Our call proved right… Electrosteel Steels taken over by lenders

The case of bankers stepping-in to change management control of BSE listed Electrosteel Steels, which has a debt of around Rs. 10,000 Crore, is a first-of-its-kind activism by institutional lenders in India. In March 2014, InGovern had highlighted the case of mis-governance at Electrosteel Steels and had called for “lenders as well as the public shareholders should hold the promoters and the Board more responsible in such cases and should take active role in removing those responsible for the mismanagement of funds” in our March 2014 newsletter.

The key-points of InGovern’s insights were:

  • Electrosteel Steels was a debt ridden company and had entered into a debt restructuring scheme with its lenders
  • This didn’t stop the promoters from proposing unjustified and exorbitant salary increases to their own relatively in-experienced family members
  • Salaries of Rs. 80,00,000 and Rs. 18,00,000 per annum were proposed for two promoter family members both of whom were young and comparatively inexperienced, with one having no corporate experience at all
  • InGovern perceived this as one of promoters’ “alternative outlets to take out cash from the company’s reserves, either in form of dividends or buybacks or, as in this case, through excessive remuneration to promoter members/relatives
  • This also jeopardize the ‘going-concern’ ability of a company with already-stressed financials
  • InGovern called for lenders and shareholders to be more active and if needed remove the management responsible for mismanagement of funds

The article published in our newsletter of March 2014 can be accessed from here.

Based on our article, the Times of India had also published a story “Promoters fatten their pay packs as staff get raw deal”.

InGovern has consistently maintained that bankers and other lenders, as capital providers, have a significant role to play in enhancing corporate governance in Indian companies. Banks should ensure that the companies’ board composition is right, capital is preserved, and action is taken as soon as signs of distress are noticed.