Bhushan Steel and its Historical Emergence out of the Indian Debt Trap

The banks operating in India probably need an elaborated class on history. What do you say? Because the number of defaults and bad recovery records don't seem to be enough to teach them to 'act cautiously'. 

From Vijay Mallya to Nirav Modi nothing seems to ring the alarm for them. While the tales of corporate defaults seems to increase, there was another company on the list, which elaborated on the great Indian Debt Trap. Bhushan Steel will be a story worth narration and one which every future banker will have to look into and learn to stay away from.

And in this blog, we will discover how it happened. We will see every detail right from how the sun rose to how it set in the Bhushan steel kingdom. So what's the wait for? Hop on to find out. 

Brief History of Bhushan Steel

Brij Bhushan Singhal started Bhushan steel in 1987 by acquiring a steel plant which was struggling to survive. He entered into the steel business along with his sons Neeraj and Sanjay, bringing the old steel plant back to life. 

The company focused on the production of secondary steel, and its customers were majorly from the auto sector. They had 4 major plants established in Sahibabad, Khopoli, Odisha and Hosur. 

Bhushan Steels did things slightly differently. They used sophisticated and high-end technology to support their production and used the help of Japanese technology to manufacture steel. This indeed gave the company an edge over the others. 

Rise to Victory

Luck favours the brave. But in the case of Bhushan Steel, it looks like; even time favoured them. To be precise, the time during which they had set foot in the industry was a period where the steel business was at its peak, and there was a lot of optimism surrounding it as well. 

Further, the industry was dominated by state-run enterprises which were holding the lion's share of it. The demand was also considerably high, both in the global as well as domestic markets. 

All this paved the way for the success of Bhushan Steel. They soon rose to become the third-largest steel producer in the country, with big names such as Maruti Suzuki, Mahindra and Mahindra, and Tata Motors as their major clients. 

So, where did it all go sideways?

Well, as all this was happening on one side, the company started to look for ways to shed off their disadvantages and move further. And that is when bad luck made its appearance. Let's see how.

The Fall of the Success Story of Bhushan Steel

History has taught that almost every empire, which once fed upon success, was soon pushed towards the feet of failure. Going by the same theory, the success story of Bhushan Steel was also set to see a drastic fall.

Bhushan steel imported most of their input, and it restrained and limited their production activities. Hence, they decided to construct a new plant in Odisha so as to address this issue. As mentioned earlier, the decision came at a time when the business and the sector as a whole was flourishing, and thus, the banks were more than happy to lend them.

As a result, Bhushan Steel got a huge amount of loan from the banks and started the construction of the plant in 2005. As per the plan, the plant was set to help the company in controlling the availability of raw material and ensure that there was enough supply of ore and coal to meet the production needs. 

While everything went as planned, the financial crisis of 2008 proved to be a huge obstacle in the path of the company. A large number of businesses fell into the huge pit hole that the crisis caused, and Bhushan steel was no exception. 

The company witnessed a huge fall in the price of steel from a height of $1265 per tonne to just $300 per tonne. Further, the demand from the Chinese market also fell drastically, leaving a huge dent on its balance sheet. 

Falling into the Indian Debt Trap

Amongst everything, the completion of its Odisha plant seemed to be Bhushan Steel's only ray of hope. The first phase of construction was completed in 2010. And by the end of the FY 2010-11, the company showed a debt of 11,404 crores. 

However, Bhushan Steel was still undeterred and went on borrowing with a view to complete the construction. The firm, along with the lenders, believed that once the plant reaches its full capacity, they would make enough profits to repay the debt.

But what actually happened was entirely different. Enormous borrowing and falling profits slowly made the company tremble with losses.

While Bhushan Steel went on borrowing one loan after the other, the plant's construction never finished. Further, in 2013 the company witnessed a terrible accident which killed 3 workers and left 29 injured. 

While problems took new faces, everyone was shown the reality, which was bitter than they thought. The company's spending alone stood at 1600 crore by the end of 2014. 

But guess what? The ticking sound of the bomb never reached the ears of the banks. They advanced a fresh loan of 18000 crores to Bhushan Steel, with the company's stocks as collateral. 

The following table shows the list of various lenders and the loan borrowed.

Bhushan Steel became irregular in its interest payment. And with steel prices not reaching its previous height, profits kept spiraling.

In short, the company was officially in chaos as the debt rose from 35,710 crores in 2014 to 46,062 crores in 2016. 

The Revival of Bhushan Steel 

The banks which were once very positive about lending to Bhushan Steel now started to feel the increased burden of bad debts and demanded repayment. A forensic audit was also put into place, which was led by Deloitte. Alongside this, the CBI also started investigating the case.

This brought into various light mishappenings which were otherwise not visible. The CBI probe claimed that the then Chairman of Bhushan Steel, S.K.Jain, bribed bank officials to grant loan extension and had defaulted more than 100 crores. The stock prices fell drastically as stakeholders panicked and looked for immediate relief. 

By 2014, the company officially entered the bankruptcy court. It was auctioned as per the rulings. Among the huge bidders JSW and Tata Steel, and the latter emerged as the winner. 

It is noteworthy that Bhushan Steel has been the first company to emerge successfully out of bankruptcy. The banks had to take a 37% haircut on their dues, considering the rest to be standard. 

As per the documents, Bamnipal steel and Tata steel together hold a 72.65% stake in the company. 

Further, Tata steel officially took control of Bhushan Steel by repaying a debt of 35,200 crores and renaming it as 'Tata steel BSL'. 

Looking ahead with Tata Steel BSL

Currently, the Tata steel BSL (formerly known as Bhushan Steel), seems to show good performance, with the board doing some genuine work to erase the bad name and the debt on the company. 

Tata Steel BSL's board has also claimed that it is working to increase capacity usage to 4 M.T from 2.5 M.T. The Tata group has also said that they are working on improving safety and various other standards as well. 

While the worst seems to be over, the company is hopeful towards bringing back its good old days. However, time is the only thing which can have an answer to that.