What Is Cooking at Essar?
In what seems like an exercise in confusing and confounding issues, we have a series of developments on Essar group’s attempt to retain Essar Steel with its fantastic, last minute offer to pay back its entire debt, including money owed to unsecured creditors. 
 
The activity began to build up over the past week with a press release and publicity blitz by Essar. But it still didn’t answer the one, key question: Where is the Rs54,389 crore coming from? And, if the group had access to this kind of money, why did it refuse to pay until it was categorised a wilful defaulter?
 
Remember, Essar’s repayment offer came from a subsidiary of Essar Global after the lenders had already accepted a bid of Rs42,000 crore from the LN Mittal group under the IBC (Insolvency and Bankruptcy Code) process, that too after forcing the group to make several other repayments as a condition to the bid. But Essar appears to have found a way to stymie the IBC process at the last minute, again calling into question the bankruptcy process.
 
Consider a few issues.
 
Indian Dues: On 7th January, Essar Global Fund Ltd, the holding company for the Essar group of companies, repaid a debt of Rs12,000 crore to its various Indian and foreign lenders. This is in addition to the Rs30,000 crore that it had repaid in August 2017 to various lenders from the proceeds of the sale of Essar Oil. This includes payments of Rs6,300 crore to ICICI Bank, Axis Bank and Standard Chartered Bank, to extinguish its borrowing from them. 
 
The group, in a statement and media interviews, claimed that it has paid back 80% of its group debt, or Rs1,37,000 crore. According to Hindu Business Line, the only continuing lender to Essar Global, so far, is the VTB group, Russia’s leading universal bank. 
 
Global Dues: Essar’s sudden access to mega funds and repayment spree wasn’t limited to Indian creditors. On the very same day, i.e., 7th January, Essar Global concluded a settlement with lenders of Essar Steel Minnesota Ltd, where it had offered unsecured guarantees to lenders.
 
In this deal, Essar Global has purchased notes of the face value of $260 million, issued by Mesabi Metallics Inc, getting back into the iron mining and pellet project from which it was almost out for two years. Here is what a local paper, Mesabi Daily News, has to say about that deal in its opening paragraphs:  
 
“Fool the state once, shame on you. Fool the state twice, shame on it.
Consider the state looking sufficiently foolish after Monday when Essar Global, the former parent company of Essar Steel Minnesota and its primary driver into bankruptcy, paid of about $1.75 billion in global debt—including that of Essar Minnesota—and spent another $260 million to buy out Mesabi Metallics’ debt on the Nashwauk project.
 
After hard tones and harsh words from Minnesota Gov. Mark Dayton, in the final hours of his administration, Essar and Ruia family snuck in the back door after months of speculation of their involvement in the project’s reboot. It wasn’t dissimilar to the way the company creeped (sic) into a $1.1 billion bankruptcy in July 2016 as the state prepared to pull their mineral leases—a move that first took months of Essar misleading Dayton about its direction with the project. 
 
And here we are again, with somehow fewer answers on how we arrived here than when we last left Essar more than two years ago. It amounts to more layers of misleading statements, and a state seemingly all-too-willing to work with anyone not named Cleveland-Cliffs.” 
 
Doesn't all this sound similar to what is happening with Essar Steel in India? A company, that is labelled a wilful defaulter after running up largest bad debt among Indian corporates, comes up with an overnight supply of unlimited funds—sources unknown. And our biggest bank, instead of celebrating this extraordinary bounty, wants to receive just half the money. Here’s what happened today.
 
SBI’s Bouncer: On 16th January, BloombergQuint reports that, without discussing its plan with any other lending bank, State Bank of India (SBI) has put on sale its total loans to Essar Steel Ltd worth Rs15,431 crore, as per information on its auction website. The sale is open for asset reconstruction companies, non-banking finance companies, banks and financial institutions.
 
The minimum reserve price for the loans has been set at Rs9,587 crore and the Bank has disclosed that  as per the Arcelor Mittal resolution plan, approved by Essar Steel’s committee of creditors, the minimum recovery amount on these loans is Rs11,313 crore. 
 
This is extremely strange because SBI was part of the committee of creditors, which has already approved of LN Mittal’s bid for Rs42,000 crore, and it is the largest lender in this group. Also, when Essar Steel itself has promised full repayment, including money to unsecured creditors, why is SBI in such a hurry to flog the loans at what may be a significantly lower price? After all, SBI is a public sector bank (PSB) and this is public money. 
 
The deal has, naturally, caused a flutter on social media with speculation about SBI allowing Essar to nearly halve what it is owed, by selling its debt to an asset reconstruction company, which will then be paid by Essar. 
 
Even if SBI claims that the loan has been fully provided for and whatever it gets is an bonus, this does not explain why the bank will settle for half the dues, when an offer of full repayment is before a committee of creditors in the IBC process.
 
Well, anything is possible! This is clear from Prashant Ruia’s interview to a couple of publications preceding this hectic repayment activity. In his media spin, Mr Ruia said, “Over the past two years, we committed ourselves to a massive deleveraging programme and have repaid more than Rs1,37,000 crore to our lenders. This is more than 80% of its group debt.” Here is what the group has claimed:
  • Rs72,600 crore repayment as part of the dale of Essar Oil to Rosneft. 
  • Rs6,000 crore through sale of Aegis to Teleperformance and CSP.
  • Rs2,400 crore through the sale of Equinox Business Park.
  • And Rs54,389 crore through the sale of Essar Steel. This has not been paid and is stuck in the IBC proceedings; all we have is an offer to pay, with no source of funds declared. 
 
Now, do the math and even these numbers, including the dubious claim of payment for Essar Steel, only add up to Rs1,35,389 crore! If one adds Rs3,955 crore paid to Essar Oil’s minority shareholders, it overshoots the claim in a big way. So, it still doesn’t add up. 
 
In a stunning irony, Prashant Ruia, in his interviews, equates the group to start-ups that have failed! He says, “You cannot have a one-size-fits-all-policy. Our belief is that there should be a distinction. If there has been a promoter who has done something wrong, then, obviously, the rules for that scenario have to be different. But if it’s just a business decision that has failed, then we should not talk about punishment there.”  
 
Start-ups are funded by risk capital and venture funds, not public money through PSBs. Moreover, Mr Ruia would have a point, if this were their first ‘failure’ leading to losses or defaults. It is not. The Ruia family remains stupendously wealthy, while it has a history of huge perpetual business failures (domestic and international), of over a quarter of a century almost. 
 
When asked about the source of funds, Mr Ruia says, “I am not at liberty to give you more information than what is out there in public domain; but we will be having nearly Rs30,000 crore of debt on the asset, which is very normal and the rest will come in the form of equity and we do intend having partners along with us for the equity component.” So, the funds are limitless, but the sources are unknown, while a bid from the LN Mittal group, with all conditions fulfilled, remains in limbo.
 
Mr Ruia also claims that steel companies, that were restructured in the 1990s, repaid all their loans when they recovered. This is not true. In fact, bankers have always alleged that they are forced to restructure and write-off loans when the going is bad. But Indian banks have never had claw-back clauses that allowed them to recover these write-offs when the steel cycle turned highly profitable. 
 
A detailed calculation of interest and debt write-offs extended to large corporates, that have repeatedly sought restructuring, would show that it has been a one-way street for companies. And, yet, they always manage to get fresh loans from nationalised banks, which this government wants to privatise. 
 
I have already written on some of its losses, its influence-peddling and frequent attempts to intimidate the media. Even today, it is SBI, the largest of PSBs that seems determined to fall on the sword and get a self-inflicted wound, even when Essar has proclaimed the availability of a nest egg to payback every penny! 
Like this story? Get our top stories by email.

User

COMMENTS

Pankaj Malhotra

4 weeks ago

It is astonishing that the same SBI which is calculating interest loss on Essar Steel due to delay in resolution, is not bothered about Reliance Communication's debt which is status quo for more than 2 years

Krishnan Hariharan

1 month ago

SBI is trying to help Essar by means of backdoor entry! They wouldn\'t mind getting a hit on loans to Essar. What does this mean, both SBI and Essar conspire to scuttle the resolution through IBC. Shouldn\'t government pull up SBI Chairman?!

Rajendra Ganatra

1 month ago

Stunning and factual piece. It is worrisome, that provisions of the robust Insolvency and Bankruptcy Code seem to be seriously undermined to permit the Essar Steel promoters to retain the company. It will send extremely damaging signal to the international investors and the domestic market even as it will rob the country of entry of new promoter with fresh inflows and technology upgradation.

Veeresh Malik

1 month ago

I've seen bankruptcies up front in other countries, big ones, think about shipowners with fleet size over 100 and additional businesses, going bust, selling everything including personal effects and paintings and the family silver, bowing in apology, and then returning stronger than before with the blessings and help of previous employees and financiers.

In India, by a modest estimate, most big bankrupts have 3x to 6x of their outstandings and debt salted away variously, and can pay off their debts overnight, if they want to. Their lifestyle does not change, in fact it becomes even more ostentatious, and the body language remains pugnacious. Employees and financiers can go to hell in a snowflake.

This needs to change.

How does it change?

The banks become more transparent. Everywhere else in the world the banks come into the public domain with disclosures. Here in India the banks appear to protect the bankrupts.

REPLY

B. KRISHNAN

In Reply to Veeresh Malik 2 weeks ago

As usual Mr Veeresh Malik is incisive and to the point. But it is astonishing that SBI is allowed to get away with such an atrocious chicanery!

Unsold Housing Inventory Hits 2-Year Low across 7 cities, Sales Exceed Number of Units Launched 2nd Year in a Row: Report
Mumbai, 15 January 2019: Despite all headwinds including the liquidity crisis in 2018, housing sales rose by 18% and new launches by 33% across the top seven cities compared to 2017. Residential inventory overhang reduced to a year-low from 47 months in Q4 2017 to 33 months in Q4 2018 across the top seven cities. 
 
This is revealed by a comprehensive report prepared and released recently by Pune based Anarock Property Consultants Pvt. Ltd.
 
The demonetisation (DeMo) effect in late 2016 had pushed up unsold inventory to 47 months in Q4 2017 from 40 months in Q4 2016. An inventory overhang of 18-24 months signifies a fairly healthy market, states the report.
 
 “Having absorbed a lot of the impact of various structural changes, the Indian real estate sector seemed poised to grow from the previous year,” says Anuj Puri, Chairman, Anarock Property Consultants.
 
“However, the issue of stalled projects and liquidity crisis continued to confound the housing sector in 2018, though it continued its transition into a relatively more transparent and end-user driven market. End-users accelerated growth while investors shifted focus towards alternate asset classes such as commercial, retail and warehousing, which did fairly well during the year,” he states. 
 
“Builders were extremely cautious about launching projects to align supply with the existing buyer demand. This helped sales pick up momentum in 2018. Simultaneously, builders reduced the average property sizes to align their offerings with the highly-incentivized affordable housing bracket. The affordable segment spearheaded residential growth in 2018,” says the report.
 
Pan-India Inventory Overhang (in Months)*
 
Source: ANAROCK Research (*Months inventory measures how many months it will take for the current unsold housing stock to sell)
 
2018 New Launch Tracker
 
The report found that the top seven cities recorded new unit launches of around 1,95,300 units in 2018 against 1,46,860 units in 2017. The affordable segment comprised the lion’s share at 40%. Major cities contributing to 2018 new unit launches included Mumbai Metropolitan Region (MMR),  National Capital Region (NCR), Pune, and Bengaluru, together accounting for 74% of the new supply. The findings also show:
  • Bengaluru saw approx. 34,880 units launched in 2018 – a whopping 91% increase from 2017. More than 80% of the new supply added was in the sub-Rs80 lakh budget segment.
  • MMR added approx. 59,930 units in 2018, a yearly increase of 12% over the preceding year. Approx. 40% new supply was added in the affordable segment.
  • Chennai added new supply of 15,680 units in 2018 compared to 7,940 units in 2017 - a massive rise of 98%. Approx. 49% new supply was added in the affordable segment.
  • Pune added 24,430 units in 2018, a significant increase of 29% over 2017. More than 90% new supply was added in the subRs80 lakh budget segment, of which 52% comprised of affordable projects.
  • Hyderabad added 17,290 units in 2018, a significant increase of 43% over 2017. Approx. 58% new supply was added in the budget segment of Rs40- 80 lakh in 2018.
  • NCR added approx. 26,010 units in 2018, a yearly increase of 17% over the previous year. Approx. 47% of the new supply catered to the affordable segment.
  • Kolkata added approx. 17,290 units in 2018, a significant increase of 25% over 2017. Approx. 73% new supply was added in the affordable segment.
 
 
Other factors that had a bearing on the housing scenario, according to ANAROCK were: The GST Debacle Haunted 2018: GST was a major hurdle in 2018 on under-construction properties, dissuading buyers from purchasing properties that fell under its ambit. The twin issues of stalled/delayed projects and financial stress within residential real estate augmented interest for ready-to-move-in properties, with most buyers preferring to buy what they can see. 
 
Shrinking Flat Sizes: Builders submitted to consumer demand and offered more property options in the affordable segment, along with an overall reduction in average property sizes across segments, to fit the affordability quotient. At the pan-India level, average property sizes in 2018 shrank to 1,160 sq. ft. from 1,260 in 2017. Surprisingly, Bengaluru saw maximum decline of 13% in average property sizes in 2018, followed by MMR and Kolkata with 11% each. On a two-year basis, the decline in housing sizes was nearly 23% in most key cities, except in Chennai and Bengaluru.
 
Sales Exceeded New Supply: Another significant trend witnessed is that housing sales numbers have exceeded new launch supply consecutively in 2018. Prior to 2017, sales numbers were far lower than new launch supply. This definitely indicates that the market is managing to shed unsold stock.
 
In the first three quarters of 2018, sales numbers rose q-o-q, but Q4 saw a mere 4% rise as against Q3 2018. Sales growth was essentially marred by the non-banking financial companies (NBFC) crisis in the last quarter of 2018. 
 
Consolidation via mergers and acquisitions dominated all sectors including residential during the year, completely redefining the definition of ‘financial health’ among players. This trend will continue in 2019 as well, predicts the report.
 
2018 Housing Sales Tracker
 
Around 2,48,310 units were sold in 2018 with NCR, MMR, Bengaluru and Pune together accounting for 82% of the sales. The details are as follows:
 
  • Bengaluru recorded the highest jump in sales in 2018 as compared to other top cities. City sales increased by 33% - from 43,130 units in 2017 to 57,540 units in 2018 due to buoyant commercial activity and realistic property prices dictated by end-users.
  • NCR housing sales increased by 18% - from 37,610 units in 2017 to 44,300 units in 2018. Despite rising sales, the region continues to grapple with the issue of stalled/delayed projects.
  • Pune sales rose by 12% - from 30,730 units in 2017 to 34,460 units in 2018.
  • MMR sales rose by 17% - from 56,970 units in 2017 to 66,440 units in 2018 - the highest number of units sold in 2018.
  • Chennai sales declined by 17% over the previous year and recorded 11,340 units in 2018.
  • Hyderabad sales significantly increased by 16% over the previous year with 18,630 units sold in 2018.
  • Kolkata saw approx. 15,600 units sold - a yearly increase by 21% over 2017
 
Overall Unsold Inventory till Q4 2018
Unsold inventory declined by nearly 7% - from 7.26 lakh units in Q4 2017 to 6.73 lakh units in Q4 2018 and 14% from 7.90 lakh units in Q4 2016. An uptick in the traction of ready-to-move-in and nearing-completion properties helped developers clear their existing stock.
 
 
Price Movement
Residential property prices across the top seven cities increased by a mere 1-2% in Q4 2018 when compared to the previous year Q4 2017 - except Chennai, where prices decreased by 1% and Kolkata, where they remained stagnant.
 
 
Outlook 2019
Despite the numbers suggesting a positive outlook for 2018, the report is pessimistic about at least the first half of 2019. The liquidity crisis – further aggravated by the NBFC issue – has caused mayhem in the industry and early 2019 will continue to see its spill-over effect, it says.
 
Even while various reforms strove to eliminate unscrupulous players from the real estate ecosystem, the issue of stalled projects needs to be seriously addressed by the government, or else the recovery of the residential sector will remain compromised.
 
If developers continue to focus squarely on their core business, remain customer-centric and launch the right products at the right prices in 2019, the residential segment will gain traction. Else, the sector will have to solely rely on petty sops offered by the government to intermittently boost sales, according to the report.
Like this story? Get our top stories by email.

User

COMMENTS

Aditya G

1 month ago

The only way out of this mess is to lower prices...substantially. Not happening. I foresee more NPAs for the financial system (from the RE sector) which hasn't been factored into the market yet. I hope I'm wrong.

REPLY

Shyamsunder Nambiar

In Reply to Aditya G 4 weeks ago

You are absolutely right. The Best and the Only Win-Win Solution is to Sell at a Price the Buyer is willing to Buy...

Clarity Needed on FDI in E-commerce
The government has amended the FDI policy in e-commerce, in order to ensure a level playing field between offline and online sectors, through the Department of Industrial Policy and Promotion (DIPP) press note no.2 (2018 series) released on 26 December 2018. E-commerce companies are required to comply with the guidelines by 1 February 2019. What is the impact on them? The pre- and post-amendment scenario, along with its impact, is discussed below:
 
Ownership
Prior to Amendment: E-commerce entity providing a marketplace will not exercise ownership over the inventory, i.e., goods purported to be sold. Such an ownership over the inventory will render the business into inventory-based model.
 
Post-amendment: E-Commerce entity providing a marketplace will not exercise ownership or control over the inventory or goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory-based model. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchase of such vendor is from the marketplace entity or its group companies. 
 
Impact: Ownership has now been clearly defined under the para. However, there is no clarity regarding calculation of the 25%, i.e., whether it is required to be calculated as at end of the financial year or a regular check on the purchase is required. 
 
Equity Participation
Prior to Amendment: An e-commerce entity will not permit more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies.
 
Post-amendment: An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
 
Impact: An entity having equity participation by e-commerce market place entity or its group companies will not be able to sell its products through such marketplace. This effectively prohibits any entity related directly or indirectly from selling on a platform. This will ensure fair play in the market and will promote healthy participation.
 
Prior to Amendment: E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.
 
Post-amendment: E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity or other entities has direct or indirect equity participation or common control , to vendors on the platform at arm’s length and in a fair and non-discriminatory manner. Such services will include but not limited to fulfillment, logistics, warehousing, advertisement / marketing, payments, financing, etc. Cash back, provided by group companies of market place entity to buyers, shall be fair and non-discriminatory. For the purpose of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.
 
Impact: Press note has provided some clarification.
  • Services to be provided to vendors should be at arm’s length basis and in a fair and non-discriminatory manner by e-commerce marketplace entities.
  • Such services will include: logistics, warehousing, advertisement/marketing, payments, financing, etc. 
  • Equitable treatment should be there for all vendors i.e. any provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.
  • It is not merely the prices, but also the nature of terms at which the services are provided to the vendors and cash back facility to the buyers. This will move towards fair competitive practices in the market, allowing reduction in irrational discounts and undue benefit to a section of vendors.
  • However, there is no clarification on what constitutes similar circumstances.
 
Exclusivity (New clause)
Post Amendment: E-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.
 
Impact: Sellers will now have a free hand in selling products. E-commerce marketplace will now no longer mandate seller to sell any product exclusively on its platform only. However, it seems that this does not prohibit a vendor from voluntarily selling exclusively on the platform. 
 
Auditor’s Certificate 
Post-amendment: E-commerce marketplace entity will be required to furnish a certificate with a report of statutory auditor to the Reserve Bank of India, confirming compliance of above guidelines, by 30th of September of every year for the preceding financial year.
 
Impact: Yearly reporting to the Reserve Bank of India has been made mandatory for e-commerce marketplace entity.
 
The amendment to the FDI in e-commerce policy will have impact on e-commerce giants, ensuring a level playing field between offline and online sectors. The changes are important as their enforcement will affect the flexibility that e-commerce platforms had in doing business and force them to be neutral to all vendors. The timeline to comply with the changes may, however, need to be re-visited as companies will need to study the latest provisions in detail and may need to bring about several operational changes.
 
(The author works as a manager, corporate law service division of Vinod Kothari & Company)
 
Like this story? Get our top stories by email.

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

online financial advisory
Pathbreakers
Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
online financia advisory
The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Online Magazine
Fiercely independent and pro-consumer information on personal finance
financial magazines online
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
financial magazines in india
MAS: Complete Online Financial Advisory
(Includes Moneylife Online Magazine)