Essar Googly: Will Government Scrutinise the Source of Rs54,389 Crore?
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? 
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COMMENTS

Mahesh S Bhatt

2 weeks ago

Great Indian Financial roped Tricks Gol Maal Again Mahesh Bhatt

Dayananda Kamath

2 weeks ago

If you go to verify the source the govt will have to step on autonomy of RBI, And a stern warning is given by Viral Dy. Governor about consequences.
You can remitt millions abroad under LRS without any check or monitoring with vague RBI notifications, and satisfied authorised dealers.

Mohit Mehta

2 weeks ago

I have ability to change the entire process of IBC. Anyone interested to to tie up with me may call on 9892489265

sundararaman gopalakrishnan

2 weeks ago

ESSAR should not be entertained.

Ashok Senniappan

2 weeks ago

If the money is amassed by smuggling/loan given by Nirav Modi/Choksi/Hassan Ali Khan and unknown politicians people will it be OK. Later on conduct another investigation.Please Learnt to accepet money from highest bidder instead from men with questionable integrety.

Anil

2 weeks ago

I am in full agreement with the contents of last para of the write up.

B. KRISHNAN

2 weeks ago

Ruias have always manipulated the financial and political stake-holders in the country to their advantage. This last minute effort is one such attempt. Hope the Govt and the SC will see thru this game and pre-empt another corporate chicanery.

Parimal Shah

2 weeks ago

If the agencies, the courts, and the authorities; including the government, do not investigate the source of money suddenly available with these guys; obviously something is seriously wrong somewhere and people are not dumb not to realize this.
Ignorance of the source and turning a blind eye to this magical source of funds will be at its own peril - of the government and ruling parties.

SuchindranathAiyerS

2 weeks ago

Where got, where gone of Rs54,389 Crore to keep control of Steel will be an interesting insight into the Gujarat Model.

Ramesh Bajaj

2 weeks ago

A most pertinent question.... which deserves an Honest answer. How come a "full" offer of settlement suddenly...and who is paying? Most mysterious and the public is hoping for an honest answer.

SURAJIT SOM

3 weeks ago

That Ruias have enormous clout within the Establishment is beyond doubt. That explains how they got such humongous amount of loans from banks ,mostly PSUs. In a sense it is CHHOTA BHAI of MOTA BHAI IL& FS . The modus operandi is very similar. It was Supreme Court who saw that proper procedures are followed as per law. Now the Ruias have come with "last defence" . It is an utter nonsense and actually criminal in nature. If they had (and have ) this kind of money ,why ES came to IBC in the first place ? Because they tried to pocket the money ,simple !!! What about all those "retired"( and non-retired !!!) PSU bank honchos etc ? This shows how corrupted the whole system has become. Now Rs 54,000 Cr !!! Russian Oligarch/Mafia money ?

PRAKASH D N

3 weeks ago

If the NDA Govt. wants to walk the talk, they should investigate from where the money is coming and from whom and why? The creditors should seek a direction from the court to get the money deposited in court within shortest time before any decision is taken as the background of Essay is dubious. It is high time the Parliament Pass a bill making wilful default a criminal offence with stiff penalties. Otherwise story of Essar will get repeated.

Harish

3 weeks ago

Very pertinent questions raised by Ms Dalal on behalf of taxpayers.

PRAVIN BANKER

3 weeks ago

As the first restructuring advisor for Essar Steel - brought in by Bank of America back in 2001 after the Essar bond default - I am the one responsible for the subsequent continuous defaults by the Ruias cited in this article. I had engineered a buyback and settlements with foreign creditors at between 23% face and 55% face.. This successful act convinced the Ruias that they can borrow - default - and repay at steep discounts to par. with impunity. THIS time though they are up against Laxmi Mittal, the man who singlehandedly - with grim determination - not only engineered a change in the government in the Ukraine to revserse the privatization of Kryvoristal to the son-in-law of the then President in 2005 but successfully overcame French and Luxembourg prejudices and Russian Oligarch moneys to win control of Arcelor. This moprnings decision by the CoC speaks for itself.
Pravin Banker- Chairman African Medical Investmenst PLC and Managing Director of Global Financial Network Inc./ Balkan Capital Management OOD

REPLY

Nanda Patel

In Reply to PRAVIN BANKER 2 weeks ago

May be the simple to way to keep this financial engineering at bay is to

1. Bar Company( All Group company) and all promoters from accessing capital markets for 10 years (Keep the penalty high, so, they avoid going this way).

2. No more debt given from any PSU bank (You don't give a guy money who burns up cash, why would you give away tax payers money, guaranteed by government ?)

3. Stop Company from buying back shares / issue bonus or pay dividend (If they don't have money why pay dividends, should pay the debts first)

4. Put all group company and all promoter bank accounts in full surveillance ( there are too many ways to syphon money, but at least gov needs to start from somewhere)

5. Stop pay rises for all high level employee and directors.

6. Set a rule, so, the banks that have given loans to company never settles for anything less. For the full amount, all promoter share shall be transfered to banks at atleast 30% discount.

--- to many more to list here, but once a culprit is found, they shall not be encouraged, so, they become so, big and haunt everyone.

SURAJIT SOM

In Reply to Nanda Patel 2 weeks ago

There may be one more reason why Ruias are mad to keep control of ES. You recall what happened in Bhushan Steel. Thousands of crores were siphoned off !!! One went to jail. After TATAs took over , it came to light !!! I do not discount such a possibility in ES as well !!!!

Ravindra Shetye

In Reply to PRAVIN BANKER 3 weeks ago

Essar had been given a Loan by KFW, the German equivalent of Exim Bank in Mid ninetys at the behest of the German Equipment suppliers Mannesmann Demag (who had supplied major equipment for the steel Plant ). After about 5-6 years Essar defaulted and settled for 56%.
I think Modi Government needs to intervene that his deal by Essar does not win to give at least a semblance of JUSTICE by this Government.

Dayananda Kamath

In Reply to Ravindra Shetye 2 weeks ago

It was due to the Govt policy change. You set up a facility and on the day it starts commercial production Govt changes duty on import of scrap which is substitute for the pellets the manufacturing they initiated and you should not forget they had a patent for the process where they reduced one stage.

Dwijendra Srivastava

In Reply to PRAVIN BANKER 3 weeks ago

Very insightful

Poor implementation of RERA across states poses a challenge to home buyers
More than a year after implementing the Real Estate (Regulation and Development) Act (RERA), the legislation remains a non-starter on the ground in many states, posing a challenge to home-buyers and developers, experts say.
 
Among the states and Union Territories in India, Maharashtra takes the pride of place when it comes to proactive adoption, implementation and integration of the act, followed by Uttar Pradesh, Gujarat, Madhya Pradesh and Karnataka, according to the experts.
 
"As per respective state RERA websites in August 2018, more than 32,306 projects and 23,111 real estate agents have been registered under RERA across states. Maharashtra has the highest share of registered projects under RERA, accounting for 17,353," Anarock Property Consultants' Chairman Anuj Puri said.
 
According to him, Uttar Pradesh has 3,950 projects registered, Gujarat follows with 3,300 projects. The figures for Karnataka and Madhya Pradesh are 1,982 and 1,901, respectively.
 
"Despite some encouraging numbers, it is evident that RERA has not been adopted in the manner and to the extent the Centre originally intended. In some states, there have been serious developer-favouring dilutions of the clauses meant to protect the interests of buyers," Puri told IANS.
 
The Real Estate (Regulation and Development) Act, 2016 -- an act to establish a real estate regulatory authority -- came into force on May 1, 2017.
 
If the act is implemented properly, it should ideally generate confidence among buyers by creating a level playing field between then and the sellers, which was "missing in the pre-RERA era", JLL India's Chief Economist and Head of Research Samantak Das said.
 
"States have notified the act but, unfortunately, the structures of the RERA machinery in most of the states have not been put in place," Das told IANS.
 
Interim regulators with additional responsibilities "are in place in most of states while permanent regulators have been appointed in some states like Maharashtra, Madhya Pradesh and Punjab", he said.
 
"Interim regulators can be appointed according to the law, but interim regulators for an indefinite period is a lacuna.
 
"RERA is supposed to disseminate information to buyers so that anyone who is looking to buy a home can access all the information of a particular micro-market from a portal at the click of a mouse. Again, except for a few, many states have portals running without enough information. In terms of disseminating information, they fall short of expectations," Das added.
 
Many states do not even have an online portal till now and projects have to be registered manually, which is a troublesome exercise, Das said.
 
Maharashtra probably is the only state till now to have a robust portal providing adequate information to buyers, he said.
 
More than 60 per cent of RERA-registered projects are from Maharashtra, followed by Uttar Pradesh and Gujarat, he said. The share of the other states would go up once they have their own online portals.
 
He said there was an uptick in sales of residential projects in Mumbai and Pune during the January-June period of 2018 and the better implementation of RERA in Maharashtra played a "vital role" in this.
 
"After constituting a model act at the central level, the Union government has a role to look at whether the states are adhering to the central legislation and implementing it in true letter and spirit. A comprehensive structure of RERA machinery is a must for the sector," Das said, adding that it will be at least two years before "RERA will be up and running in the way buyers, developers and real estate experts want".
 
Moreover, every state has modified the central act some way or the other while enacting their respective acts.
 
"While many states are still in the process of notifying their RERA rules, there has been continuous fretting about the dilution of the rules recently notified by many states. In fact, there are multiple changes made by different states in the RERA proposed initially by the central government," Puri pointed out.
 
Dilution in ongoing projects' definitions left a huge number of projects out of the RERA ambit, and this is understandably a major concern for buyers, he said.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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Suddenly Essar Steel “Shareholders” Find Rs54,389 crore to Pay Creditors to Retain Control
The Ruia owned Essar Steel India Ltd (Essar Steel) which was on the brink of changing hands, has claimed that it has submitted a proposal to its Committee of Creditors (CoC) for full settlement of the entire admitted claims of the financial creditors, operational creditors, and workmen and employees of the company, aggregating Rs54,389 crore. 
 
"The plan includes an upfront cash payment of Rs47,507 crore to all creditors, including Rs45,559 crore to the senior secured financial creditors, i.e. 100% recovery," the company said in a release on Thursday without revealing how the promoters and shareholders have suddenly got access to such huge funding.
 
When asked, Essar Steel has refused to reply on the source of its sudden riches. The question is if the money was so easily available, why was the company a defaulter?
 
Prashant Ruia, Director, Essar, said, "Essar Steel got into difficulty because of external factors. In fact, even after the onset of the insolvency resolution process, the shareholders of Essar Steel had made offers to settle the debt of the company, but the lenders did not accept those offers. We believe our current proposal will provide 100% recovery to secured creditors and lenders, and maximum recovery for unsecured creditors."
 
While the resolution plan currently under the CoC's consideration takes care of only the secured creditors (i.e. the banks), by offering this settlement, Essar Steel says its shareholders are ready to pay up the entire dues that will lead to not only maximum recovery for the lenders, but also for all other classes of creditors, thus taking the Company out of the corporate insolvency resolution process under Section 12A of the IBC, which was introduced in June 2018 by way of an amendment. 
 
"If the CoC were to accept the resolution plan currently under consideration, it will have to settle for a sizeable haircut. Moreover, the offer does not provide for meaningful payment to operational and other unsecured creditors," it added.
   
Earlier in September, the National Company Law Appellate Tribunal (NCLAT) had ruled that ArcelorMittal must pay its dues to enable consideration of its bid for Essar Steel along with resolution plans of other contenders, Numetal and Vedanta Resources.
 
The revised bid by the world's largest steelmaker is believed to be Rs42,000 crore compared with Rs37,000-crore bid submitted in the second round of bidding by Numetal, a consortium led by Russia's VTB Bank.
 
The commitment by ArcelorMittal to pay the outstanding dues of Rs7,000 crore on Uttam Galva and KSS Petron is learnt to be separate from its bid of Rs42,000 crore. ArcelorMittal was asked to clear its dues of about Rs7,000 crore related to Uttam Galva and KSS Petron, of which it was a promoter when these turned non-performing assets (NPA).
 
While ArcelorMittal got conditional approval from the NCLAT, Numetal's bid filed in the second round in March this year was found eligible as by then it had restructured its shareholding composition by removing the stake of Essar Steel promoter's son.
 
The first bid of both Numetal and ArcelorMittal were rejected by the CoC, the lenders of Essar Steel, as they violated Section 29A of the IBC, which disqualifies a promoter of NPA from submitting a resolution plan.
 
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COMMENTS

Ramesh Bajaj

5 days ago

There's definitely something fishy...
But what needs to considered is the FACT that all creditors will be paid in full.

rajee

2 weeks ago

Indian promoters style we worship them calling them entreprenuers

pravin sarwade

2 weeks ago

If the Bankers who have lent to Ruias by now know more about them, should accept a time bound plan of payment by them and none of the banks in India should lend them a paisa of of ₹54389 crore. Let Ruias raise money from Foregin banks and pay to Lenders. Else it will be bankers are sold to Essars and depositers should stay away from such Banks

Shivram Ramakrishnan

3 weeks ago

No doubt they had given daily allowances to their Mother who had saved it inside kitchen utensils. Given their current difficult circumstances this was their last resort. How callous of the lenders..

Chandragupta Acharya

3 weeks ago

Height of shamelessness.

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