A scheme worked out by the union steel ministry attempts to convert part of the zero-debt company's Rs 635-crore equity capital into government loans. The resulting debt to equity ratio of 1:1 is expected to prove attractive for prospective strategic partners.

The capital restructuring proposal has recently been forwarded to North Block by the union ministry of steel. The extent of disinvestment in the company will be decided by the union cabinet.

The Disinvestment Commission has recommended a strategic sale of 30 per cent of the government stake in the company to a partner in management, with a commitment to further dilute government holding within two years. The panel felt that the subsequent dilution of government equity could be both, through a sale of shares to the strategic partner and a public offering.

The steel ministry was initially toying with the idea of effecting a block sale of 49 per cent of government equity, while retaining the majority shareholding for the centre. There has been a change in the thinking within policy-making circles now, that the union finance minister has shown a predilection for divesting the controlling stake in public sector enterprises.

In his budget speech this year, finance minister Yashwant Sinha hinted at one-shot strategic sales of 74 per cent government equity in PSEs. The government holding in the company is now 99 per cent, one per cent having been disinvested already in favour of mutual funds, insurance companies and other institutional investors.

Kudremukh Iron Ore Company is among the money-spinners in the PSE stable. In 1996-97, the company earned a profit after tax of Rs 73.23 crore, from Rs 218.99 crore of iron concentrate and pellets sales overseas.

The broad plan is to write off the interests on loans that were converted into government shares a decade ago. The government loans were converted into equity when the Iran government backed out of the Kudremukh Iron ore project.

A 7.5-million-tonne capacity iron ore processing plant was commissioned in April 1976 to supply iron ore concentrates to Iran. The centre had signed an agreement with the National Iranian Steel Industries Company, committing 150 million tonne of iron ore concentrates over a period of 21 years, beginning September 1980.

The government of Iran initially agreed to cover the $630 million cost of the Kudremukh Iron Ore project, but ultimately only disbursed $255 million. The Rs 516.87 crore project was finally completed with funds provided by the Union government.

Some of those funds were in the form of loans and the rest were in the form of government equity. Iran was finally not able to lift the contracted amount of iron ore either and the Kudremukh Iron Ore Company was compelled to scout around for new markets.

To help KIOCL diversify its product range, the centre invested another Rs 116.65 crore in the company to set up a three million tonne - capacity pelletisation plant. Finally the whole project cost was converted into government equity, including the loans granted by the Centre and the unpaid interest that had accrued on the borrowings.

The union government will now write off the portion of the equity that was at one time interest on loan. The rest of the roughly Rs 634 crore paid-up share capital will be split into government loans and government equity.Meanwhile, an inter-ministerial taskforce is in the process of selecting global advisors for the strategic sale in KIOCL. The Centre has already appointed the Industrial Development Bank of India (IDBI) a consultant to the disinvestment programme.

According to highly placed sources in government, the process of picking a global advisor is now on.