Facing a Rs 2,700-crore loss, FIs swoop down on Bhushan Steel

MUMBAI: Financial institutions that have loaned money against shares owned by promoters of scandalhit Bhushan Steel have begun invoking these pledges as they stare at losses of more than Rs2,700 crore following a steep plunge in the share price.

Bhushan has dropped 55per cent in the past six trading sessions after vice chairman and managing director Neeraj Singhal was arrested last week by the Central Bureau of Investigation in a case related to bribes allegedly being paid to Syndicate Bank chairman SK Jain in return for enhancing credit limits.

Disclosures made by the company on Tuesday show that Kotak Mahindra Bank invoked 16.6 lakh shares while STCI Finance invoked 8.72 lakh shares on August 4 and 6. Other lenders that have made similar loans include JM Financial, ECL Finance, Aditya Birla Finance, STCI Finance and IFIN Securities.

The promoters held 71.29per cent of Bhushan at the end of June. Of this, 74.21per cent was pledged with financial institutions at a time when the stock was at about Rs400. It closed at Rs168.9, down 5per cent, on the BSE Wednesday, a level not seen since August 2009.

Typically, shares are invoked — or transferred to lenders’ accounts — when borrowers fail to chip in enough cash or securities to replenish margins in a falling market. Margins vary between 40per cent and 60per cent; so, for every Rs100 borrowed, securities worth Rs140 or Rs160 have to be pledged.



ECL Finance, the non-banking finance company of listed Edelweiss Financial Services, is among those leading the list at 1.44 crore shares. At current prices and assuming a worst-case scenario, the firm is likely to suffer a loss of Rs300 crore, though experts say that some money may eventually be recovered.

A spokesperson for Aditya Birla Finance declined to comment, and the rest of the lenders did not respond to an email query at the time of going to press. Poor volumes have hampered sales in the market with only 16 lakh shares changing hands in the past few days. The stock has fallen by the maximum daily permissible limit for six straight days.

Almost all domestic and foreign institutional investors have stayed away from the stock, but state-owned Life Insurance Corporation was asurprise investor, buying 3.54per cent. Brokers said that many lenders tried to sell but were unsuccessful as intense selling pressure had cut trading in the stock.

Some market experts feel it will be difficult to quantify losses right now.

"The actual loss amount to the lenders cannot be calculated in a stock which is falling like nine pins with no buyers,” said Arun Kejriwal, founder and CEO, Kris Research. "The loss amount will come to be known only when the quantity that has been invoked would be sold in the open market."

CBI arrested Singhal in connection with the Rs50 lakh bribery scandal on August 7. Jain and several others have also been arrested in the case. Bhushan Steel on Tuesday reported a net loss of Rs141.63 crore for the quarter ended June against a profit of Rs76.26 crore in the same quarter last year.

Gross sales rose 13per cent to Rs2,945.39 crore while finance costs increased 37per cent toRs552.49 crore. Bhushan Steel has debt of more than Rs40,000 crore involving 51 banks with State Bank of India as lead banker having an exposure of Rs6,000 crore.

The firm also recommended a $1 billion fund-raising plan to shareholders. State Bank of India wants to bring in a management agency to oversee the running of Bhushan Steel and is canvassing other lenders for support in order to safeguard total outstanding loans. The consortium of lenders headed by PNB will meet next week to discuss the move.