Global Steel Trade; Structural Problems and Future Solutions

Banks’ Debt and Equity Exposure
Debt. Low and declining sales volumes in domestic and export markets made it increasingly difficult for
Indian steel companies to service their loans. The exposure of financial institutions in India due to
aggressive lending practices in the early 1990s was already on average 12 percent of banks’ portfolios. 158
Many of the new steel projects were not completed within stipulated time frames, forcing companies to take
on additional debt.
Equity Stakes. Major equity stakes in the steel sector increased many financial institutions’ exposure.
Their stakes had originally accumulated due to the lack of public interest in the companies’ equity
issuances. 159 Even though these banks have refused to finance additional steel projects, their existing equity
stakes have compelled them to refinance the steel companies’ current debt. 160 To that end, the Industrial
Development Bank of India promised that while no new projects will be approved in the near future, all
plants currently in the pipeline will receive sufficient funding to be completed. 161 Since the Asian financial
crisis, about $2 billion in additional financing has been sought. 162
The ultimate effect of this assistance has been to increase company borrowing, even as company profits
declined, resulting in growing debt to equity ratios (Chart 6-13).
Import Surcharges. The government also lifted the surcharges levied on major steel inputs, forgoing tax
revenue in an effort to reduce production costs for suffering Indian steel companies. 163
1996–1997 1997–1998 1998–1999
Profit D/E Profit D/E Profit D/E (%)
(million R) (percent) (million R) (percent) (million R) (percent)
SAIL 4.5 210 -5.3 230 -18.5 300
TIS 11.3 100 8.5 110 2.1 130
ESSAR 0.7 180 1.2 210 -24.9 290
Source: CMA India.
6-13. Profits and Debt-to-Equity Ratios of Three Indian Steel Producers
SAIL Bailout
The most telling example of recent direct government intervention is the restructuring package for
government-owned SAIL. In February 2000, the Cabinet Committee on Economic Affairs approved a
package of approximately $2.2 billion for the company’s financial and business restructuring. While the
financial package does not entail direct cash infusions, the government will provide SAIL with several
valuable kinds of assistance:
• A writeoff of about $1.14 billion in loans from the Steel Development Fund. 164
• New government loans of about $86 million.
• Loan guarantees for private sector loans totaling about $67 million.
• Permission for SAIL to write off a $440 million loan advanced to its subsidiary, Indian Iron and Steel
Company, and waive $114 million in interest on loans to that subsidiary that were previously written
off.
• Guarantees for an additional $675 million in market financing; $337 million to finance SAIL’s
voluntary retirement scheme, and $337 million to service its current-year debt burden. 165
Chapter 6: New Players in the Global Market—India 167