A security guard pulls a gate across the logo of Hutchison Essar Ltd. at the company’s corporate office in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

The Orissa Slurry Pipeline That Could Muddy Essar Steel’s Insolvency Bid

Indian lenders, in the midst of finalising a resolution plan for debt laden Essar Steel Ltd, have a new problem on hand. One of the bidders for the asset is trying to gain control of a key pipeline which supplies raw material to Essar Steel’s Odisha plant, even before it secures ownership of Essar Steel. Should it succeed, competing bidders may find the asset less attractive and more complex to operate.

The bidder complicating matters is Numetal Mauritius - an SPV in which the Ruia family has an interest. On Jan. 16, BloombergQuint reported that a Singapore based trusteeship, of which a Ruia family member is the beneficial owner, holds 30 percent in Numetal Mauritius.

In an email response, Numetal confirmed that it has entered into an agreement to purchase Orissa Slurry Pipeline India Ltd.

This is a first step that will allow us to make an unconditional bid for Essar Steel. Price and conditions cannot be disclosed at this time. Numetal’s largest shareholder is VTB with other minority shareholders including Rewant Ruia.
Spokesperson for Numetal Mauritius

Numetal Mauritius and ArcelorMittal – which is bidding through its subsidiary ArcelorMittal India Pvt. Ltd. (AMIPL) – submitted bids for Essar Steel as the deadline closed at 5 pm today.

The proposed bid for the pipeline has bankers seeing red. Particularly since recent amendments to the Insolvency and Bankruptcy Code bar defaulting promoters from bidding for their own assets until they clear overdues. The Ruia family has not done so yet and hence is not eligible to bid for Essar Steel.

Given that, lenders, led by the State Bank of India, have decided to oppose Numetal Mauritius’ bid to buy out the slurry pipeline from a fund promoted by Srei Infrastructure Finance Ltd., two people in the know confirmed. The people, who spoke on condition of anonymity, said the deal will have a significant bearing on the resolution plan for Essar Steel.

Numetal Mauritius has proposed to buy a 70 percent stake in Orissa Slurry Pipeline Infrastructure Ltd. from the Srei-promoted India Growth Opportunities Fund for around Rs 1,500 crore, the two people quoted above said. The deal is still not closed and is subject to conditions and approvals, these people added.

The Economic Times first reported the deal and the lenders’ decision to oppose it.

An email sent to Essar Steel seeking confirmation of the transaction was not answered. SBI also did not respond to an email seeking comment.

The Importance Of The Slurry Pipeline

The Orissa Slurry Pipeline is responsible for transporting about half the raw material required for Essar Steel's iron pellet plant in Paradip, Odisha. The 253 kilometre pipeline is the cheapest way to bring in raw material.

Whoever controls the pipeline, would have considerable influence over the plant's production capabilities and thereby on Essar Steel's ability to repay its debt.

"The pipeline is a critical part of the infrastructure to run the steel plant for long term success. With it, you will also get a captive iron ore mine, which insulates the operations from global price movements,” said Rakesh Arora, managing partner at Go India Advisors and a long-time watcher of the mining and metals sector. “If the pipeline access is not part of the deal (for Essar Steel), it will impact pricing,” added Arora.

Essar Steel owes banks roughly Rs 48,000 crore and is one of the 12 largest accounts being resolved under the IBC, following instructions from the Reserve Bank of India in June 2017.

Recognizing the importance of the pipeline to resolution the process, the interim resolution professional, Satish Gupta, had sought a court order to attach OSPIL to Essar Steel. However, in an order dated February 7, 2018, the Ahmedabad bench of the National Company Law Tribunal said that it cannot take any decision in the matter since a dispute over the ownership of OSPIL is pending in the Kolkata High Court.

Gupta did not respond to an email from BloombergQuint.

The Ownership Dispute

Here the story takes another twist.

The India Growth Opportunities Fund, which is in the process of selling stake in OSPIL, had purchased the 70 percent stake from Essar Steel via a sale and leaseback agreement in 2015.

By March 2015, physical possession of the pipeline assets had been transferred to the India Growth Opportunities Fund, show the documents filed with the Ahmedabad NCLT.

In 2016, OSPIL sought to cancel the deal after lenders to it, who were also lenders to Essar Steel, opposed it. This was because the bankers felt that the sale would not help them upgrade Essar Steel to a standard account from a non performing account, said one of the bankers quoted above.

Srei Infrastructure opposed this. In May 2016, Srei Infrastructure approached the Kolkata High Court to claim ownership over the pipeline company, in its capacity as the promoter of the India Growth Opportunities Fund. It argued that the purchase had already concluded.

It is worth mentioning here that the then Ruia group promoted Essar Oil, with an investment of Rs 1,195 crore, was the largest investor in the India Growth Opportunities Fund which had a corpus of Rs 1260 crore. This fact emerged from a separate order passed by market regulator SEBI in a case unrelated to the ownership of OSPIL. The Securities Exchange Board of India was looking into whether Srei Multiple Asset Investment Trust and Srei Asset Investment Managers Ltd. had followed the regulator’s Alternative Investment Fund guidelines. The India Growth Opportunities Fund fell under the umbrella of Srei Multiple Asset Investment Trust.

The Legal View

With the dispute over OSPIL’s ownership still pending before the Kolkatta High Court, the Ahmedabad bench of the NCLT, in its order, said it cannot take a decision on the IRP’s request to attach the pipeline asset to Essar Steel.

But is the IRP’s request legally tenable?

Alok Dhir, founding partner of law firm Dhir & Dhir Associates told BloombergQuint that clubbing distinct companies together may be a case of overreach.

You can’t have your cake and eat it too. Corporate entities are distinct from each other and if lenders feel that one asset is critical for the value to be maintained in another, they should insist in the beginning that these two be clubbed together. To go across companies and band them together would be a case of overreach. That would be contrary to the thought behind the insolvency and bankruptcy code.
Alok Dhir, Founding Partner, Dhir & Dhir Associates

While it is unclear which way the dispute will go, potential investors in Essar Steel will likely weigh the situation with the pipeline asset before they structure their bids.

Note: On Tuesday morning, the Delhi High Court stayed the sale of Odisha Slurry Pipeline to Numetal till April 5. The next hearing has been scheduled for April 5. The development took place after this story was published.

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