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Essar Steel issue: Why the offer made by Ruias can, and must, be refused

The last minute offer by the Ruias to clear their dues to bankers of Essar Steel—so that the insolvency application can be withdrawn under Section 12A—hours after the Committee of Creditors (CoC) voted on other bids, is the surest sign of the success of the IBC (Insolvency and Bankruptcy Code).

Essar Steel issue: Why the offer made by Ruias can, and must, be refused

The last minute offer by the Ruias to clear their dues to bankers of Essar Steel—so that the insolvency application can be withdrawn under Section 12A—hours after the Committee of Creditors (CoC) voted on other bids, is the surest sign of the success of the IBC (Insolvency and Bankruptcy Code). The fact that Essar Steel attracted more than two bids, and two very strong ones, is a message to all promoters who default on their loans. It tells them they cannot get away with not paying up and that the law now is strong enough to ensure they lose control of their companies.

Indeed, after decades of promoters having had the upper hand and arm-twisted lenders, bankers are in a more commanding position. As former RBI Governor observed, a lot of promoters in India tend to be freeloaders and there is scant respect for the sanctity of the debt contract. Thursday’s offer by the Ruias of an amount of Rs 54,389 crore shows they had the money and yet did not pay up. That, indeed, is the classical definition of a wilful defaulter. If they could rustle up close to Rs 55,000 crore, why did they not do so all these days? After all, the case was referred to the NCLT (National Company Law Tribunal) almost one year back.

While Essar Steel says the CoC is empowered to consider the new plan, it is really the Supreme Court that will decide on whether the bid is an eligible one and whether the CoC can vote on it. For one, the bid has come in after the CoC voted on the other bids while Section 12A is clear that an insolvency petition can be withdrawn—provided 90% of lenders support this—only before the bidding process begins. Indeed, when the SC ruled on the eligibility of ArcelorMittal and NuMetal to bid a few weeks ago, it made it abundantly clear only the two bids, as of April 2, could be voted on.

Also, both NuMetal and ArcelorMittal were asked to clear all their dues as well as those of group companies or affiliates—that is why Arcelor has paid the dues of Uttam Galva and that is why Numetal was asked to pay the dues of the Essars even though there were two Russian firms in the consortium. While the Ruias are trying to tempt the CoC—and possibly the government which owns most of the banks—with an offer that gives financial creditors Rs 7,407 crore more than what ArcelorMittal has offered, the current offer does not mention making good the dues of other Essar group companies which is required under the IBC law. The legality apart, it would be unfortunate if the apex court was to rule that the Ruia bid is eligible because they are clearly wilful defaulters and both the letter and the spirit of the IBC process is that promoters who are wilful defaulters are to be kept away. That would send out the wrong signal to India Inc.

It is a fact that not every case sent to the NCLT under the IBC has seen a successful resolution from the point of the lenders. Indeed, in some instances, they have taken very steep haircuts of anywhere between 75 and 80%. It would, therefore, be very tempting for the CoC of Essar Steel to accept what looks like a better offer; though the fact that other dues are not being paid also needs to be factored in. However, the CoC should desist from accepting it, if at all the SC directs them to vote on it. The lenders will lose Rs 7,000 crore, but if they allow the Ruias to regain control of Essar Steel, it would dent the credibility of the IBC process since it would mean that anyone can derail the process with a new bid, regardless of whether they are even eligible to bid. The process is about value maximisation, but not at the cost of destroying the faith in the system.

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