high
profit.
Moreover, the promoters managed to buy a second hand Steel Plant
in Korea at a very attractive price. This Plant was placed under an unlisted
group entity Essar (Hazira) Ltd. and not brought under Essar Steel Limited. At
the same time the promoters also made investments in other steel plants abroad
in their unlisted company Essar Global Ltd.
The regulatory paradigm shall also change to adapt to the new
circumstances. Since the chances of any recovery for equity shareholders of
defaulting companies are insignificant in most cases, it would be better if a
special window is created for trading in shares of all companies which are
under IBC process or facing winding up proceedings. The traders (I am
deliberately not using the word investors here) who wish to buy lottery tickets
must know upfront what they are getting into.
