Essar Steel: An Intense Battle for Control that May Not End in the Indian Supreme Court
On 7th May, Prashant Ruia, director of Essar Steel, moved the bankruptcy court, yet again, in an attempt to derail Arcelor Mittal’s Rs42,000-crore bid for the family’s flagship company. Mr Ruia has attempted to link Arcelor Mittal’s promoter, Lakshmi Niwas Mittal (LNM), to his defaulter brothers Pramod and Vinod Mittal, because LNM had settled a massive outstanding
payment on their behalf with State Trading Corporation (STC).
Prashant Ruia’s petition, through Essar Steel Asia Holdings, argues that the Mittal brothers continued to have business links and, as defaulters, are ineligible to bid for Essar Steel under Section 29A of the Insolvency and Bankruptcy Code (IBC).
By way of comparison, this is like Prashant Ruia arguing that Reliance Industries be disallowed from bidding for any stressed assets because Mukesh Ambani ‘continued to have business relations’ with Anil Ambani, as evident from the Ericsson bailout that helped keep the younger brother out of jail. It is absurd, but serves his purpose of delaying the handover of Essar Steel until the bankruptcy court and, probably, the Supreme Court decides the case as well. This is exactly how the resolution that is supposed to be completed in 270 days has dragged on for over 600 days with no sign of ending.
Remember, LNM has paid over Rs7,500 crore, under pressure from banks, to clear the dues of Uttam Galva and other companies he had invested in, to be eligible to bid for Essar Steel. Meanwhile, the Ruias found a way to delay matters and foment litigation with a gimmicky offer to pay over Rs54,000 crore to secured and unsecured creditors. The proposal was made after Arcelor Mittal won the bid and the source of their sudden access to such large funds remains hazy.
Indian banks, especially public sector banks (PSBs), are the biggest losers in this long delay. Other group companies also owe thousands of crores of rupees to PSBs with little hope of full recovery. Why then are banks such passive spectators in this litigation? Do they have no role in convincing courts that the Ruias are not fit to retain control?
For instance, Essar Steel and Arcelor Mittal are locked in legal battles in the US and UK, where Mr Mittal is able to get quick and clear orders overseas. A few days ago, Arcelor Mittal obtained an interesting order from a UK High Court in connection with a $1.5 billion US arbitration award against Essar Steel in 2017. Essar Steel had failed to honour the claim. This was originally against Essar Steel Minnesota and Essar Steel Ltd.
Arcelor Mittal has now turned on the heat globally leading to several disclosures that ought to be of interest to Indian lenders and investigation agencies as well. Areclor Mittal’s recovery action exposes the reckless lending by Indian banks, who accepted personal guarantees from the Ruias, far in excess of their ability to pay. Here are a few revelations from the legal proceedings in London and in India.
Personal Guarantees: A clutch of banks, led by State Bank of India (SBI), has approached the debt recovery tribunal (DRT), Ahmedabad (652 of 2018), to invoke personal guarantees of a massive Rs13,000 crore plus interest by Prashant Ruia and Ravi Ruia. These guarantees were obtained against loans to Essar Investments, a company whose borrowings are rarely reported. Notice how large the amount is—it would have kept Kingfisher Airlines (which owes Rs9,000 crore with interest to banks) as well as Jet Airways (Rs8,500 crore) afloat and saved over 30,000 jobs.
This is probably the largest personal guarantee extended to individuals by the banking sector. Although the DRT, Ahmedabad, has accepted the banks’ plea, they have almost no real hope of recovering any money, because the affidavits filed by Ravi Ruia and Prashant Ruia show that they have hardly any individual assets to cover this guarantee. Prashant Ruia’s entire family lives overseas. His father, group founder Shashi Ruia, and his wife Manju, live in Dubai and his children study in the US.
Prashant has only one entity—Bamboo International Holdings Ltd—which is 100% owned by him. Ravi Ruia, the second defendant, shows just two entities in which he has a 100% holding—Briar Gardens Ltd and Euro Global Investments FZE. Ravi Ruia’s son, Rewant Ruia, also lives in Dubai.
Lenders, who are part of this DRT action, are: SBI (on behalf of affiliate banks since merged with it), Bank of India, Canara Bank, Edelweiss Asset Reconstruction, ICICI Bank, IDBI Bank, Punjab National Bank and Union Bank of India. Again, it is PSBs who have maximum exposure and have probably written off these loans, leaving the exchequer and investors to take the hit.
At a time when the ministry of corporate affairs (MCA) wants to disgorge money from independent directors of IL&FS (Infrastructure Leasing and Financial Services), shouldn’t the Reserve Bank of India (RBI) or government investigation agencies bring to book the bankers who accepted such dubious guarantees?
Misleading RBI: Indian Express
has a report
on how Chanda Kochhar, of ICICI Bank, had ‘misled’ RBI in 2014 on a $365-million loan disbursed to Essar Steel Minnesota LLC. The report said that she responded to RBI’s query regarding ever-greening of Essar loans saying no additional funding had been provided to the Minnesota company. In fact, ICICI Bank extended a $365-million foreign currency term loan to Essar Steel Ltd, Mauritius, for infusion into Essar Minnesota. Such active collusion by Indian bankers is evident in almost all lending to the group.
US Award: While the Ruias continue to game the Indian judicial system, Arcelor Mittal has stepped up the heat on them in international courts with significantly faster results. The US arbitration relates to Arcelor Mittal USA’s (AMUSA) agreement in 2014 to purchase iron ore pellets produced by Essar’s Minnesota plant for 10 years, but it failed to deliver them. Although the Minnesota company filed for bankruptcy in the US, AMUSA could continue its claim against Essar Steel Ltd. An arbitration order on 19 December 2017 by the International Chamber of Commerce (ICC), Paris, said that AMUSA was entitled to recover $1.38 billion plus interest and costs in damages from Essar Steel Ltd. Essar failed to pay up.
UK High Court Order: After attempting to recover its dues in the US, Arcelor Mittal has filed legal proceedings in the UK in 2019. This led to a March 2019 order, hotly contested by Essar Steel, allowing Arcelor Mittal to search electronic data and documents at Essar’s London headquarters. It also includes a freeze on Essar Steel’s assets. Interestingly, this is based on Arcelor Mittal showing how Essar Steel had transferred assets to group companies. It also presented in court a show-cause notice by India’s directorate of revenue intelligence (DRI) on fraudulent invoicing or customs documents by group entities.
The UK High Court noted how Essar Steel had presented ‘deliberately false information’ during the ICC arbitration with regard to the ‘dissipation of $1.5 billion’ to benefit the Ruia family. Essar has been ordered by the Court to pay the arbitration award of $1.5 billion plus interest and costs.
Arcelor Mittal continues to pursue action against the group in UK, Cayman Islands (against Essar Global Fund Limited) and Mauritius where various Essar group companies are registered.
Surprisingly, Indian bankers (not surprisingly PSBs) are making no attempt to present a holistic picture of the true extent of dues by the Ruias, across group companies and the world. Shouldn’t our lenders present some of these facts to the Indian courts, when they have so much more money to recover from the Ruias? If Essar is unable to pay $1.5 billion ordered by the UK and US courts, how serious is their claim to bring in Rs54,000 crore to save their control over Essar Steel?
It is Indian PSBs that have allowed Essar to delay the sale of Essar Steel by repeated filings before the bankruptcy courts or the Supreme Court. This will continue, until the government holds bankers accountable for their acts of commission and omission while colluding with wilful defaulters.
Moneylife had sought a response from the Essar group to the UK order. Here is the response from the company:
“Essar is aware of a ruling issued by the courts of England on 25 March 2019 in respect of certain Orders that were obtained by ArcelorMittal USA (“AMUSA”) on an ex parte basis on 14 January 2019 (the “Orders”). Essar does not agree with many of the factual findings in the ruling, however it recognizes that the Orders remain in place and will continue to ensure that it adheres to their terms.
The origins of the Orders (and AMUSA’s underlying claim) arise from an arbitration award made against Essar Steel Limited (“ESL”) in December 2017. That award related to a guarantee provided by ESL to AMUSA in 2014 regarding a pellet off take agreement that was executed in respect of its project in Minnesota. AMUSA has had the arbitration award recognized in Minnesota and England and tried previously to bring a claim in Minnesota running the same arguments that it is now running in England but that claim was thrown out by the Minnesota court. ESL is a Mauritius company and AMUSA has applied to recognise the award in Mauritius. ESL is resisting that application.
Essar Global completed a sizeable de-leveraging exercise in December 2018, settling amounts due to its legacy secured creditors as well as other legacy claims arising from its project in Minnesota. Essar Global has paid down US$ 21 billion of debt during this recent initiative.
Essar Global is not (and never has been) liable to AMUSA in respect of the arbitration award, which it is claiming against ESL.”