Question

Q 3) Essar Steel Ltd. (Essar Steel) is the largest integrated producer of steel in Western India with a capacity of 4.6 million tonnes per annum (mtpa). Essar diversified its business by expanding into various sectors. The simultaneous launch of several projects during the 1990s pushed the group towards a liquidity crunch. To tide over the financial crisis, Essar Steel decided to avail the option of CDR to get out of the debt trap and strengthen its balance sheet. The case discusses Essar Steel’s financial crises and its reengineering. It also discusses how financial problems affected the liquidity of Essar Steel and the several financial strategies formulated by Essar Steel to tide over the problems. It also helps to evaluate the reengineering strategy undertaken by Essar Steel to repay the debt and expansion of related projects.

a. Comment on the factors lead the Essar Steel towards financial crises. (10)

b. To evaluate the re-engineering Strategy adopted by Essar Steel to overcome its problems. (10)

Answer 1

3.a)Essar Steel is India’s leading sponge iron manufacturer. In the mid-1990’s it underwent a huge financial crisis when it tried to simultaneously launch many projects at once. It affected the liquidity of Essar steel and lead to a liquidity crunch. The following are the reasons that lead to the financial crisis in Essar steel.

· The company issued Floating Note Rates [FNR] worth $250 million to the foreign investor to finance its Hazira plant, but failed to repay it on the maturity date

· The Essar group expansion that was initiated in the 1990’s was done without inadequate planning that resulted in increased debt issues when the FNR crisis occurred.

· More and more investments were made in capital intensive areas with the idea of expanding the industry, but without proper planning, it resulted in insolvency of the group.

· The global prices crashed to what experts called as a ‘Death valley’ in late 1990’s which lead to a fall in the rate of steel.

· Equity worth 247 crores was provided as unsecured loans and guarantee to the extension of 1342 crores was provided which was further extended to 1800 crores which exposed the lenders to high credit risk and debt liabilities which cut their return on investments.

b) The following were the measures taken to bring back stability to the Essar group

· Debt restructuring plan was inducted to absorb the shock that happened to the group.

· Many of the projects were called off which lead to increased availability of liquid money and played a crucial role in overcoming the liquidity crush.

· The Essar power, which was more affected was sold to the US based Marathon power which induced a 500 crore cash inflow in to the Essar group and increased the liquidity of the firm.

· 26% stake was sold to Bharat Petroleum which again brough in more liquidity to the firm.

· Financial restructuring was done on a massive scale by 2000.

· FRN holders were extended and the maturity period was also extended by 8 years which gave them time to implement the restructuring plans.

· Various funds were diverted to the steel sector and many austerity measures were taken by the government to bring back stability

All the above factors were able to bring back stability in the operations of the Essar group and by 2002, most of the externalities that affected the group were eliminated and the debt crisis curve was smoothened.