Transcript of one hundred twelfth special meeting of Executive Directors, held on Tuesday, June 26, 1956 : India - Tata Iron and Steel Company Expansion and Modernization Project

STRICTLY CONFIDENTIAL 89703 INTERNATIONAL BANK FOR ETK RECONSTRUCTION AND DEVELOPMENT ONE HUNDRED 'rWELFTH SPECIAL MEETI1'G of EXECUTIVE DIRECTORS Board Room International Bank Building Washington, D. c. Tuesday, June 26, 1956 The meeting vas convened at 10:05 o'oloek a.m., '! ii Mr. Eugene R. Black, Pree1dent, presiding. ,I ii ii 'I  11 STRICTLY CONFIDENTIAL i I' Agenda Item ol I Minutes of Previous Meetings • • • • • • • • • • • • 2 Proposed Loan t o the Tata Iron and Steel Co. Ltd.. • 2 Ii ·t I' I 1, •: a 'I I. If 1 1 !I 1: ! . i I ) I 'I 11 ,; 1l : 1 ;! ii ji 1 ! * * * ·t !1 11 :1 !j II 1! 1· ,J Ii 11 .l lj I: II 'i ij I! 11 :· JI I' :! I' ,I l! ,: !i ii i: I '. ii I~ ii ll .. d I• ii I. 'I ij I' ii Ii II  2 STRICTLY CONFIDENTIAL THE CHAIRMAN: The first item of business is the Minutes i ot the 276th Regular and 11th Special Meetings ot the Execu- tive Directors held on June 6 and 21. Any corrections? (1'o response) If not, it Will stand adopted. We vill next take up the proposed loan to the Tata Iron 1 I ! and Steel Company, Limited in various currencies equivalent toiI $75 million. I I would like to tirst call on Dr. Basch to discuss the loan and economic aspects. DR. BASCH: Mr. Chairman, gentlemen, the proposed expansipn of basic industry is included in the second five rear plan of i i India. It started on April 1st this year. The second five year plan follows or is an outgrowth of the first five year plan which is being considered as a success. There is an over~ I I I all strengthening of India's economy. The rate of growth in l I the last two years or three reached about f'our percent a year.! It 11 hoped it vill increase to about five percent a year in 1; the second five year plan. '! 1 This overall increase vas achieved not only by investment: in the public sector but also by investment through the economy, I ! a great part of it in the private sector.  3 STRICTLY CONFIDENTIAL The second five year plan changes somewhat the emphasis ! I ' I of the first plan. The first plan emphasized mostly increase1 production of agriculture. The second places a great emphasis! l on transportation and industry for both these sectors and ex- Ii i ; penditures proposed amounting to nearly one-half of the total i as compared with less than one-third in the first five year plan. i Industry is expected to be expanded in nearly all import~nt sectors, also in the private sector including coal, steel, textiles, chemicals, aluminum, paper, sugar. i As a whole, it may be said that the private sector in I I industry at the end of the second five year plan will be large~, t much larger than the public sector. With regard to balance of payments in the first five ye~ " ! " plan, in spite of still increasing investment, the balance of I i parments developed favorably. However, because of the changed composition of imports in the second tive year plan--it vill J, I much more imports of equipment, machiners rolling stock and steel--there is to be expected a· greater strain on India's I balance of pa:yments, and, therefore, India will need more ex- " ternal assistance in the second five year plan than she neede~ in the first five year plan. Oomi~g nov to the project, I should like to say that thi~ i i project ts among the most important industrial projects in the plan. On its completion, Tata Steel will be the largest  4 STRICTLY CONFIDENTIAL industrial unit in India, with very good f"urther expansion potentialities. It will represent an important contribution to the whole of India's eeonomy. Foreign exchange savings re-i i sulting from the project will amount to about $50 a year. i In this connection, if one considers the yearly amount ofi service on this loan ot about $4.1 million, one can say that this amount certainly vas in Indta•s capacity to service. With regard to loan documents, these are basically in the customary form. There are some difterenoes which are outlined! in the President's report. I One interesting feature of it is that the loan vtll have I a trust deed constituting first mortgage and floating charge on the company's assets. However, the execution of the trust deed will not be a condition of eftectivenss. The loan can be made effective before the trust deed ts 'i executed, and the trust deed must be executed by tne end of Janua:ry 1957. At that time, the company vill be entitled to ! draw on the loan to the amount of $25 million, and as a featu1'! ot this loan the trust deed or the mortgage ts open end for :! 13-1/2 million dollars tor issue or the debentures or other obligations on tel'Uls and conditions to be agreed by the Bank. There a.re rev conditions of eftecttveness, which, as we reel, can be completed within three months. One of them con- cerns the supply of additional power. We know by nov the rNC  5 STRICTLY CONFIDENTIAL has confirmed all the additional power which will be needed will be supplied on time. On this last item, transportation, we have received assurances from the Government of India that they vill assign high priorities to transportation investment operations in this area so that the operation ot the steel mills should not be hampered by transportation difficulties or transportation delays. There is also an agreement vith the compan1 concerned an~ ! I the Bank Vith regard to providing or securing tu.nds needed to~ I additional financing ot the whole program. The company in i tsi i ' very conservative statements assessed the gap at about $55 mil.l- 1 lion for the whole five year period. on a close examination, it appears to us this gap will bel I much less than 55, maybe 30, maybe 35, of which about $10 mil-; lion has already been secured in India. I i The agreement provides tor reimbursement to the company for expenditure incurred after January 1st, 1956. In the firslt two months, only about several thousand dollars has been dis- burs ed. Orders placed to the end ot March amount to about $30 million, of which $3.8 million is in Deutsche marks, $11.5 in i I u. s. dollars, and $4.6 in pounds and yen. i I It is estimated -- roughly estimated -- that of the tota~ foreign exchange expenditure, about one-halt Will be in u. s. i ! '  6 STRICTLY CONFIDENTIAL dollars, one-third in Deutsche marks, and the rest in sterlin~ I and yen. The Bank has been informed that the UK treasury vill re- lease the amount or $8.3 million out of 60 million pounds re- leased for the Commonwealth countries. The Bank has requested an additional release or yen and discussed an accelerated use ot the released 18 percent ot. Deutsche marks. There are tvo additional small points: The Statutory Loan Committee Report has been duly executed, and the draft resolution which has been numbered "Number 5," -- there is a blank for the date -- should have a date of June 19. THE CHAIRMAN: Excuse me, Dr. Basch. What did you say about the Deutsche marks? I didn't catch it. DR. BASCH: About one-third. THE CHAIRMAN: No, about the release or Deutsche marks. DR. BASCH: Accelerated. THE CHAIRMAN': I see. We requested that, acceleration? DR. BASCH: Yes. Acceleration or the amount that vas re- leased, in. principal to be· used over a number of years. THE CHAIRMAN: Thank you. Mr. Rembert. ' MR. REMBERT: Mr. Chairman, gentlemen: The Tata Iron and! Steel Company vas formed in 1907 and has gradually expanded its operations over the years to the current production level  7 STRICTLY CONFIDENTIAL or about 765,000 tons of finished steel per year. This is aboiUt ; 65 percent of total Indian production. Produo tton tact lt ties are conttned to one tu 11,- tn te grater steelworks located at Jamshedpur. The company has an unusualljy I good record of sound management. Its assets are conservativeJ1. ! ! valued and the earnings record has been good. It has only a small amount of long term debt outstanding. The company started a program of modernization and ex- pansion in 1951 which has been modified and enlarged on severl occasions. The current program is based on an increase in I production from 765,000 tons to 1.5 million tons or :f'inished I steel per year. This involves changes and additions in every department or the works as well as in ore and coal mining operations. i To March 31, 1955, the company had invested the equivalen~ of about $50 million in this program. Expenditures over the l five years ending March 31, 1960 are estimated at the equivalent of about $270 million, of vhich the equivalent of $125 million!I will be foreign exchange. More than half or this amount is i I expected to be financed by the balance of an existing governme't advance, retained earnings and a current issue ot nev shares. i 1 The balance would be borrowed from the Bank and other sources. The essential works necessary for the production of 1.5 million tons per year are scheduled for completion in the firs half of 1958. To meet this tight schedule the compan~ has  8 STRICTLY CONFIDENTIAL retained Kaiser Engineers for supervision and management or the construction or these works. The job is well organized and work is well under way. Procurement has been and will be i on the basis of international bidding so far as practicable. i i i The Tata program is a part of a much larger national pro-1 gram vpich is estimated to increase Indian finished steel pro-! , duction from the present level of about 1.25 million tons to 4.5 million tone by 1961. The market for the added production!' ': from Tata must be considered within this framework. We have ' I concluded that the domestic market vill absorb this production! I I on a realistic schedule and, if not, any reasonable surplus could be exported. I I i! Upon completion of the program, Tata Will have a power depaane of about 70,000 kw on the system of' the Damodar Valley Corpor8iL tion which will be met largely from generating plants which have been financed by the Bank. The financial position of the company on completion of the project promises to be satisfactory. The equity-debt ratio will be 54 to 46. Earnings on total equity are likely to be about six percent, increasing to eight percent within tvo years. Debt service will be covered about 2.5 times. This is considered to be a very attractive project for Bank financing and is suitable tor a loan of $75 million. THE CHAIRMAN: Thank: you. Any questions?  9 STRICTLY CONFIDENTIAL 11 .MR. BASYN: What is the exact meaning of sale repro- duction"? That is reproduction that is not salable? ! I I MR. REMBERT: It ia diff'erent trom finished steel produc-1 i tion in that Tata sells a certain amount of the semi-finished ! ij l I! steel, and that is inoluded in the salable production. The !j '1 I! ii t: figure that I have given you here is really steel production. ! L .• MR. OVERBY: just wanted to get a recapitulation on my : I I favorite subject of availability of other currencies. What wab j! I 1 ii it again? I i ;I H 1! THE CHAIRMAN': Well, we have gotten a release from the British Government or about $8,300,000 in sterling to cover purchases 1n the UK. I We have requested the Japanese Government to make ava1lab~e I I a small amount or yen which covers the Japanese purchases. i I I We have requested the German Government to accelerate theJ I allowed disbursements or releases on German marks. We haven't! I 1 heard from them. So the only thing that 18 involved is Deutsche marks and yen and pounds. MR. OVERBY: Is it your expectation that there vill be enough Deutsche marks put up tor what i8 required for purchase in Germany? THE CHAIRMAN: I am. sure there won't. We haven't got tha!t I much left. MR. OVERBY: Well, not that much left out of their  10 STRICTLY CONFIDENTIAL remaining 18 percent. THE CHAIRMAN: Yes, that is right. I I I MR. OVERBY: The whole thing is used now, the 18 percent.I I THE CHAIRMAN: That is right. It is earmarked. MR. OVERBY: Earmarked. THE CHAIRMAN: That is right. I do~t lcnov how much Japanese yen is involved. MR. RUCINSKI: Five million dollars maybe. I THE CHAIRMAN: Five million dollars. But there will be--i i MR. OVERBY: Germany will have made available full 18 per~ ! cent in one way or another. THE CHAIRMAN: That is right. MR. OVERBY: Fine. Somebody made it. I MR. WARREN: Would someone say a word about the retention\ I price system? I am sure it is all covered here, but I am not sure I understood it. THE CHAIRMAN: Mr. Rembert. I MR. REMBERT: Iron and steel prices in India are ·controlltd, and the prices are set in much the same way as power rates are normally set, allowtng all expenses, depreciation, taxes, and a reasonable return on the investment. This practice has been followed since the end of the war. The only change that has been instituted recently has been the allowance of a development, an amount for development which is equivalent to about 50 rupees per ton, and the company is free  11 STRICTLY CONFIDENTIAL to take that and use that money tor investment. Another item which is included in the retention price is a contribution to the equalization fund which has been used I in the past to equalize prices between domestic production andj imports so that the uniform price is given in the country, andi ! in 1951 that amount vas increased to provide some funds which the Government loaned to India Iron and Steel and Tata for expansion purposes. THE CHAIRMAN: Any other questions? MR. BURY: What is regarded as a reasonable rate or re- turn investment apart trom vhat is allowed tor-- MR. REMBERT: In the past, it has been fixed tor about eight percent on what is known as the block. But I might say 1 I that the block includes the total investment of the company, including housing and all service factors. THE CHAIRMAN: Any other questions? ' MR. WARREN: 'Why does the retention price tall during thei period? Is that because or the decline in costs? I MR. REMBERT: No, that is part of the present arrangement1. ! i In other words, they have an agreed retention price subject to: 1960, and then the arrangement is that it vi 11 fall thereafter:, ! unless there are necessary adjustments on vages. I MR. WARREN: It there are upward changes in cost, this is! I taken into consideration? MR. REMBERT: That is risht. ,;' !i  12 STRICTLY CONFIDENTIAL THE CHAIRMAN: Any other questions? Well, i t there are no questions, I want to announce that we have participations requested in this loan by three banks: First National City Bank: or New York:, $1,065,000; Irving Trust Company or Nev York, $1,065,000; and the Manufacturers Trust Company of Nev York, $225,000 making a total of $2,355,000 •. That participation is in the tirat maturity which is in 1959, and the rate on that Will be 4-1/4 percent as compared with the rate on the loan of 4-3/4 percent. It there is no further discussion, I would like to have a dratt resolution to approve the loan and also to approve the participations that I have mentioned. Do you vant me to read these participations over? ,,: 1 To read the banks' participations: First National City Bank: of Nev York:, $1,065,000; Irving Trust Company ot Nev York, $1,065,000; and Manutacturers Trust Company of Nev York, $225,000, a total of $2,355,000. This covers the first maturity of the loan, 1959, and the rate that they are taking this at is 4-1/4 percent. Nov can I have a motion to approve this resolution and the participation. (Motion duly made and seconded, unanimously carried.) ! THE CHAIRMA1': I declare the loan of $75 million in various i ! I currencies to The Tata Iron and Steel Company, Limited approv~d. I :i i ! ii  13 STRICTLY CONFIDENTIAL MR. RAJ: Mr. Chairman, on behalf or The Tata Iron and ! i Steel Company and the Government or India, I wish to thank th~ ji I ii Board of Directors for approving this loan. I wish also to thank all those who have participated in the Bank staff in the negotiations for their very sympathetic I • I I I handling of this case from its inception, and in particular I i iI want to thank you. sir, for the speedy conclusion of this loanj. THE CHAIRMAN: Thank you, sir. I i'