Essar Steel may script big IBC success; ArcelorMittal’s higher offer may result in minimal haircut to lenders

By: | Updated: October 24, 2018 8:50 PM

One of the reasons behind Essar Steel case, which may script a big success under the IBC is section 29A -- the ineligibility clause included in a hurry to bar wilful defaulters, defaulter promoters and related parties from bidding for any other NPA account.

And one of the reasons behind this case, which may script a big success under the Insolvency and the Bankruptcy Code (IBC), is section 29A -- the ineligibility clause included in a hurry to bar wilful defaulters, defaulter promoters and related parties from bidding for any other NPA account.And one of the reasons behind Essar Steel IBC case, which may script a big success under the Insolvency and the Bankruptcy Code (IBC), is section 29A.

Lenders of bankrupt Essar Steel are now looking at minimal haircut as top bidder ArcelorMittal has revised its offer up to Rs 42,000 crore against the total claim of Rs 49,000 crore. Furthermore, other companies are also looking for a chance to trump ArcelorMittal’s offer — which would mean more leverage for the lenders.

And one of the reasons behind this case, which may script a big success under the Insolvency and the Bankruptcy Code (IBC), is section 29A — the ineligibility clause included in a hurry to bar wilful defaulters, defaulter promoters and related parties from bidding for any other NPA account.

The ineligibility clause was brought into picture initially via an Ordinance when the Essar Group was found trying to acquire its own bankrupt subsidiary Essar Steel at discount price.

It was because of this clause that the case got stuck in a long-drawn legal battle. The first two bidders — ArcelorMittal and VTB-backed Numetal Mauritius — were declared ineligible under the clause. ArcelorMittal was also compelled to pay up about Rs 7,000 crore of old outstanding dues for fear of losing out on an opportunity to enter into the Indian steel industry.

“Since the corporate structure is extremely complex, it was important that such assessment is done in order to serve the purpose behind the IBC, namely, to maximize the value that can be provided to the creditors.

Introduction of Section 29A was important to check and prevent mischief involving defaulting promoters from acquiring assets at discounted rates,” Punit Dutt Tyagi, Executive Partner and Prashant Phillips, Partner at Lakshmikumaran & Sridharan Attorneys told FE Online.

Also Read – Not an easy win for ArcelorMittal in Essar Steel IBC case! Vedanta, VTB Bank of Russia could give good fight

The ambiguity over the interpretation of the clause and its usage continued until the Supreme Court’s October 4 order, which upheld the ineligibility decision but also gave another chance to both parties to clear any past outstanding dues.

“The SC order indicated their inclination towards resolution and revival of Essar Steel, rather than pushing the debtor into liquidation,” Tyagi and Phillips added.

Thereafter, ArcelorMittal committed to clearing the dues to the tune of Rs 7,469 crore. It was then declared ‘preferred bidder’ by the lenders for a Rs 35,000 crore upfront offer along with Rs 8,000 crore via equity infusion into the company.

“Giving an opportunity to resolution applicants to clear itself of the provisions of Section 29A(c), the Supreme Court has created possibilities for a viable resolution of Essar steel, which would be in the larger interest of all the stakeholders,” Saurav Kumar, Partner at law firm IndusLaw told FE Online.

Also Read- Essar Steel becomes IBC test case: A timeline of twists and turns in race between ArcelorMittal, Numetal

ArcelorMittal had pipped Vedanta’s offer of Rs 35,000 crore upfront plus an infusion of about Rs 6,000 crore. ArcelorMittal revised its offer following the news that Vedanta was looking to sweeten its deal and VTB Bank of Russia was trying to enter the race solo or with a new partner, severing ties with Numetal, which was the reason behind the ineligibility due to the ‘looming presence of the Ruias’.

Even as the Lakshmi Mittal-company has revised the offer, there is a great possibility that Vedanta will be given a chance to revise its offer as well. Previously, other companies were given the chance to revise their offers in other cases under the Swiss Challenge system. It is yet to be seen what happens in the case of VTB’s petition to re-enter the race solo or with the new partner.

Earlier, Tata Steel’s Rs 36,400 crore buyout of  bankrupt Bhushan Steel against its total outstanding debt Rs 46,000 crore became not only the first successful IBC case but arguably the only successful case in terms of recovery of loans by lenders. The haircut to lenders in Bhushan Steel’s case was 37%. Other cases, however, witnessed offers, in which lenders may be required to take 60-85% haircut.

Both Bhushan Steel and Essar Steel were part of the Dirty Dozen list by the Reserve Bank of India (RBI). In June 2017, the list identified 12 big NPA accounts for immediate resolution under the IBC within nine months (270 days). Essar Steel case has taken up more than 14 months; however, the time lost in courts is excluded.

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