Cactus. (Photographer: Waldo Swiegers/Bloomberg)

Essar Steel: Ruia Offer Is Bigger But Is It Better?


At 1 p.m. on Oct. 25 the voting closed. Over 90 percent of votes cast by the Essar Steel committee of creditors were in favour of ArcelorMittal’s Rs 50,000 crore resolution plan. The resolution professional was then directed to file the plan with the National Company Law Tribunal. The expectation was that the insolvency process, that started in June 2017 and went through several litigation-filled twists and turns, would come to a successful end in a few days. Successful, because ArcelorMittal’s plan would amount to an over 80 percent debt recovery for financial creditors.

But as the IBC has taught us time and again in the past year – it ain’t over even when it looks, feels and smells over.

Four hours after the vote closed, Essar Steel’s promoters, the Ruia family, issued a statement offering to clear all dues, yes, all dues. Financial creditors, operational creditors, unsecured creditors. That’s a total Rs 54,389 crore including an upfront cash payment of Rs 47,507 crore.

No doubt the Ruias’ promise to repay all creditors in full trumps ArcelorMittal’s resolution plan. But is value maximisation the only point to consider in this rather twisted insolvency saga?

The Ruia offer is bigger, but is it better? Before you decide consider these factors.

1. Why The Last Minute Offer?

That’s the first question that would have occurred to most when news of the Ruia offer broke. Why now? Why didn’t the Ruias offer to settle earlier on in the insolvency resolution process that dragged on for 17 months?

One argument a Ruia official presented to me was that they were hopeful of retaining control of this prized asset of theirs via participation in Numetal, one of the bidders in the insolvency process.

It’s a weak argument for two reasons.

One, Section 29A was legislated primarily to keep promoters like the Ruias out of the bidding process for insolvent assets. The section, as most already know by now, disallows promoters of non-performing assets from submitting a resolution plan for any insolvent asset. And while Rewant Ruia was not quite in control of Numetal, the proximity itself made for a weak case of eligibility.

Two, the Ruias were obviously aware of the slim chance they had of winning the steel company back via Numetal. Otherwise in the second round of bids Rewant Ruia would not have been replaced by JSW Steel.

The Eligibility Saga

Six bidders submitted bids. Numetal and ArcelorMittal found ineligible to bid.
Due process not followed. Reconsider bids by Numetal and ArcelorMittal and allow both to repay dues to become eligible.
Numetal (Rewant Ruia out, JSW Steel in) eligible, ArcelorMittal to pay overdues to become eligible.
Numetal and ArcelorMittal bids ineligible until overdues are paid.

Even if the Ruias had truly pinned their hopes on somehow retaining Essar Steel via Numetal, the bid values betrayed a lack of aggression more than one banker insisted to me.

In the first round Numetal offered approximately Rs 17,000 crore versus ArcelorMittal’s more than Rs 30,000 crore bid. When ArcelorMittal upped its bid to Rs 42,000 crore, Numetal offered Rs 37,000 crore.

That raises two questions.

1. If the Ruias were keen to retain the asset, and believed their legal case on eligibility was strong, why didn’t Numetal bid more aggressively?

Were they hoping to get the asset cheap?

Why would anyone who says they are willing to settle full dues want to participate in a bidding process fraught with commercial and legal uncertainties?

Why not make the settlement offer earlier on and be done with it?

2. Where’s The Money?

The Ruias say they’ve made efforts to settle in April and July 2018 but the Essar Steel Committee of Creditors – the lenders group tasked with picking a resolution plan - rejected their offers.

Except that none of those offers were accompanied by any financial assurance or arrangements. Nor is the last one.

All the Ruias sent the CoC on Oct. 25 is a a letter offering to pay up. No information on funding arrangements. No accompanying bank guarantee.

This is not to suggest they don’t have the money. But remember, ArcelorMittal and all other bidders paid earnest money to bid, Rs 500 crore. And thereafter Lakshmi Mittal’s company has given the lenders a bank guarantee of Rs 4,000 crore. That’s how much the winning bidder stands to lose if it fails to make good on its resolution plan.

Besides, ArcelorMittal is also out of pocket another Rs 7,469 crore that it paid to clear overdues so that its bid for Essar Steel be deemed eligible.

The Ruias have not offered any financial assurance to emphasise the seriousness of their offer. Which, given their tenuous relationship with the lenders, may make the banks doubt the seriousness of their offer.

Also read: What Essar Steel Brings To The Table For ArcelorMittal

3. Who Will Respond To The Ruia Offer?

This is an unprecedented situation, so the next steps are unclear.

Technically, this offer has nothing to do with the insolvency resolution process and hence the resolution professional has no role to play in its response.

So does it fall upon the CoC to respond? One view says yes. But chances are slim the CoC will take any firm legal view in such an unusual situation. It’s more likely to leave it to the courts as CoCs have often done in past such complex matters.

The other view says the CoC, having approved a resolution plan is now functus officio – its mandate has expired, and hence can take no action on the letter.

To be clear, an insolvency case can only be withdrawn by the parties who filed it - in this case State Bank of India and Standard Chartered Bank.

Most likely the Ruias will move the NCLT to be heard before the tribunal approves the ArcelorMittal plan. Sooner rather than later I suspect.

4. Then There’s The 12A Problem

This raises several legal questions as the Essar Steel insolvency process is all but over – pending the NCLT approval of ArcelorMittal’s plan.

At the time Essar Steel was admitted to insolvency proceedings (August 2017) the Insolvency and Bankruptcy Code, 2016 had no provision for an insolvency application to be withdrawn once it was admitted by the NCLT. Which means the law didn’t allow for such a withdrawal.

Question 1: Hence, is withdrawal even an option in the Essar Steel case?

It was in June 2018 that Section 12A was added to the IBC. It permits the withdrawal of an insolvency case, but only with 90 percent approval of the CoC.

In July 2018 the IBC regulations were amended to provide that a withdrawal application can only be made before invitation has been issued for Expressions of Interest. This Regulation 30A is to allow withdrawal of the case up to a point in the process and not after bidders have become invested in the process.

Interestingly, the gazette notification that amends the regulations says it applies to prospective insolvency cases even though the amended regulations don’t seem to make that distinction.

Question 2: Can the Ruia settlement offer prompt a withdrawal of the insolvency so late in the process when the regulation expressly disallows it?

The Ruias argue that since the regulations were amended several months after EoIs had been invited for Essar Steel it cannot logically apply to their case. Besides, as one lawyer pointed out, the gazette notification is clear that the new regulation applies prospectively.

Question 3: In which case, if the Essar Steel insolvency case were to be withdrawn would it only have to meet the new condition in 12A, i.e.: 90 percent approval of CoC?

The answers to these questions are likely to be forthcoming only in court...Supreme Court.

Also read: Watching The IBC: Lessons From The RBI-12 Cases

5. Who’s The Victim?

Everyone involved can legitimately play the victim card.

The Ruias claim Essar Steel ran into trouble due to situations out of their control. Cancellation of a gas supply agreement by the government and attacks by insurgents on their slurry pipeline disrupted manufacturing. They point to the Rs 19,000 crore they’ve infused as capital in Essar Steel, especially the additional Rs 8,000 crore to service debt, as proof of their commitment to the project.

Over the last one year, the Group has repaid debt of Rs 80,000 crore, and by this proposal plans to repay another Rs 45,000 crore of debt (at no loss to the lenders), thus cumulatively repaying Rs 1,25,000 crore of debt (which is 75 percent of group debt), which again is the largest by any Indian corporate.
Ruia Statement – Oct 25

ArcelorMittal has spent one year and at least a billion dollars to win this asset. It has consistently outbid other players, cured its ineligibility and submitted a plan that provides for an over 80 percent debt recovery to financial creditors. If this is not a legitimate win, what is?

Lenders to Essar Steel have waited years for their loans to be serviced, debt to be repaid. Every time the end seems near another delay crops up. After patiently waiting for the insolvency resolution process to pass muster with the NCLT, NCLAT and Supreme Court, if at this stage it, for whatever reason, goes back to the courts and languishes there for a few months the banks will hurt the most.

Finally, what does it say about the IBC process if such a last minute offer can overturn months of work? The efficiency of this new law is tied to completion of cases within prescribed time limits. Already in many cases, including Essar’s, the 270 -day deadline has been stretched to accommodate litigation.

If the Ruia offer were to prevail creditors will get all their money back. But at a cost.

Here on, which bidder would want to invest time, money and resources in a process that could be hijacked last minute by a promoter refusing to let go?

Also read: Mittal's Good Essar Show Mired in Legal Farce

Menaka Doshi is Managing Editor at BloombergQuint.