Bhushan Steel – Another Case of Weak Corporate Governance

Shares of Bhushan Steel Ltd remained under intense selling pressure so far in the month of August after CBI arrested Neeraj Singal, Vice Chairman and Managing Director of Bhushan Steel Ltd in connection with Rs 50 lakh bribery scandal involving CMD of Syndicate Bank S K Jain.

Bhushan Steel, the sixth largest Indian steel maker by capacity, produces about 2.2 million tonnes (mt) of mostly flat steel products with plants in Uttar Pradesh, Odisha and Maharashtra. BHushan Steel is a prominent supplier of automotive body sheets, and has a major expansion taking place in Odisha that would take its total installed capacity to 4.7mt.

The Bhushan Steel stock has plunged by over 40% including last Friday's 10% intraday fall. The recent fall has wiped out nearly Rs 4000 crs in market capitalisation on Friday as compared with Rs 8623 crs on Tuesday in this week. LIC is the biggest minority shareholder in Bhushan with 3.54% stake.

Concerned about the recent bribe-for-loan scam which has led to the arrests of top executives of Bhushan Steel Ltd and Syndicate Bank, all lenders to the steel maker have stepped in to protect their exposure of about Rs.40,000 crs.
SBI has a Rs 6000-crs exposure to Bhushan Steel, a sizeable chunk of the steelmaker's Rs 40000 crs borrowings from Indian banks. Syndicate Bank has a Rs 100 crs exposure the steelmaker.

Now SBI intends to push for appointing a managing agency to run Bhushan Steel after the arrest of its vice-chairman and managing director Neeraj Singal and says that it is not worried about its exposure to Bhushan Steel which is a good quality asset for the bank.

Even FII Analysts and domestic broking houses are saying that they await more clarity on the recent developments and until then the Bhushan stock will remain very volatile and face more selling pressure.

But we find these statements from both SBI management and Broking Analyts quite surprising. What exactly is the clarity which Bankers and Brokers expect to emerge regarding Bhusan Steel?

Bhushan Steel was sanctioned multiple loans under consortium arrangements by two dozen banks and headed by SBI and PNB separately. The total loan outstanding is of the order of Rs.40000 crs plus interest. Bhushan had defaulted repayment of interest and installment since as far back as December 2013. As is the style of commercial banks, especially PSBs, it seems that this bad asset was not reported as a Non Performing Asset (NPA) earlier.

In the last part of the previous financial year the consortium banks gave a further loan of Rs 6900 crs to Bhushan to repay past interest and installments overdue and future interest and installments for the next two years.
By any banking standards this looks very surprising. It seems that Bhushan managemet put pressure on the individual banks to give additional loans, each amounting to around Rs.100 crs outside the consortium arrangements. This is the loan for which the Syndicate Bank CMD was caught demanding a personal bribe.

The present position is hence very clear. The account is an undeclared NPA. With the ongoing CBI investigation and the arrest of the top brass of the company, bankers have little option but to declare the account as NPA.
If we go by the record of consortium loans headed by the SBI and PNB like Zoom Developers, Kingfisher and Winsome Jewelers, there is good reason to believe that a major portion of the loans given has been diverted by Bhushan Steel.
What should investors do now?

Retail Investors apart from Institutional holders have little options left as to what they should do with the Bhushan Steel stock as of now.

More note worthy is the fact that even before the Bribery case for Bhushan involving the Syndicate Bank chairman surfaced, the companys financials over the last 3 years have been going from bad to worse which is very evident from the fact that Bhushans bottomline which was Rs 1012 crs in FY12 stood reduced to a paltry Rs 59 crs in FY14. Also in Q4 and Q3 of FY14 Bhushan Steel reported a combined net loss of Rs 75 crs.

We believe that It does not look that the Q1FY15 performance would be any better and hence it will be a long time before the market is convinced on the companys credentials once again.

Historically we have seen that once a senior management loses the markets trust, it takes years to repair this before investors start looking at it again. Hence by all means for the Bhushan stock even at the current level retail investors need to exit as some more down side looks possible.