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    Ruias ready forces for a comeback at Essar Steel

    Synopsis

    The move will come under fire as the recent IBC amendment aims to stop promoters of such companies from regaining control unless they settle their dues first.

    ET Bureau
    MUMBAI: Essar Steel promoters Shashi and Ravi Ruia are working toward setting up a consortium to bid for the company that’s in the midst of bankruptcy proceedings at the National Company Law Tribunal (NCLT), said several people aware of the matter.

    However, the move is expected to come under scrutiny as a recent amendment to the Insolvency and Bankruptcy Code (IBC) is aimed at preventing promoters of such companies from regaining control unless they settle their dues first. One of the persons said Essar’s comeback bid will be in compliance with the rules.

    The Ruias are expected to join forces with Russian bank VTB and Hong Kong-based special situations fund SSG Capital. Some Essar Group employees are likely to be part of the consortium.

    ‘Promoters May Retain Small Stake’
    One person said the Ruia brothers have already floated a special purpose vehicle (SPV) that will be part of the consortium. A former senior public sector banker and a former Steel Authority of India (SAIL) head are expected to be part of this SPV and will act as the management team responsible for turning around operations. Law firm Khaitan & Co is said to be an adviser to the effort.

    “VTB is organising the funds. The Essar promoters may retain a small minority stake of 10-20%, while SSG and VTB will be the principal shareholders. Essar has sought legal opinion and are confident that they have a strong chance in retaining the asset,” said an executive. “Expect an aggressive all-cash bid.”

    Flagship unit
    Essar Steel owes lenders about Rs 45,000 crore, of which Rs 31,671 crore became non-performing as of March 31, 2016. The company owes as much as 93% of the amount to a consortium of 22 creditors led by State Bank of India.

    An Essar Group spokesperson said it had begun working on the bid before the IBC was amended. “We had submitted an expression of interest (EoI) as a part of the Corporate Insolvency Resolution Process,” the person said. “In the EoI, we had indicated that we intend to work together with VTB. Since then, the government of India has come out with a new ordinance which necessitates a re-look at the bid itself. We are currently in discussion with our lawyers and VTB to decide on the way forward. No decision has been taken as yet.” SSG and VTB didn’t respond to queries.

    Cofounded by Shyam Maheshwari, Edwin Wong and Andreas Vourloumis, former top executives of Lehman Brothers’ Asia special situations group, SSG Capital focuses on China, India and Southeast Asia. The fund has $1.3 billion under management and aims to raise another $2 billion pan-Asia fund. Headquartered in Singapore, it has acontrolling stake in asset reconstruction firm Asset Care and Reconstruction Enterprise.

    VTB is Russia’s leading bank. Its arm VTB Capital advised on the $12.9-billion sale of Essar Oil to a Rosneft-led consortium last year. VTB Bank, which is 60.9% owned by the Russian government, provided afacility agreement to provide up to $3.9 billion for refinancing debt at Essar Global Fund Ltd in preparation for the sale of Essar Oil.

    Essar Steel’s 10 million tonne steel plant on the Gujarat coast has drawn the interest of big strategic players such as Tata Steel, Arcelor Mittal and Nippon Steel along with Vedanta. The deadline for bids was January end but that’s likely to be extended. Banks expect aggressive bids and hope to recover at least 60% of the dues owed to them and other operational creditors. Satish Kumar Gupta of Alvarez and Marsal (A&M) is the resolution professional (RP) appointed to oversee the Essar Steel bankruptcy process.

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    Divided house
    Legal opinion is divided on the eligibility of promoters looking to regain control of companies undergoing bankruptcy resolution. “Nobody from the Ruia family or any person connected to them can bid. But someone who does not fall in that definition but enjoys their confidence can,” said a senior source involved in the Essar Steel resolution.

    “The amendment is absolute. It does not talk about any quantum of stake. As per Section 29A of the Amendment, first the bidder needs to be certified. Then the RP’s lawyer – in this case Cyril Amarchand Mangaldas – will have to accept it before it comes to the lenders for approval.”

    The newly introduced Section 29A of the IBC is a “gatekeeper” section that determines which bidders are eligible to bid for a company in IBC, said Nilang Desai, partner, AZB & Partners. It also looks to prevent any promoter from regaining control indirectly. The concepts of “related party” and “person acting in concert” are relevant in this regard. Related party is defined in the Companies Act and the IBC.

    “The definition in the IBC is, for the most part, wider, making the impact of section 29A stronger,” Desai said. “But some legal experts have argued that the definition in the Companies Act is the one to rely on. This has led to some uncertainty. The term ‘person acting in concert’ is not defined under the IBC but is defined under other laws and has a legacy of jurisprudence there. The process of adapting it for the purpose of the IBC may give courts the opportunity to adapt it in a manner that captures the spirit of section 29A, cutting through some potential clever structures which try to involve ‘tainted’ persons.”

    Ruia defence
    The Ruias had challenged the referral of Essar Steel under the bankruptcy process to the NCLT in June.

    Essar Steel was among the 12 companies with large problem debts that the RBI had initially picked for resolution under the IBC.

    The promoters asserted that they had not been characterised as wilful defaulters or accused of diverting funds, perpetrating fraud and indulging in malfeasance.

    They also said they had been servicing the loans and had, in fact, paid Rs 3,467 crore to banks and financial institutions between April 2016 and March 2017.


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