A baton is changing hands in Chhattisgarh.

Big companies are entering the state’s steel and power sector, using India’s ongoing insolvency proceedings to buy distressed firms. At the same time, Chhattisgarh’s local steel makers, several of whom entered the power sector in the mid-2000s, are looking beyond these two sectors.

Raipur-based Sarda Energy and Minerals, for instance, has set up a dairy. Others have entered education or real estate or splashed out towards sunrise areas. “One company has entered the LED bulb business,” said a Raipur-based chartered accountant who has worked with several of these firms. “Another has decided to make e-rickshaws.”

Though each of these companies is expanding into unfamiliar businesses far beyond their core competencies, most of them are playing down these decisions. Pankaj Sarda, deputy managing director of Sarda Energy and Minerals, for one, attributed the company’s entry into the dairy sector to his grandfather’s wish.

Yet, a thick line connects the diversification of smaller firms and the entry of larger companies into Chhattisgarh. As Scroll.in explained in the first part of this series, India’s insolvency proceedings – by which banks are seizing and selling companies that have defaulted on loans – has created a situation where a few firms are buying most of the assets on sale.

As the defaulting firms are acquired by domestic business groups, global companies and funds, a major change in the ownership patterns of India Inc’s corporate assets is underway. As the companies making the acquisitions grow larger, smaller companies, such as those in Chhattisgarh, are realising they cannot compete and are diversifying in response.

Rise of a business elite 

Over the last four deccades, Chhattisgarh’s steel companies have risen and fallen.

Around 1980, when Chhattisgarh was still a part of Madhya Pradesh, metalworking plants began to spring up in the region. Congregating around the state-owned Bhilai Steel Plant, these units bought scrap metal from the plant and processed it into products such as steel sheets. Around 1985, some of these units – run by families such as the Sardas and the Singhanias – began manufacturing steel themselves.

By the early 1990s, Chhattisgarh’s steel-making capacities had developed further. It had, by now, nine or 10 induction furnaces. Newer firms such as the OP Jindal group had entered the sector as well. This was the time China’s gargantuan appetite for steel was starting to be felt around the world. In response, a large region spanning northern Chhattisgarh, western Odisha and parts of Jharkhand saw rapid industrialisation. “Companies from Kolkata, Bihar, Odisha and elsewhere set up shop in Chhattisgarh,” said the accountant, who did not want to be identified. “These were mostly sponge iron plants and induction furnaces.”

The next phase began to take shape in the mid-2000s. As China’s appetite for steel started to flag, Chhattisgarh’s steel companies were pushed into trouble. Not only did their exports to China fall, Chinese steel-makers began exporting surplus steel at low rates. Global steel prices dropped.

At the same time, a power project run by the industrialist Naveen Jindal was making news for being spectacularly profitable. One reason for its success was cheap and plentiful coal from coal blocks that Jindal’s company had obtained for private use from the central government. Eager to invest their gains from the steel boom in another sunrise sector, Chhattisgarh’s steel families rushed into thermal power. Attracted by the state’s iron and coal reserves, companies from elsewhere in India flocked to Chhattisgarh as well, intending to set up power plants. Bankers, swept up in the excitement, financed these projects without due diligence.

The rest of the story is well-known. By 2012, many of these projects had gone belly up – or were never completed – because they could not sell power as cheaply as the power plants with their own captive coal blocks. But when the Supreme Court in 2014 cancelled all captive coal block allocations, even companies with captive blocks went belly up. As they were forced to buy coal at higher rates from the government-owned Coal India or import it, these companies had no option but to raise the selling price of their electricity.

At this point, companies that had struck power purchase agreements to supply electricity to customers at fixed prices slipped into losses when they could not renegotiate these rates. Those selling power commercially faltered due to low demand for their more expensive power. These power projects slipped deeper into red as the government-owned National Thermal Power Corporation and electricity boards of various states added fresh generation capacity. Exacerbating the problem was the sluggish economy, the result of government policies such as demonetisation in late 2016 and a rushed roll-out of the Goods and Services Tax in 2017.

By 2014, the troubled companies had begun selling their assets to avoid defaulting on loans. The ones that failed to do so began entering insolvency proceedings.

The fallout is a drastic reconfiguration of the state’s steel and power sectors.

Steel firms in trouble

At first glance, Chhattisgarh’s steel industry is not too affected by India’s insolvency proceedings. Just two companies – Monnet Ispat and Electrosteel Castings – have been sold so far. Another company, Jayaswal Neco, has obtained a stay on the proceedings. Some companies have paid off their loans by selling assets like land or shares. Others were sold by their promoters even before the insolvency proceedings were rolled out.

Yet, it would be a mistake to conclude these were the only companies affected by the insolvency process. As the first two reports in this series showed, a small number of companies are buying most of the stressed assets on sale as they compete to add as much scale as they can. Consider, for example, the scramble for Essar Steel. “Companies like Nippon Steel, ArcelorMittal and JSW are eager to bag it because it is a 10 MTPA [Million Tonne Per Annum] plant in a country with an installed capacity of 130 MTPA – 8% of Indian’s total steel manufacturing capacity,” a former senior official at Jindal Steel and Power explained.

This has major implications for smaller firms. “India can manufacture 130 MTPA of steel,” said the chief financial officer of a Chhattisgarh-based steel company. Of this, he added, the big five – Steel Authority of India, Tata Steel, JSW, JSPL and Rashtriya Ispat – account for about 55%-60%. “Once Electrosteel Castings, Adhunik, Jayaswal Neco, Bhushan, Essar, Monnet and others change hands, the big companies might account for as much as 80%-85% of India’s steel-making capacity,” the executive added.

When that happens, Chhattisgarh’s smaller steelmakers will be in trouble. As things stand, few among them manufacture specialised products such as steel for razors or vehicle body panels. Most of them, the executive said, make commoditised products such as construction rods which big steelmakers also manufacture.

ArcelorMittal is among the firms that hopes to buy Essar Steel. Credit: Reuters

Working on a much larger scale, the big companies can sell their products cheaper. Alternatively, the chief financial officer pointed out, they could collude to keep prices high. In both scenarios, Chhattisgarh’s smaller steel companies end up in what can be called a profitable dead-end. “If they have low debt and depreciated plants, their cost of steel-making will be comparable, if not cheaper, than the bigger guys,” the executive said. In the first scenario, a company that has already recovered the cost of setting up its factory should be able to compete on price. In the second scenario of cartelisation, the executive said, “smaller companies can build cheap and make profits selling at the price the cartel determines”.

What these units cannot do, however, is expand. “Even if a 5 lakh Tonne Per Annum company doubles its capacity, it won’t help because its rivals are 10 MTPA or 20 MTPA in size,” he explained.

Power sector’s woes 

Chhattisgarh’s thermal power projects face more fundamental questions. When it comes to power generation, they are grappling with an uncertain supply of coal as well as falling tariffs of solar power. In addition, the demand for their power by state electricity boards and industrial users has turned out to be lower than originally estimated. That is because state electricity boards are setting up their own power generation units. “They will buy power only if there is a gap between their generation capacity and demand,” said a senior official at the Chhattisgarh State Electricity Board who did not want to be identified. “If so, they will first buy from the NTPC and then from the rest.”

Selling flailing power companies to a new management is not enough to make them viable. Instead, two kinds of power projects have a greater chance of revival.

One, projects that are complete (or almost complete) and have access to coal and/or have a power purchase agreement with a client who has agreed to buy electricity at a certain price. Two, projects that change hands at very discounted rates. For instance, if a buyer is able to acquire a Rs 15,000 crore power project for Rs 3,000 crore, they can sell power much cheaper and still be profitable since both the fixed cost and the financing cost (loans) will be much lower. Projects that the new management fails to turn around will be back on the block, the electricity board official explained.

That said, with only a few buyers bidding for defaulting projects, power generation is getting consolidated among a handful of big players. “In the power sector, four or five companies will survive,” said a senior official at the Association of Power Producers. “The rest will wait for a good valuation and then exit.”

Wider fallout

Not only is economic power in Chhattisgarh shifting from one set of businesses (or business families) to another set, it is also moving beyond the state’s boundaries to national and transnational companies.

This reduces the state government’s negotiating power vis-a-vis these companies. “We are trying to get the NMDC [National Mineral Development Corporation] to put up a plant in Bastar and we would like them to do as much local recruitment as possible,” said a senior bureaucrat in Chief Minister Raman Singh’s secretariat. “It is easier to get local companies to agree to such conditions than firms from outside.”

It also accelerates an ongoing shift in Indian politics. “The Bharatiya Janata Party’s dependence on traders and midsize companies for political funds has been falling,” a senior Congress leader in the state said on the condition of anonymity. “It has started relying more on large companies. That trend will accelerate further.”

This is the third part in a four-part series on India’s attempts to tackle its bad loan crisis. You can read the first part here and the second one here.