Will steel king LN Mittal and the Ruias both lose the tug-of-war over Essar Steel?
The advisors have pointed out that both bids are in violation of last year's amendment of the Insolvency and Bankruptcy Code.
- Feb 21, 2018,
- Updated Feb 21, 2018 12:19 PM IST
After six months of painstaking insolvency proceedings and due diligences, the beleaguered Essar Steel received just two bids last week, from ArcelorMittal and Numetal Mauritius. And now it looks as though the tug-of-war between steel king LN Mittal and the Ruias may end up seeing no winner because the legal and financial consultants advising the interim resolution professional (RP) overseeing sale of the beleaguered company have reportedly recommended the rejection of both bids.
According to sources privy to the development, the advisors have pointed out that both bids are in violation of last year's amendment of the Insolvency and Bankruptcy Code (IBC), which prevents promoters of defaulting companies from bidding for stressed assets until they clear their dues. ArcelorMittal's bid - submitted together with Nippon Steel & Sumitomo Metal Corp - was recommended to be rejected on the grounds that it previously held stake in Uttam Galva Steel Ltd, a delinquent borrower, and Numetal due to the 25% share owned by Rewant Ruia, the son of Essar Steel founder Ravi Ruia.
Both resolution applicants had certainly gone all out to stay eligible to bid. Earlier this month, ArcelorMittal transferred its little over 29% stake in Uttam Galva to co-promoter Sainath Trading Company, for a mere Re 1 per share, to avoid any last-minute controversy. "ArcelorMittal was never the promoter of Uttam Galva," an external spokesman for ArcelorMittal told BloombergQuint, denying any legal basis for being considered ineligible to participate in the bidding process. "We had no board representation and no involvement in the management of the company even before selling our shareholding."
But the recently-inserted section 29A(c) in the IBC clearly states that "A person shall not be eligible to submit a resolution plan, if such person" or any others acting in concert with him/her, "has an account, or an account of a corporate debtor under the management or control of such person... classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India... and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor".
ArcelorMittal cashed out of its investment in Uttam Galva less than a month ago. The Ruia family had gotten far more creative in order to retain its grasp on Essar Steel and pinned its hopes on a special purpose vehicle, Numetal, in which leading Russian bank VTB is the largest shareholder (40%) followed by Russia's Tyazprom Export, a construction engineering and management consulting company that specialises in steelworks. The hope is that VTB's experience in technical and operational capabilities as well banking, finance and commodity expertise, will give Numetal's bid an edge in the bidding war.
Sources close to Numetal say that Rewant Ruia is just a financial investor with a beneficial minority stake (25%) in Numetal and is neither a promoter nor will he have control or management rights, and hence, his involvement ought to be of no relevance with regard to the eligibility of this bid. Furthermore, the Numetal spokesperson claims that they "have not received any such information from the resolution professional or his legal advisors", reaffirming that "Numetal is a fully eligible resolution applicant".
The consultants advising the RP are not convinced. Their doubts are understandable given that section 29A(j) clearly rules out any applicant who "has a connected person" considered not eligible to bid. "For the purposes of this clause, the expression 'connected person' means (i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or (iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses," states the Act.
Of course, this is just a recommendation put forward by the advisers and may well be discounted. The resolution professional is yet to take a call on the matter and the final decision will include the committee of creditors, reportedly set to meet a few days later. According to The Economic Times, in a letter to lenders sent yesterday evening, RP Satish Gupta denied that any decision to classify the bids as ineligible had been taken.
Which is exactly what the bidding parties will be praying for the prize is a big one, despite the fact that Essar Steel boasts the third biggest debt pile (over Rs 51,000 crore) among the initial 12 companies identified by the RBI for insolvency proceedings. Mittal has wanted to build a steel plant in the country since 2005 but has been repeatedly thwarted by regulatory hassles. Essar's 10 million tonne steel plant in Hazira, Gujarat - India's largest single-location flat steel plant - will fit neatly into the company's plan to create a sizable footprint in the Rs 3.15 lakh crore Indian steel market. The Ruias, meanwhile, will not want to let go of their hold at a time when steel prices have shot up 15% in the past seven to eight months. Moreover, according to the World Steel Association, steel production in India is projected to grow at 7.1% in 2018, the highest rate among the top 10 steel-using countries.
But if the RP does disqualify the two firms, which were the only entities to have put in bids last week, then the resolution saga for Essar Steel will get drawn out further and the parties may even move court. But at least a strong signal would be sent out against getting creative to thwart the IBC amendment. Else this case might end up setting a bad precedent for defaulting promoters hoping to get back in on the action.
(With PTI inputs)
After six months of painstaking insolvency proceedings and due diligences, the beleaguered Essar Steel received just two bids last week, from ArcelorMittal and Numetal Mauritius. And now it looks as though the tug-of-war between steel king LN Mittal and the Ruias may end up seeing no winner because the legal and financial consultants advising the interim resolution professional (RP) overseeing sale of the beleaguered company have reportedly recommended the rejection of both bids.
According to sources privy to the development, the advisors have pointed out that both bids are in violation of last year's amendment of the Insolvency and Bankruptcy Code (IBC), which prevents promoters of defaulting companies from bidding for stressed assets until they clear their dues. ArcelorMittal's bid - submitted together with Nippon Steel & Sumitomo Metal Corp - was recommended to be rejected on the grounds that it previously held stake in Uttam Galva Steel Ltd, a delinquent borrower, and Numetal due to the 25% share owned by Rewant Ruia, the son of Essar Steel founder Ravi Ruia.
Both resolution applicants had certainly gone all out to stay eligible to bid. Earlier this month, ArcelorMittal transferred its little over 29% stake in Uttam Galva to co-promoter Sainath Trading Company, for a mere Re 1 per share, to avoid any last-minute controversy. "ArcelorMittal was never the promoter of Uttam Galva," an external spokesman for ArcelorMittal told BloombergQuint, denying any legal basis for being considered ineligible to participate in the bidding process. "We had no board representation and no involvement in the management of the company even before selling our shareholding."
But the recently-inserted section 29A(c) in the IBC clearly states that "A person shall not be eligible to submit a resolution plan, if such person" or any others acting in concert with him/her, "has an account, or an account of a corporate debtor under the management or control of such person... classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India... and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor".
ArcelorMittal cashed out of its investment in Uttam Galva less than a month ago. The Ruia family had gotten far more creative in order to retain its grasp on Essar Steel and pinned its hopes on a special purpose vehicle, Numetal, in which leading Russian bank VTB is the largest shareholder (40%) followed by Russia's Tyazprom Export, a construction engineering and management consulting company that specialises in steelworks. The hope is that VTB's experience in technical and operational capabilities as well banking, finance and commodity expertise, will give Numetal's bid an edge in the bidding war.
Sources close to Numetal say that Rewant Ruia is just a financial investor with a beneficial minority stake (25%) in Numetal and is neither a promoter nor will he have control or management rights, and hence, his involvement ought to be of no relevance with regard to the eligibility of this bid. Furthermore, the Numetal spokesperson claims that they "have not received any such information from the resolution professional or his legal advisors", reaffirming that "Numetal is a fully eligible resolution applicant".
The consultants advising the RP are not convinced. Their doubts are understandable given that section 29A(j) clearly rules out any applicant who "has a connected person" considered not eligible to bid. "For the purposes of this clause, the expression 'connected person' means (i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or (iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses," states the Act.
Of course, this is just a recommendation put forward by the advisers and may well be discounted. The resolution professional is yet to take a call on the matter and the final decision will include the committee of creditors, reportedly set to meet a few days later. According to The Economic Times, in a letter to lenders sent yesterday evening, RP Satish Gupta denied that any decision to classify the bids as ineligible had been taken.
Which is exactly what the bidding parties will be praying for the prize is a big one, despite the fact that Essar Steel boasts the third biggest debt pile (over Rs 51,000 crore) among the initial 12 companies identified by the RBI for insolvency proceedings. Mittal has wanted to build a steel plant in the country since 2005 but has been repeatedly thwarted by regulatory hassles. Essar's 10 million tonne steel plant in Hazira, Gujarat - India's largest single-location flat steel plant - will fit neatly into the company's plan to create a sizable footprint in the Rs 3.15 lakh crore Indian steel market. The Ruias, meanwhile, will not want to let go of their hold at a time when steel prices have shot up 15% in the past seven to eight months. Moreover, according to the World Steel Association, steel production in India is projected to grow at 7.1% in 2018, the highest rate among the top 10 steel-using countries.
But if the RP does disqualify the two firms, which were the only entities to have put in bids last week, then the resolution saga for Essar Steel will get drawn out further and the parties may even move court. But at least a strong signal would be sent out against getting creative to thwart the IBC amendment. Else this case might end up setting a bad precedent for defaulting promoters hoping to get back in on the action.
(With PTI inputs)