The Essar Diaries are a peek into a sordid story of crony capitalism, first leeching off public shareholders and then public sector banks
The Essar diaries, which are part of an affidavit filed by the Centre for Public Interest Litigation (CPIL) in the Supreme Court of India provides a rare peek into the way influence-peddling by crony capitalists actually works in India. The leak of internal emails by a whistleblower reveals that the top secret Union Budget details were available to Essar in 2012. And why not? The group has enormous funds earmarked to buy these favours. For instance, the emails reveal that Gulfstream jet was sent to Trinamool Congress leaders, including chief minister Mamata Banerjee and a few journalists, at the behest of president Pranab Mukherjee for his swearing-in ceremony.
They indicate that Essar was able to influence the pricing and tax policies of the petroleum & national gas ministry under Veerappa Moily. This is corroborated by a separate investigation and arrests in the ‘corporate espionage’ scandal about purchase of stolen classified documents from the petroleum ministry.
By now it is widely known that the Essar group runs a large public relations (PR) operation to keep key journalists-cum-fixers happy. It generously opened its purse strings to fund a global ‘think-fest’ by Tehelka allegedly as a quid-pro-quo for killing a story against it.
At the same time, Essar uses every trick in the book to hound those who expose its strategy of ripping off banks and institutions and diverting funds to finance its growth. I have experienced this personally. In the mid-1990s, I was regularly reporting about Essar’s rapid growth through constant fund-raising and diversion of loans from financial institutions. The entire steel sector was looking for hefty bailouts by banks and institutions, which I exposed at The Times of India and, later, at The Indian Express. So, the group tried to intimidate me by filing a criminal defamation case at Surat. It also lobbied editors to stop my columns. This carrot & stick policy has worked well for decades of its dealing with bankers, bureaucrats, journalists and politicians.
Yet, when successive Reserve Bank of India (RBI) governors express concern at the mountain of bad loans in the system, there is rarely any attempt to plug the brazen manipulation of the system for personal aggrandisement. At the height of Essar’s problems in 1999, the chairman of Bank of India (BOI) sanctioned a fat bailout to a group company on the eve of his retirement. Two months later, he joined the group as an advisor at a fee that was a multiple of his last salary. RBI chose to look the other way and asked no questions.
Soon, every other institution fell in line and wrote off several thousand crores of rupees worth of loans and overdue interest to several group companies.
Again, when Essar Steel defaulted on $250 million floating rate notes it had issued in 1994, it tried hard to force the government to bail it out as though it were a quasi-sovereign default. This was in 1999. Eventually, bondholders received only 24% of the face value of their investment.
One of Essar’s strategies to minimise the public impact of its financial problems is to de-list companies at a low buyback price when there is no more scope to raise funds. In 2010, Essar Energy Plc was listed on the London Stock Exchange at 420p a share.
In 2014, the group bought back the 22% public shareholding at 70p a share, unfazed by the angry backlash. It attempted to de-list Essar Oil and even sent notices to the Indian stock exchanges. Essar Shipping and Essar Ports had also informed stock exchanges that they had the required board approvals to de-list their shares. The group’s shareholders know that Essar Steel was controversially de-listed in 2007 at a low Rs48 per share. Today, when it owes Rs30,000 crore, lenders cannot even hope for an upside by converting loans to equity if commodity prices revive.
The Essar diaries, and leaks, pertain only to a small recent phase, but provide an insight into how this well-oiled system of influence has worked for the past 30 years. Essar had struck gold with its investment in telecom and had a real chance of cleaning up its act. Instead, it only used it to start borrowing heavily again and run up even bigger debts from Indian banks and institutions.
In fact, telecom and the 2G scandal is the first time that group chairman Ravi Ruia and his nephew Anshuman Ruia are personally facing trial along with several top employees and their three telecom firms—Loop Telecom, Loop Mobile India and Essar Tele Holding. Ravi Ruia, now needs court permission to travel abroad and, on 24th May, an irritated judge asked him not to waste the court’s time with repeated and causal requests for permission.
At the end of April this year, a consortium of 24 banks has a massive exposure of Rs30,000 crore to Essar Steel alone. In May, HDFC Bank decided to take a hit and sold Rs550 crore of its outstanding debt to Edelweiss Asset Reconstruction at a 40% discount. This is a loss of Rs200 crore.
Bank of India’s auditors have asked it to classify its Rs500-crore exposure to Essar Steel as a bad loan. Among its major lenders, State Bank of India (SBI) has an exposure of Rs8,000 crore to Essar Steel and ICICI Bank has an exposure of another Rs6,000 crore.
Essar Steel’s outstanding of Rs30,000 crore is after it was made to raise Rs4,850 crore through a sale of assets and the promoters were made to pump in Rs1,300 crore under pressure from lenders. It is interesting to note that the money that was allegedly brought in by the promoters is twice its meagre net profit of Rs648 crore in the past financial year.
When the group’s strategy itself is to live off public funding, its financial problems are not limited to Essar Steel. Essar Shipping is also making losses and has reported a consolidated net loss of Rs159.69 crore for the quarter ending 31 March 2015. Essar Ports is also out there seeking relaxed loan terms from its bankers on its existing Rs6,000 crore outstanding to banks and wants money for a fresh investment of Rs3,000 crore.
This does not include the undue benefits running into hundreds of crores of rupees that ‘friendly’ officials gave the group over the years. Here is only one instance. A 2013 report of the CAG (comptroller and auditor general of India) on public sector undertakings lists multiple counts on which Gujarat Petronet officials favoured the group and passed on undue benefits running into hundreds of crores of rupees collectively to Essar group companies—Essar Steel, Essar Power Gujarat Ltd. The amount was over Rs650 crore.
For over a year now, Care Ratings has had a ‘default’ rating on Essar Steel but do you hear the government ordering a forensic audit into how the funds were used or diverted? Any such order can only be an outcome of the Supreme Court litigation filed by CPIL. That Essar’s outstandings can wreck the profits of major banks ensures that they are again working at ‘restructuring’ its loans with tacit support from the government. This is a sordid story of crony capitalism, first leeching off public shareholders and then public sector banks.
The Modi government claims to be keeping businessmen at arm’s length. Prime minister Narendra Modi told a newspaper a few months ago that “my government will make policies, if you fit into it, come on board, or stay where you are. My job is not to spoon-feed anyone.” It is ironic that public sector banks, owned by the government, are continuing with impunity to work at bailing out businesses houses like Essar.