India Court Asks Bidder to Pay Essar's Dues to Stay in Race

(Bloomberg) -- A steel mill that’s emerged as the most sought-after asset in India’s crackdown on delinquent borrowers will cost its purchaser at least $1 billion more than bargained for, after the Supreme Court said bidders must clear the dues of any companies related to them to stay in the race.

The world’s largest steelmaker ArcelorMittal and a VTB Capital-led consortium have been vying for Essar Steel India Ltd., which came on the block after India’s central bank ordered lenders to push it into bankruptcy proceedings last year. Since then, both parties have opposed each other’s eligibility under a rule that disallowed bidders with links to a defaulter from being part of the process, which has already seen two rounds of bidding.

Billionaire Lakshmi Mittal’s steelmaker questioned the eligibility of the VTB-led Numetal Ltd. group because, in the initial round of bidding, it included a company that is backed by the son of one of Essar’s founders. The company wasn’t part of the second round, but the Supreme Court held on Thursday that the Numetal consortium remained a related party to Essar Steel.

That would mean Numetal will have to pay off the bad loans of the entire Essar group if it wants to remain a bidder, lawyers involved in the case said, asking not to be identified as they are not authorized by their clients to speak to media. An Essar spokesman declined to comment. ArcelorMittal itself will have to pay off 70 billion rupees in dues of group companies.

Good Asset

“The court decision will make it difficult for Numetal to compete for the asset,” said Sanjiv Bhasin, executive vice president at IIFL Securities Ltd. “As for ArcelorMittal, they will look to pay all their outstanding dues, as Essar is a very good asset, the steel market is in an upcycle and Arcelor wants to get into the Indian market.”

Thursday’s Supreme Court judgment was another twist in the battle for Essar Steel, which was one of the so-called “dirty dozen” -- debtors that the central bank ordered be taken through the bankruptcy courts in June last year. The steel assets attracted a slew of potential bidders including Mittal’s fellow mining billionaire Anil Agarwal and top producers in India and Japan, all lured by soaring prices for the metal and India’s infrastructure spending.

Essar Steel, which can produce 10 million metric tons of the alloy annually, owes creditors about 508 billion rupees ($6.9 billion). The Essar group’s holdings are spread across metals and mining, energy, infrastructure and services.

ArcelorMittal dues are related to KSS Petron Pvt. Ltd. and Uttam Galva Steels Ltd.

The steelmaker transferred the amount to an escrow account with the State Bank of India as a pledge to pay off the outstanding debts, people familiar with the matter said in May. The Luxembourg-based company wants confirmation from Essar Steel’s lenders that it has won the bidding before paying off the bad loans, a separate person familiar said last month.

ArcelorMittal and Numetal have both offered to pay 420 billion rupees for the mill. To stay in the race, both bidders have two weeks to settle any outstanding dues of companies considered related entities.

Once that’s out of the way, India’s Supreme Court has effectively opened up a third round of bidding, with lenders given eight weeks to choose the best bid.

©2018 Bloomberg L.P.