Coal scam verdict: Beginning of the end for Bhushan Steel, Prakash Industries?

For Bhushan Steel and Prakash Industries, the two firms which are facing a Central Bureau of Investigation (CBI) in connection with the Syndicate Bank cash-for-loan scam, Monday’s Supreme Court ruling that deems coal block allocation will be a double whammy. Something from which there is no easy escape.

Bhushan Steel, which has total fund and non-fund exposure of Rs 40,000 crore to about 51 banks, isfighting an ultimatum to raise at least Rs 6,000 crore equity capital through a securities issue to convince its lenders that it can indeed pay back the obligations.

Banks have also stepped up pressure to have three director posts on the board of Bhushan Steel, a forensic audit and an external agency to oversee the daily cash flows of the company.

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Bhsuhan Steel plunged into a crisis after the CBI arrested its vice-chairman and managing director Neeraj Singhal for bribing Syndicate Bank chairman and managing director SK Jain to avail credit facilities in violation of norms.

According to analysts, both Bhushan Steel and Prakash Industries have captive coal blocks for production of iron and power, but only the block of Prakash Industries is operational. As ofend March, Prakash Industries has atotal debt of Rs 725 crore.

Monday’s verdict did notquash the coal block allocations. However,the final verdict of the apex bank on 1 September can give rise totwo possible scenarios–the court can either cancel those blocks thathavenotcommenced production, or impose a hefty penalty. Either way, the cost of the companies is set to shoot up.

Thus, for Bhushan and Prakash, which are already facing immense pressure from banks to pay back their existing loans, seeking loans to cover up their cost overruns is unthinkable, deepening their ongoing crisis.

Raising money from private investors too will be difficult on account of the ongoing investigations into the running of the operations. In effect, any actions on these firms would further worsen the financial position of these firms.

Adding to Bhsuhan’s worries, on Monday, V K Mehrotra, an independent non-executive director on itsboard, has resigned from the company citing “falling health”, marking the first resignation from the board of the steel maker since the arrest of Singhal.

A clearer picture on how bad is the impact on Bhsushan and Prakash will emerge only after the final ruling of the apex court on the matter.