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! 
Comments
Pankaj Malhotra
3 years 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
3 years 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
3 years 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
3 years 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.
B. KRISHNAN
Replied to Veeresh Malik comment 3 years 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!
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