ArcelorMittal has confirmed it will settle outstanding dues in two companies where it is a passive shareholder in order to become eligible to bid for Essar Steel as part of the insolvency process.

Has The Ruia Family Finally Lost Essar Steel?

The legal process for the resolution of Essar Steel moved a step further on Friday. But for the Ruia family, the day perhaps brought home the inevitability of losing a once-prized business.

On Friday, the National Company Law Appellate Tribunal allowed lenders of Essar Steel to proceed with the evaluation of a second round of bids submitted in March. In doing so, the NCLAT upheld the resolution professional’s view that the first round of bids submitted in February were ineligible.

Why is that important?

Because in the first round of bids, an entity called Numetal had submitted a bid. One of the shareholders in Numetal then was a trusteeship named Aurora Enterprises Ltd., whose beneficial owner was Rewant Ruia, a family member of the ertswhile promoters. The resolution professional’s view was that this made Numetal ineligible to bid under Section 29A of the IBC. And so when the second round of bids was submitted, Numetal changed its shareholding to eliminate Aurora Enterprises.

What the NCLAT did on Friday was tell lenders to consider that second bid. This essentially eliminated the possibility that the Ruia family would have any interest left in Essar Steel after the resolution process is over.

“The resolution professional in his decision on ineligibility of the first round of bids was spot on and the NCLAT has ruled on that,” said Ashish Chhawchharia, partner at Grant Thornton. His firm is advising the resolution professional.

Also read: Essar Steel: NCLAT Says Numetal’s Second Bid Eligible; Gives ArcelorMittal Till Sept. 11 To Clear Dues

As things stand, the battle for Essar Steel is between the restructured Numetal, Vedanta Ltd. and ArcelorMittal, provided the Lakshmi Mittal-owned company can repay the dues of its subsidiaries before Sept. 11.

BloombergQuint sent an email to the Essar Group on Friday.

A Long Saga Of Distress

This is not the first time that Essar Steel has found itself in distress.

The account had gone into corporate debt restructuring in 2002, with a debt of Rs 2,800 crore, according to an Economic Times report. It, however, managed to exit the CDR ahead of schedule in 2006.

A new cycle of distress began after the rapid expansion at Essar Steel’s Hazira steel operations at the turn of the decade. The expansion plan failed due to delay in environmental approvals and non-availability of natural gas, which was necessary for the plant to work at maximum efficiency.

By 2015, the company was saddled with financial creditor dues exceeding Rs 49,000 crore.

That year, the lenders made a first attempt to get the promoter family out of the driving seat at the company. At the time, the company was facing severe liquidity issues because of a drop in commodity prices and a failed expansion plan at its Hazira steel plant.

At a meeting in November 2015, the lenders to Essar Steel, led by State Bank of India and ICICI Bank Ltd., had discussed the option of converting a portion of the company’s debt into majority equity, which could be sold to potential investors later. Two bankers with direct knowledge confirmed these proceedings.

However, the plan was put on hold after the Ruia family told the lenders that they were willing to sell the company through an M&A process. The lenders appointed SBI Capital Markets and ICICI Securities to look for potential buyers, Essar Steel had confirmed then.

While the search for a new bidder was on, the RBI concluded its asset quality review and asked banks to classify multiple large accounts, including Essar Steel, as non-performing assets by March 2016. The NPA-tag made things worse for the stressed steel company. Lenders decided to drive the sale process, the bankers quoted above said. Nothing came of the process though.

The Many Twists And Turns

In October 2016, Essar Steel submitted a resolution plan to its lenders. It involved Rs 1,700 crore equity infusion from U.S.-based hedge fund, Farallon Capital, in exchange for 24 percent equity in the company. The plan also involved conversion of a portion of the company’s debt into 36 percent equity to be held by the lenders. The Ruias, with 40 percent equity remaining, intended to remain in control of that asset.

Discussions around that plan continued for some time.

However, in June 2017, Farallon Capital confirmed to BloombergQuint that it had never entered into any agreement to fund Essar Steel.

Around the same time, lenders had received a list of 12 stressed accounts from the RBI for immediate insolvency action. Essar Steel’s name featured among the largest of the 12 accounts. Insolvency became a reality. The account was finally admitted to the National Company Law Tribunal in August 2017.

The 29A Nail In The Coffin

As companies like Essar went into insolvency, there was still the possibility that promoters would be able to get their businesses back.

“We have sufficient fire power to do that,” Prashant Ruia had told BloombergQuint in an interview in August, 2017.

But in November 2017, the government introduced Section 29A into the Insolvency and Bankruptcy Code. The section barred defaulting promoters from coming back and bidding for assets under the insolvency process.

It was after this that Numetal was created. A resolution plan was submitted in February this year. But the resolution professional deemed it to be ineligible. The second Numetal resolution plan submitted has no direct or indirect shareholding of the Ruia family.

Also read: Numetal, ArcelorMittal Allowed To Clear Dues To Bid For Essar Steel: Exclusive

“Once you are disqualified under 29A, you can’t come out and say that now I am eligible and bid for it. That is the interpretation,” said Sanjay Asher, partner at Crawford Bayley, when asked whether the NCLAT’s judgment put an end to complex structures that could be used by promoters to retain an interest in their erstwhile assets. The good thing is that banks will still recover their dues because there are still three bidders in the fray, Asher added.

Can the Ruia family find a way back in after the resolution plan is complete?

Bankers quoted above pointed out that the Insolvency and Bankruptcy Code is silent on whether a bidder can enter into business arrangements with the promoters at a later date, after the committee of creditors has approved the plan. While lenders have insisted that all bidders sign an undertaking that they will not enter any such arrangements, it is not clear whether this is legally enforceable.