India’s pursuit of perfection could backfire. Bids for the bankrupt Essar Steel could fetch around $6 billion, plus billions of dollars more in capital expenditure, with interest from separate groups led by ArcelorMittal and Russian bank VTB. Both sit awkwardly with tough new rules barring large shareholders in defaulting entities from buying stressed assets. It is better to get good proceeds for creditors than to be a purist and fail, however. Essar Steel is the last major holding of the troubled Ruia brothers. The company, with prized assets including a state-of-the-art plant in Gujarat, is one of a dirty dozen forced into a new insolvency regime by the central bank, which is trying to clean up bad debt. Creditors face a haircut of around 40 to 50 percent on outstanding claims worth $12 billion.
One potential hurdle is eligibility. ArcelorMittal, the world’s largest steelmaker, has teamed up with Japan’s Nippon Steel. The European company was a minority shareholder in a smaller Indian group called Uttam Galva that defaulted. Chairman Lakshmi Mittal also invested in a Kazakh business which ended up with a failing Indian unit. Although both shareholdings were sold before the bid for Essar Steel, they could still cause a problem.
VTB’s bid more clearly breaks the spirit of the rules, which are intended to curb unruly tycoons. The Numetal consortium includes Rewant Ruia, son of Ravi Ruia, vice-chairman of the Essar Group. VTB is seen as a proxy for the Ruias, having financed part of Essar Oil’s $13 billion sale to Russia’s Rosneft. Even if VTB drops Ruia, Western sanctions on the state lender could complicate future investment in this strategic asset – hardly ideal from a political point of view. Neither bid is perfect. Blocking either could reduce the recovery for creditors – and for New Delhi, given its majority ownership of lending banks. A veto could also unleash a wave of lawsuits, delaying the overall resolution. If India shuts the door on a credible industry buyer like ArcelorMittal, it would send a particularly bad message to foreign investors keen to buy Indian distressed debt. As well as being tough, India’s bankruptcy regime needs to be pragmatic.