Even as 92.4% of creditors had decided in favour of accepting the bid of ArcelorMittal (AM) for the beleaguered Essar Steel, the promoters of Essar suddenly announced that they would pay up a massive Rs54,389 crore to settle all its dues to secured and unsecured creditors in order to retain control over the steel giant.
This would include an upfront cash payment of Rs47,507 crore to all creditors, of which Rs45,559 crore is to senior secured financial creditors, giving them a 100% recovery of their loans. Essar Steel, which topped the list of 12 wilful defaulters identified by the Reserve Bank of India (RBI), delivered a googly that shook up corporate India.
Those who are blissfully unaware of the machinations of Indian businessmen and how they game the system celebrated it as a triumph of the Insolvency and Bankruptcy Code (IBC) process. In fact, the group’s ability to conjure up this vast sum of money, almost at will, raises too many uncomfortable questions.
One, what is the source of so much money? Two, why has the group refused to pay its dues for years? It also calls into question the multiple debt write-offs that Essar Steel has availed in the past (mainly at the cost of Indian public sector banks). Doesn't it now appear that the group always had the ability to repay lenders?
But this is not all. Remember, Essar Steel has done everything within its power to derail the insolvency process, from first challenging the IBC itself in the Gujarat High Court in 2017, to attempting to buy back Essar Steel at Rs18,000 crore (which looks like a shocking heist in view of its new offer) to trying a back-door buyout in collaboration with Numetal of Russia.
After all attempts to retain the company had failed and serious bidders, such as AM, were made to jump through multiple hoops and pay up Rs7,000 crore, Essar Steel has now announced that it suddenly has funds enough to repay banks without any haircut.
On the face of it, it will be hard for the consortium of lenders to reject a 100% repayment that includes unsecured creditors. But the question that needs to be examined quickly is whether Essar Steel is really serious about repayment, or is this another, last ditch, attempt to derail the IBC process and kick the problem down the road by a few months?
Things can look very different a few months from now when India is in election mode and all political parties are amenable to striking deals or buying their silence. Also, a new, or weakened, political formation at the Centre may not be as rigid about the bankruptcy deals.
How the government deals with Essar Steel’s latest twist will be an important test case for those who are still hanging on the National Democratic Alliance’s (NDA’s) promise of clean governance – one that is already in tatters with the unseemly goings-on at the Central Bureau of Investigation (CBI).
What is clear is that Essar Steel has bought a little more time. Its offer will have to be evaluated by the committee of creditors (CoC) which will inevitably be challenged before the NCLT (National Company Law Tribunal) and may, finally, be decided by the Supreme Court.
ArcelorMittal, which was arm-twisted by the lenders and directed by the Supreme Court to pay up Rs7,000 crore on the doubtful premise that it was responsible for the loan of Uttam Galva Steel and KSS Petron in which it had invested for a relatively short duration, has already indicated its intention to fight.
The only change in this scenario would be if the apex court fast-tracks matters, demands answers from Essar Steel on its sudden ability to raise such a humungous amount of money and settles the issue right away.
The Ruias have claimed that Section 12A of the IBC allows the CoC to permit the withdrawal of an insolvency application. This is a new Section that was introduced through an amendment in June 2018, long after insolvency proceedings against Essar Steel had begun.
Leading lawyers and AM have countered this by saying that any withdrawal had to be made before inviting expressions of interest from other buyers in 2017. However, as I said earlier, it will be hard for creditors to ignore an offer of full repayment.
The only real question here is: Will the government probe the source of funds, since it has many implications for the nation. So far, Essar has revealed nothing. Ravi Muthreja, the group’s corporate communications chief, has ignored our queries about the source of funds.
So here are a few questions raised by Essar Steel’s extraordinary ability to conjure up Rs54,389 crore, almost at will.
Will Revenue Agencies Enquire: It is assumed that Essar Steel will show overseas borrowing at the source of funds. But no prudent and above-board lender will offer massive loans to a ‘wilful defaulter’ without substantial collateral or guarantees. It remains to be seen if these are offered from other group companies in India and have implications for the borrowings of group companies as well.
If not, it is an issue that revenue agencies need to look at and also calls into question the NDA government’s much bandied about effort to bring back unaccounted funds. Whatever the source of funds, the people of India deserve clear answers.
It is important to remember that the Essar group has defaulted on repayment obligations to overseas lenders as well and is facing multiple litigation and recovery actions abroad. This raises further questions about ability to produce a vast sum of money to retain Essar Steel.
Post-repayment Scenario: Let us assume that the CoC accepts Essar’s full repayment offer. Will the CoC members also guarantee that they will not lend to any other company of the Essar group and open themselves to the possibility, once again, of the group diverting funds?
This applies mainly to Indian public sector banks, which have been repeatedly re-capitalised at public cost through the exchequer. When banks are capitalised with public funds, it is Indian people who end up repaying the debts of large corporate defaulters who flaunt lavish lifestyles.
Prashant Ruia, a group director has claimed, “Essar Steel got into difficulty because of external factors.” The company’s press release has a litany of reasons for its problems and boasts of repayments made recently. However, anyone who has tracked the group over the decade can provide a much longer list of defaults in India and abroad, and multiple debt restructuring at the cost of Indian lenders and the public, not to mention the group’s skill in managing Indian bankers (several former bank chairmen have been on its payroll) and the political environment.
The Alternative: The CoC has apparently finished the voting process to decide the fate of Essar Steel with 92.4% votes cast in favour of AM, which offered a massive Rs42,000 crore for the company. In addition, AM has paid Rs7,000 crore to settle two other debts.
Bankers, who also need to look for credible borrowers, need to weigh the cost of starting on a clean slate or accepting Essar’s offer and forever having to watch out when Essar’s comes back to borrow again – under a different political dispensation.
A cynical, but accurate, perspective on this would be that bank chairmen, who had brazenly been on the payroll of corporate India, have rarely been held accountable. So why would they worry about what Essar Steel does in the future?