Neelachal Ispat Nigam Ltd, the public sector steel mill acquired by Tata Steel Long Products Ltd earlier this year as part of a disinvestment process run by the Centre, will not be part of the ongoing consolidation exercise unveiled by Tata Steel Ltd last week.

Odisha-based NINL will remain an independent company for three years as part of the disinvestment condition. It will, however, become a subsidiary of TSL following the merger of TSLP with TSL. TSLP concluded the acquisition of a 93.71 per cent stake in NINL on July 4 for an aggregate consideration of Rs 12,100 crore.

Apart from a one million tonne plant, the buyout provided Tata Steel 2,500 acres of land to build a large long products complex and an iron ore mine with over a 100 million tonne deposit. NINL will be the only material subsidiary that will remain outside the scope of the amalgamation process unveiled by Tata Steel. Apart from it, only the joint venture companies and allied service companies such as Jusco will be left outside the consolidation exercise.

Keep it simple

Explaining the rationale of the mega consolidation exercise, Koushik Chatterjee, chief financial officer and executive director of Tata Steel, said there were multiple synergy benefits which the consolidated entity can harness.

He pointed to the challenges the smaller companies of the group faced while placing big bets for growth. The recently concluded acquisition of NINL was a case in point. Since the balance sheet of TSLP could not undertake such a large buyout, Tata Steel invested in the subsidiary by subscribing to 117 crore 0.01 per cent non-convertible redeemable preference shares (NCRPS) of Rs 100 each, totalling Rs 11,700 crore.

“We had to invent a financing structure every time to be compliant with everything. A case in point is the acquisition of NINL. This is complex. If you want to grow, you have to grow with simplicity. You can not grow with complexity,” Chatterjee argued.

The parent, Tata Steel, held a 74.91 per cent stake in TSLP and hence, there was little scope for opting for usual routes such as rights issues. In the past, the parent had underwritten the unsubscribed part of rights issue, pushing up TSL’s stake in TSPL. Tata Steel faced the same conundrum when Tinplate was to undertake an Rs 2,254 crore-expansion project.

The assistance from the parent is being provided in the form of a shareholder loan. TSL holds a 74.96 per cent stake in Tinplate. Indian securities market rules mandate a public float of a minimum of 25 per cent to remain listed on the bourses.

“With this consolidation, synergy on financing will be easier. Businesses will be stronger and the potential to grow them will be faster, easier,” Chatterjee noted.

Mining synergy

While there will be a few benefits — TSL and TSLP both sell long products and there were leakages in terms of time, effort and compliances and if folded inside, it will be one consolidated business — mining synergy will be more.

The consolidation exercise involves the merger of wholly owned subsidiaries, S&T Mining Ltd and Tata Steel Mining Ltd. “Mining synergy is more when you run it together. TSL has a very strong mining set up and now we have new mines such as Gandhalpara. So having the hard infrastructure and the mine in the same entity makes a lot of sense,” Chatterjee pointed out.

“We decided to have a mining vertical within one company. For instance, we will now develop Gandhalpara, which will be an important source of iron ore in the future.” he explained.