Behind India’s Largest IBC Recovery: The Essar Steel Story

In July 2017, top lenders to Essar Steel Ltd. met in Mumbai to discuss pitches by restructuring firms that wanted to run the steelmaker’s for the nine months during the insolvency period. They looked at technical and financial merits of the firms and decided to go with Alvarez & Marsal India. Not because the U.S.-headquartered turnaround specialist offered to take up the job for the least amount of money—it didn’t. But because it had successfully managed large stressed firms.

Other consultancy firms offered to do it for a lower fee but Alvarez & Marsal had the maximum experience, a former public sector banker present in that meeting told BloombergQuint—he spoke on the condition of anonymity as details aren’t public.

For a consortium led by public sector banks, such a selection was surprising. The suggestion came from private lenders like ICICI Bank Ltd. and Axis Bank Ltd., and their state-owned peers went with it, the banker added. This preference for quality over price was kept alive all through the insolvency period, and paid off ultimately more than 850 days later.

On Dec. 16, financial creditors to Essar Steel, led by State Bank of India, recovered nearly 92 percent of their Rs 49,000-crore claims after a consortium between Luxembourg-based ArcelorMittal and Japan’s Nippon Steel & Sumitomo Metal Corporation Ltd. agreed to take over the company. That brought closure to one of the largest insolvencies under India’s new bankruptcy law.

The Resolution Professionals

Satish Kumar Gupta, an independent operator, was named the resolution professional to run the insolvency proceedings. Vivek Kamra, a managing director with Alvarez & Marsal, was appointed to run the company during the resolution period.

Kamra, a steel industry veteran with 25 years of experience at Tata Steel Ltd., identified the trouble right at the outset. Essar Steel was in dire straits but it had built a world-class steel plant with a capacity of 10 million tonnes a year, he said.

As a restructuring professional, the first job was to get interim financing in place. He asked the committee of creditors to provide Rs 1,500-2,000 crore. The lenders declined to offer that support. To cover for operational costs, Kamra approached vendors to keep providing services on credit. While that cost more, it got the job done.

The next step was to shield Essar Steel against the inter-connectedness with other group companies like Essar Ports Ltd., Essar Shipping Ltd. and Essar Power Ltd. For this, resolution professionals needed the support from the promoter group—Ruia family that had already started employing legal measures to counter the insolvency proceeding. To Kamra’s surprise, while the promoters mounted a legal challenge, they didn’t disrupt the operations of the company.

Since the lenders didn’t provide the necessary financial support, resolution professionals relied on financials of Essar Steel to keep it operational. The lenders to the company had already established a cash-monitoring process, recording payments and other transactions in requisite bank accounts to ensure no cash changed hands. That helped Alvarez & Marsal easily take control of cash flows and use them efficiently.

Kamra and his team also ensured that tagging—that allows banks to adjust funds in a company’s accounts against pending dues—was stopped. The Alvarez & Marsal team decided that the cash Essar Steel earns should be used for operational needs, adding about Rs 200-250 crore worth of funds. The lenders were unhappy but they agreed. This went on to become the norm for all other insolvency proceedings in the country.

Then steel prices recovered and remained steady for the most of 2018. That helped Essar Steel push up production and ensure suppliers are paid in time. Customers, mostly automakers, absorbed the additional output.

Average production increased from 460,000 tonnes a month in 2016-17 to 600,000 tonnes subsequently with support of the Committee of Creditors and executive management of Essar Steel, resolution professional Gupta said. Rolled steel production rose from 5.47 million tonnes in FY17 to 6.78 million tonnes in FY19, benefiting all stakeholders including employees, he said.

In fact, the operational turnaround of Essar Steel is one of the reasons why ArcelorMittal increased its bid. Over the course of the insolvency proceeding, the Luxembourg-based steelmaker conducted three rounds of due diligence of Essar Steel’s finances and its facilities. In February 2018, in the first round of bidding, it offered Rs 29,000 crore but raised it to Rs 42,000 crore in subsequent rounds.

“Essar (Steel) provides ArcelorMittal an opportunity to buy a producing, profitable, cash generating asset at below replacement costs,” ArcelorMittal said in its analyst presentation for the July-September period. The company targets to increase shipments to 8.5 million tonnes in the medium term and 12-15 million tonnes in the long term through brownfield expansion.

The Lenders

The Essar Steel insolvency tested lenders’ patience. Not only was it one of the largest insolvency cases in India, it was referred to resolution when the law was new.

The initial days of the insolvency proceedings faced considerable disruption. The promoters first approached the Gujarat High Court in July 2017, challenging the RBI’s decision to identify Essar Steel among the first 12 large cases for insolvency resolution. While this caused a delay of about two weeks, Essar Steel was eventually admitted for insolvency proceedings in August that year.

Then came the uncertainty from the introduction of Section 29A of the Insolvency and Bankruptcy Code in November 2017. It barred promoters of companies that defaulted on loans for 12 months from submitting bids. At the outset, this caused confusion among bankers because it limited the pool of investors for stressed accounts like Essar Steel, said another public sector banker closely involved with the process.

SBI, the lead lender, took charge saying it would conduct an auction and ensure that interested bidders from around the world would be invited to participate. While five global steel companies expressed interest, only two eventually submitted bids in the first round. But one of them, Numetal, was indirectly connected to the Ruia family, making matters worse.

But it was incumbent upon the resolution professional to prove that the connection was in violation of Section 29A. In his assessment though, Gupta found both, ArcelorMittal and Numetal to be in violation.

Gupta, the resolution professional, found that while Rewant Ruia, the son of Essar Group co-founder Ravi Ruia, was involved in the creation of Numetal, ArcelorMittal had invested in Uttam Galva Steels Ltd. and KSS Petron Pvt. Ltd.—the two companies that had defaulted on bank loans.

That led to the rejection of bids and the two bidders challenged it in court. The fight went up to the Supreme Court, which in October 2018 ruled that the resolution professional was right in his assessment and that the bidders could participate if they cleared dues.

While lenders had to wait for eight months to get clarity on the eligibility of the bidders, they received a Rs 42,000-crore bid for Essar Steel and Rs 7,500 crore from ArcelorMittal as repayments on dues owed by Uttam Galva and KSS Petron.

The lenders cleared ArcelorMittal’s bid in October last year, which received the NCLT’s nod by March. But more uncertainty followed.

Operational creditors to Essar Steel and Standard Chartered Bank approached the National Company Law Appellate Tribunal to seek more than what the Committee of Creditor had allocated. The resolution professional had assigned Rs 60 crore worth repayment to Standard Chartered Bank against its admitted claims of nearly Rs 3,500 crore as the dues were unsecured. Operational creditors with dues worth more than Rs 1 crore each would not be repaid at all.

In September, the appellate tribunal ruled in favour of operational creditors and Standard Chartered Bank. The NCLAT said that all classes of creditors would get an equitable share of the repayment.

The financial creditors rushed to the Supreme Court, which ruled that the hierarchy of creditors must be respected in resolution of insolvency cases. It set aside the NCLAT’s suggestions and said the financial creditors were well within their rights to approve a repayment plan of their liking.

The Promoters

In 2015, the lenders to Essar Steel had told the promoters to bring in additional equity to ensure that the company’s debt can be restructured. Discussions lingered on but the Ruias were unable to finalise anything.

In October 2015, the Central Bureau of Investigation conducted raids into offices of IDBI Bank Ltd. during their investigation into the Kingfisher Airlines Ltd. case. The raids and the subsequent arrest of senior bankers spooked the banking sector. Decisions on restructuring and additional financing froze as bankers feared prosecution later.

About a year later, in October 2016, the Ruias submitted a resolution plan to the lenders saying that U.S.-based fund house Farallon Capital was willing to infuse capital into Essar Steel. While the lenders started reviewing the plan, it never reached anywhere. In June 2017, Farallon Capital confirmed to BloombergQuint that while it held initial discussions, the fund had never agreed to invest in the company.

The Ruias, meanwhile, continued to oppose the insolvency proceedings and tried legal remedies, calling the RBI’s decision to shortlist Essar Steel among the 12 large stressed companies as arbitrary. The courts, however, denied any relief, holding that referring the company for insolvency was valid.

The promoters even joined hands with VTB Capital and other Russian companies to create Numetal to bid for Essar Steel. Their main contention was that since the Ruia family was not in control of Numetal, it could not be disqualified under Section 29A. But the Supreme Court rejected the argument, saying the the promoters must clear their overdue payments to become eligible to bid.

In October last year, when the lenders declared ArcelorMittal as the highest bidder for Essar Steel, the promoters made one final attempt to buy back their company. Essar Steel Asia Holdings offered to make a one-time settlement of Rs 54,000 crore, which represented the total dues owed to financial and operational creditors. According to a person with direct knowledge of the offer, the lenders never responded.

An Essar Group spokesperson declined to comment on the story.

Since 2017, the Essar Group has lost control of two large assets, Essar Oil and its steel unit. It is also in the middle of negotiations with lenders to restructure the debt of Essar Power Mahan Ltd., its coal-based unit in Madhya Pradesh. It’s shipping business continues to report losses. The group’s ports business, however, has reported a 20 percent rise in cargo in the first six months of the current financial year.