CFO Leaders: Seshagiri Rao On Lessons From JSW Steel’s Near-Death Experience In The ‘90s
A conveyor at the JSW Steel Ltd. manufacturing facility in Dolvi, Maharashtra, India. (Photographer: Dhiraj Singh/Bloomberg)

CFO Leaders: Seshagiri Rao On Lessons From JSW Steel’s Near-Death Experience In The ‘90s

This is a story of many parts. Of an entrepreneur who took unusual steps to put his business project back on track. Of finance and operations teams that helped achieve a turnaround. And, of lenders who kept the faith.

Atleast that's how Seshagiri Rao tells it. And he admits that a repeat in these times is unlikely.

The JSW Steel Ltd. joint managing director and chief financial officer featured on the second edition of CFO Leaders to recount top learnings from his journey.

He spoke

  1. Of how JSW Steel pulled off a financial resurrection.
  2. What it takes to be a cost leader.
  3. And inorganic strategies.

Here's the first story, mostly in his words. (Or watch the interview video below)


1997 - 2001: Freak Rain, Plant Shutdown

Rao recalls how prior to liberalisation private firms could set up upto 2.5 lakh tonne capacity in the steel industry. Liberalisation changed that and there came a flood of players, like JSW Steel, Essar Steel Ltd., Ispat Ltd and others.

“Fortunately or unfortunately, all the companies took the decision to enter steel at the same time. By the time JSW Steel was ready, other companies were also ready. At the same time, globally there was the Asian crisis and even in India the nuclear test happened in 1998. So raising money for any company was very difficult in India.”

The company, at that time known as Jindal Vijayanagar Steel Ltd., did a Rs 1,100 crore initial public offering in 1995.

“At that time, SEBI guidelines were that you cannot collect the entire money at one go. Based on project progress you have to collect in phases. There was over subscription of 11 times. The application allotment money was collected but the call money was not collected as it was not required at that time.”

JSW Steel took another risk - it bet on Corex technology for its smelter in Bellary, Karnataka - to convert iron ore and low grade coal into hot metal. It was the first time this technology was used in India.

“At the time the thought was this technology is well suited for Indian conditions. Power is very expensive in India. We have always imported petrofuels (for power generation). So, we thought we should have a technology where it is cheaper - it doesn’t depend upon petrofuel and it is not very power intensive.”

Sajjan Jindal, chairman and managing director of JSW Steel, at the Bellary site in 1995 (Image: JSW Steel)
Sajjan Jindal, chairman and managing director of JSW Steel, at the Bellary site in 1995 (Image: JSW Steel)

But a turn in the weather jeopardised the very existence of JSW Steel in 1998. It rained for the first time in 50 years in Bellary, says Rao. To JSW’s luck, the conveyor belts that carried the iron ore and coal into the furnace had been built as open conveyors.

“It (hadn’t ever rained) and there was no need to have the closed conveyors. Unfortunately, when we started the Corex plant it rained in Bellary. Water went inside the open conveyors. That was the problem. It was not a technology issue. We were aware but how to convince the entire world that this is what has happened.”

The plant shut down before it could start production. Contractors and suppliers left the site. Rao, who had just recently joined the company was inundated with calls from vendors and lenders.

Generally, whenever you are in problem you stop taking calls. I patiently took every call and explained to them the problem and our future plan, how we will be able to turnaround.

But the lenders insisted on an independent, third party evaluation of this new technology. A German consultant was appointed and their assessment took 9 months. At the time JSW had a debt of about Rs 3,000 crore. As the interest clock ticked, the company desperately needed to get the plant up and running.

“During these 9 months, we had to survive and motivate the people and retain the team, and we had to bring back contractors and suppliers who had left the site. The share price had come down to Rs 2.”


Three actions helped JSW Steel survive.

1. An audacious share option increment.

“Instead of giving an increment to employees we thought we’d pay in the form of a share option for Rs 2, and employees took it. They made a lot of money later. So, a steel company which is under distress announcing an ESOP scheme was never heard of in 1999. But it was a great success. People bought the idea that this company will do well, and employees stayed with us. They took this incentive as a production incentive and we could manage as far as employee motivation was concerned.

2. A stop gap production process

“In the steel business, there is a hot strip mill which is the end of the process. For which you need backward integration like iron ore, pellets and all that process. This was not complete whereas the mill was commissioned. So, we had been completing backward integration. But the Corex technology failed. Therefore, we didn’t have our own slabs. But we could buy the slabs from the market and roll the hot strip mill and sell, and generate some cash flow to manage the business for 8-9 months.”

- How did you pay for the slabs?
“We went to the trading companies (for suppliers credit) and not the bankers. If for six months they could give us credit, we would be able to get the slabs, roll into hot rolled coils, sell in the market, get the cash, and pay them. We used to make margins that were enough to pay salaries and run the company.”

3. Give away promoter equity

After 9 months were over the banks became comfortable. Then they said we will give you money. But they did not give full money because we had 2 Corex units. One Corex unit was under implementation and one that we had commissioned failed. We restarted that in 1999 and within 15 days we could achieve full capacity. But the unit was not viable just by running one phase of the total project. We had to complete the second phase. There were 10-12 big suppliers and contractors. There were a lot of dues owed to them which we had not paid. Banks were not ready to release that amount. So, how do we get these contractors back to the site to complete the balance project? We contacted the 10-12 big suppliers and contractors and convinced them that we will give some security to you. It was nothing but shares held by the Jindal family, by the promoters. We offered shares as security and brought them back to site.

We then went to lenders and asked them to give money only for this project, money which goes directly to the contractors and suppliers. With that we got confidence of lenders. By 2001, we could complete the entire project.

2001 - 2002: Debt Restructuring

By this time the company’s debt doubled to approximately Rs 6,000 crore. Rao recalls the weighted average cost of interest then was 16.73 percent. And though the plant had restarted, the operating income was insufficient to service the debt. Restructuring was the only option. There was no formal CDR or corporate debt restructuring mechanism at the time. That made JSW Steel the first such case, Rao says. The lenders wanted more equity contribution before extending any further funds, but the Jindals were out of capital.

“That was the turning point as far as the restructuring was concerned. Very few entrepreneurs in India took this call because generally the tendency of entrepreneurs is when they are in problem and debt is too large then the problem becomes the problem of lenders. But Sajjan Jindal told banks that he owned 63 percent of the company and that he could write down his equity if they converted an equivalent amount of debt into equity and then restructured the company - which means they would be equal partners. So 63 percent came down to 40 percent Jindal’s equity. Lenders converted their debt into equity of another 40 percent and the public holding was 20 percent.”

The restructuring involved one more term. The company negotiated a lower interest rate, from 16.73 to 14 percent, and gave lenders a right of recompense.

“We wanted the right to buy back the equity at 16.73 percent return from the date of conversion to the date of actual buyback from the lenders. They agreed to this clause. Whatever loss was there in amount of restructuring we had to pay them 100 percent. We agreed to all the clauses. They also insisted on a promoter personal guarantee. Mr. Jindal was ready to give a personal guarantee because he said if I lose the business then what is the value of a personal guarantee. So, he thought he should give a personal guarantee and save the company. That was the turning point which we got in 2001-02. So, company got restructured and after than we never looked back.”

Seshagiri Rao, left, looks at Sajjan Jindal, chairman at JSW Steel Ltd. in this file photograph. (Photographer: Dhiraj Singh/Bloomberg)

2002 - 2004: The Itch To Grow

As part of the debt restructuring the lenders imposed several conditions on JSW Steel, such as no further capital expenditure during the restructuring period. Only Rs 40 crore per annum was permitted as capex. Rao says the company adhered to every condition the lenders stipulated and that helped win their confidence. The stock price had also recovered by then, to about 100 rupees per share. But the itch to grow didn’t go away.

The company assessed that with an investment of just Rs 900 crore it could add 1 million tonne capacity. But the lenders refused to lend any more money even though they agreed that higher capacity would boost EBIDTA and accelerate repayment. JSW Steel told the lenders if they permitted the expansion it would raise the money elsewhere. Rao and team turned to big steel traders across the world with a pitch to set up two special purpose vehicles.

“We told them - if you can bring in money, I will give you 20 percent return. But I need this money only for 2 years’ time. So, you please bring equity and we will help you raise debt in India. If that’s not possible, you bring debt from overseas. Whatever equity you are investing, I will give you 20 percent return.

We also said we will sign ‘take or pay’ agreements. So, whatever is produced we will buy and sell in the market. We took that risk as a company. Other than that, we would not put in any money. There were two big trading companies globally. One company set up a coke plant and the other company set up a blast furnace. Those two companies put in Rs 120 crore of equity. The balance debt was raised partly overseas and partly in India. By 2004, after two years, we finished these projects.”

EBIDTA rose and lenders were happy. The two SPVs were merged into JSW Steel in exchange for equity to the trading companies.

“With that we became 2.5 million tonnes by 2004. The company started doing well at that time. That was organic growth.”

JSW Steel was soon ready to exit the debt restructuring process but many lenders were not keen to return the company’s shares. A deal was struck, says Rao. The company offered to buyback the shares at a 16.73 percent return and pay the lenders the right of recompense. But if they didn’t want to sell the shares the lenders would have to forego the right of recompense.

“Some lenders opted to give back the shares. Some lenders said we will retain shares and they didn’t want right of recompense. Our holding went up as we bought back the shares. In 2004, we came out of CDR. That is how 2004 ended. After that the story is different, it’s about inorganic growth.”

BloombergQuint’s Menaka Doshi (left) in conversation with Seshagiri Rao. (Image: BloombergQuint)
BloombergQuint’s Menaka Doshi (left) in conversation with Seshagiri Rao. (Image: BloombergQuint)

Risk Management Rao-Style

Menaka Doshi: You got into business with an ambitious entrepreneur. The company did ESOPs at a time when the shares were worth nothing. It did suppliers’ credit which was not a well-known concept in India. You gave away promoter shares. You managed to convince banks to convert loans into shares. Did you as a finance professional agree with that promoter ambition? Or were you more conservative?

Seshagiri Rao: It is important to understand what is sustainable and what is important. You have to manage the risk involved in decision making. After the 2001 rough phase, when Mr. Jindal wanted to grow from 1.6 million tonnes to 2.5 million how would any CFO respond? By saying, “please don’t do it”. We went through restructuring and were in the midst of it. There were so many conditions, that you can’t spend more than Rs 40 crore, etc. Then in this condition to say we want to grow to 2.5 million tonnes - that is not a wise idea. I responded in such a way initially.

As long as your boss is willing to listen to you, then you can explain your view and also hear what he is saying. He said then - that 2001 was the time when China was starting to grow. Up to 2001, China had a 100-million-tonne capacity. (Today it has close to 1.1 billion tonne capacity.) The entire steel industry was looking up 2001 onwards. He said “this is the time you need to invest. I understand the problem. But if you don’t find a solution then we will remain at 1.6 million tonnes and remain in the same problems. So, we have to grow and that is important for us. You have to work on how you will find a solution”.

Menaka Doshi: What if it had failed?

Seshagiri Rao: That’s why we had to (be prepared to) take the downside.

Menaka Doshi: What is the risk metric you applied that gave you comfort that the downside would not cripple you?

Seshagiri Rao: Two parts there. One is, whether we would be able to raise money or not. We didn’t start any project until we raised the money. So, first we tied up the funding.

Second was the execution risk. Can we complete this project within cost and time? There we took a lot of efforts not spend too much money. We created a focused execution team to complete the project.

Then the other risk is - will you be able to sell assuming that the project gets commissioned? If steel is available and there is no market, what would you do? That market risk was there.

One philosophy we follow - notwithstanding the cycles, is that we have to operate our plans at 100 percent capacity. If you see, from 2001-2019, notwithstanding global crises or any issues or volatilities, we will always work 90 percent plus.

And we have to sell our products. If we want to sell our products, then one important requirement is quality and the other is cost competitiveness. You have to build in that- as long as there is cost competitiveness then you should be able to sell. If you are not able to sell in India, you should be able to export which means quality is important. We never compromised on technology. These were high standard, very good plants. So, qualitywise we never had a problem with our customers. We used to export even earlier when we were producing cold-roll galvanizing coils from our other companies. From 1993 onwards we were exporters of steel from India. If the Indian market was not doing well we used to go to export markets. If export markets were not attractive we used to come back to India. It is important to build that flexibility.

India is a vast country and we are located in the west and south of India. So, if we have to sell steel in the north and east, then we have to spend lot of money for freight. If export markets are good, then we exit from north and east and export, and reduce transport costs. That is how we are flexible in changing markets.

So, we were not that much worried about market risk. So, funding is in place, execution is possible and we were able to sell. I didn’t expect there could have been a failure.


Rao counts the period between 1997 and 2004 as his biggest professional success as as a CFO. “Even though I joined as CFO, once we passed through the rough phase during 1997 to 2001, the exposure which I got to other functions including marketing, IT, procurement, strategy, that opened up the mind to understand the steel business and how it should be handled,” he says.

Would JSW Steel be able to pull off such a financial recovery now, if it were to recur?

“Lenders were willing to look at it that time. Now I don’t think any lender would agree.” 


Watch Seshagiri Rao discuss how JSW Steel pulled off a financial resurrection.

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