Essar Steel To Feel The Heat Of The New Bankruptcy Code
Essar Steel likely to be among the 12 accounts identified for resolution under the Insolvency and Bankruptcy Code.
Essar Steel, a long standing trouble spot for Indian lenders, is likely to be among the 12 bad loan accounts that the Reserve Bank of India (RBI) wants banks to resolve using the Insolvency and Bankruptcy Code (IBC), said atleast two people familiar with the matter.
On Tuesday, the RBI said that it will direct banks to resolve these 12 accounts, which constitute 25 percent of the bad loans in the system, under the IBC. The regulator has not released the names of the firms on this list, but most analysts say these accounts are centered in the steel, and power sectors.
Essar Steel is likely to be on the list as it has been a non-performing asset since fiscal year 2015-16. The company owes banks nearly Rs 45,000 crore and has been in talks to restructure its debt for some time now. In January, Prashant Ruia, chief executive officer of Essar Group told BloombergQuint that a restructuring deal was “weeks away.” This, however, has not fructified.
It is accounts like Essar Steel, where a resolution plan has failed to emerge, that the regulator wants banks to move the bankruptcy court. In its press release on Tuesday, the RBI said that the 12 accounts are those which have outstanding dues of over Rs 5000 crore and where 60 percent of the loan amount has been tagged as ‘non-performing.’ Essar Steel fits both those criteria.
The Essar Group did not respond to an email from BloombergQuint.
In Stressed Company
Essar Steel’s struggles have been partly linked to an industry-wide downturn brought on by weak domestic and global demand for steel. This is one reason why Essar Steel will likely be one of many steel firms on the list of 12 shortlisted by the RBI.
“We estimate a couple of large steel companies account for ~50 percent of this and the rest of the names are from textile and construction sector,” said brokerage house Credit Suisse in a report on Tuesday.
Shares of firms like Bhushan Steel and Electrosteel Steels, which have also been termed as non-performing assets for some time now, fell sharply in trade on Tuesday on fears that they too would be part of the RBI-identified accounts.
In the case of Essar Steel, the company and its lenders have been attempting to restructure the account since November 2015. While lenders, along with the promoters, have tried to bring in strategic investors, it hasn’t worked as planned.
In October 2016, the Essar Group had announced the sale of 98 percent stake in its oil unit for $13 billion to Russia’s Rosneft. The funds were expected to help reduce the debt of the Essar Group, especially in the steel company. This plan too hasn’t yielded results as the sale to Rosneft is yet to close.
Improving Operational Environment
Ironically, the move to push steel firms like Essar Steel towards bankruptcy proceedings comes at a time when the operational environment in the sector has been improving.
According to a statement dated April 4 on the company’s website, the company’s flat steel production registered a growth of 47 percent in 2016-17. Pellet production also grew by 60 percent. The company, which is privately held, did not declare it financials for the year in the statement.
For the year ended March 31, 2016, the company had reported a gross revenue of Rs 14,378.52 crore, up slightly from Rs 14,369.35 crore a year ago. Essar Steel reported a net loss of Rs 5,800 crore for financial year 2015-16, as compared with a profit of Rs 648 crore in the year before that, according to the company’s annual report.
Bankruptcy Process
As banks follow through on the RBI’s directive on referring the 12 accounts for resolution under the IBC, the process will involve filing an application with the National Company Law Tribunal. Once the NCLT admits a case, the board of the concerned company is suspended and insolvency and recovery professionals are put in place. Following this, a Creditors Committee is set up, which then needs to approve a resolution plan within 180-270 days. If lenders fail to do this, the company can be put into liquidation.
“Through this process, the equity holder’s rights are suspended. However if a deal is struck within the stipulated time period, there is no bar on the promoters coming back,” said Kumar Saurabh Singh, Partner, Khaitan & Co. He was not commenting on any specific account but on the general process to be followed under the bankruptcy code.