Though Essar officials declined to divulge details of the company's plans, it is believed that the equity issue is likely to be used to bridge the gap for the company's $250 million floating rate note (FRN) redemption which the institutions have refused to bail out.

Essar officials only said the proceeds from the issue will strengthen the flagship's balance sheet. As Essar Steel currently has a paid-up capital of Rs 330 crore on an authorised capital of Rs 500 crore, it is possible that the company may charge a premium on the issue, unless it goes to shareholders to raise the authorised capital.

The company also did not respond to whether the promoters, the Ruias, will pick up additional shares in case of a large-scale renunciation.

Essar officialshave already initiated the process of meeting FRN holders and it is believed that Essar Steel is likely to seek a three-month rollover from the bond-holders. The temporary breather will give the company time to execute several fund mop-up plans.

The Ruias have already signed an agreement to sell the group's entire stake in Essar Power, the 515 mw power company, to Marathon Power of US for Rs 720 crore. The deal is expected to be completed by end-August.

By virtue of Essar Steel's 42 per cent shareholding in Essar Power, the sale will fetch the steel company around Rs 310 crore. The sale of 51 per cent stake in Essar Minerals to Stemcor of US is likely to fetch another Rs 180 crore.

The sale of stake in Essar Power and Essar Minerals will take off around Rs 1,000 crore of debt from Essar Steel's books. FIs currently have an exposure of Rs 2,550 crore in the group flagship.

It appears that even after the rights issue, and if the sale of stake goes through, the gap between the total amount required forredemption and what Essar Steel can raise will be Rs 285 crore.

Essar Steel had earlier submitted a exposure-neutral proposal to FIs, seeking a loan to redeem its entire FRN outstanding following its failure to secure an export performance guarantee from the State Bank of India.

While the Rs 310 crore-odd will be repaid to the institutions, another Rs 663 crore will be reduced through stake sale in Essar Minerals, the pelletisation project that was hived off from Essar Steel to strategic partners and by transferring debt. From Essar Power, Rs 200 crore of subordinate debt would also be transferred to Marathon.

Essar Steel had originally thought of striking a $300 million export securitisation deal with German steel giant Thyssen and use the proceeds to redeem the FRN, subject to the SBI guarantee.