Tag: Numetal

With SC Verdict on Essar Steel, Some Sanity has Been Restored to India’s Insolvency Process

The apex court has effectively ruled that financial creditors have primacy over the rest in the repayment of money.

The Supreme Court has finally brought the curtain down on the Essar Steel bankruptcy case.

In what is being hailed as a landmark order, the apex court threw the National Company Law Appellate Tribunal ruling out of the window and ushered in a sense of clarity in the nascent insolvency and bankruptcy resolution process in India. 

The apex court order decidedly established the right, nay the supremacy, of the Committee of Creditors (CoC) in deciding the distribution of money raised from the sale of assets of an insolvent company. In doing so, the apex court also ruled that the financial creditors have primacy over the rest in the repayment of money. This should close the door for any ambiguity in the entire insolvency resolution mechanism. 

The order, thus, paves the way for ArcelorMittal’s take over of Essar Steel. While confirming the larger responsibility of CoC in the insolvency resolution exercise, the apex court made it abundantly clear that the adjudication authority – NCLAT, in this instance, cannot tinker with the CoC-approved resolution plan in an insolvency case. 

Also read: SC Orders Status Quo in Essar Steel’s Insolvency Case

The Essar Steel case is among the first set of 12 big defaulter cases that the banks had sought to resolve under a fiat from the Reserve Bank of India (RBI) in 2017. This specific case had since seen many twists and turns, leading up to last week’s verdict by the Supreme Court. ArcelorMittal and Numetal came into the scene in early 2018. They were, however, found to be ineligible. 

Subsequently, they were given a fresh opportunity by the Supreme Court to pay off the NPAs (non-performing assets) of their related corporate entities before resubmitting their resolution plans for Essar Steel. The process took an unexpected angle when the promoters of Essar Steel challenged the very insolvency proceedings and offered the entire debt by offering to cough up Rs 54,389 crore.

This was way high when compared to ArcelorMittal’s offer of Rs 42,000 crore. But the National Company Law Tribunal (NCLT) put its foot down. That did not settle the matter, though. Then came the issue of distribution of proceeds among various claimants (financial, operational and other creditors). 

Photo: Reuters/David W Cerny

What upset the financial creditors was the decision of NCLAT overruled CoC’s distribution plan and sought to insert a sense of parity in the distribution of money among financial and operational creditors. Predictably, financial creditors were forced to knock at the doors of Supreme Court. In a way, the apex court sort of made it clear that there could be no equal treatment of unequals. It laid much store by according equitable treatment to each creditor depending on the class to which it belongs – such as secured, unsecured, financial, operational and the like.

Significantly enough, the Supreme Court also indicated that there is nothing sacrosanct about the 330-day window for insolvency resolution. This should take the pressure off creditors who could otherwise be resigned to accept below-par resolution deal. 

The overall clarity ushered in by the Supreme Court order should go a long way in quickening the insolvency resolution exercise in the Indian corporate world. And, it should do a world of good for the banking industry which has been pulled down under the weight of bloated stressed assets.

Also read: Why India’s Insolvency and Bankruptcy Code is Slowly Imploding

An early end to their stressed assets imbroglio could help its quick return to health. The conclusion of the Essar Steel imbroglio could prove a sharp warning to recalcitrant-promoters who cared less for financial discipline. 

Two classical instances – one pertains to the recent past and another related a distant history – bear testimony to the muddled thinking and avoidable interpretation. 

In both cases, the end result proved disaster. In the case of Stayzilla, a Chennai-based start-up, the promoter landed in prison when an operation creditor filed a criminal complaint for non-payment. Eventually, the company was dragged to NCLT under IBC (Insolvency and Bankruptcy Code). 

Very many summers ago, Readymoney, a Chennai-based listed entity, met with closure when angry depositors turned their ire on promoters. An eminent person, a leading auditor, associated with the company was arrested in this instance.  The two companies just collapsed. 

Set against this backdrop, the Supreme Court order on the primacy of secured creditors must redefine the business play in the country. This can happen if only the entire chain in whole canvass – including India’s law-enforcing agencies – is made to understand it. 

K.T. Jagannathan is a senior business journalist.

ArcelorMittal, Numetal Ineligible to Bid for Essar Steel, Finds Audit Report

If Essar Steel’s lenders accept the report, bids by both hopefuls could be rejected at the meeting of the committee of creditors on Friday.

Mumbai: A forensic audit report by Kroll, a corporate investigations and risk-consulting firm, has said both ArcelorMittal and VTB Bank-backed Numetal were ineligible to bid for Essar Steel.

The audit report said there were several regulatory cases pending against both the bidders. If Essar Steel’s lenders accept the report, bids by both hopefuls could be rejected at the meeting of the committee of creditors (CoC) on Friday.

On Tuesday, the CoC had opened the financial bids. Arcelor’s bid was higher than Numetal’s and required lenders to take a 40% haircut on the stressed asset’s debt.

A source who attended the meeting in Mumbai said the Kroll report was taken on record by the lenders. It would be taken up for discussion in the next meeting. Kroll examined 2,000 companies across the world and in over 80 jurisdictions connected to both bidders and promoters.

Some of the lenders are of the opinion that despite the report both companies should be allowed to bid so that there is more competition in the next round of bidding. “There will be some pending case against almost any company in the world,” said a source.

The lenders have also asked their lawyers, Shardul Amarchand Mangaldas, to provide them options in the next meeting after taking the Kroll report into account. A source said lenders will decide internally after consulting their legal teams and come prepared with options.

During the CoC meeting on Tuesday, lenders also discussed an offer letter from JSW Steel, which wants to bid solo for the company in the next round. The additional offer, lenders felt, would increase the value of the company. For now, JSW has teamed up with Numetal to bid for the company.

But before that the lenders could ask for bids of second round to be opened, said sources. Vedanta has also made an aggressive bid. Both Numetal and ArcelorMittal spokespersons declined to comment on the Kroll report.

A source said the lenders are also not happy with the offers made by ArcelorMittal and Numetal as both bids sought high haircut from the banks.

Essar Steel owes close to Rs 440 billion to banks while the offer from ArcelorMittal was to take over debt worth Rs 303 billion and Rs 2 billion to unsecured lenders. Both JSW Steel and Vedanta have won one company each in the ongoing bankruptcy process and lenders are keen that bids from both companies are permitted in the next round.

While JSW Steel has emerged as the highest bidder for Monnet Ispat, Vedanta is the highest bidder for Electrosteel Steel. Both Monnet and Electrosteel Steel had defaulted on loans and were sent to the National Company Law Tribunal (NCLT) by banks for debt resolution.

Last week, the NCLT Ahmedabad bench remanded the first round of bids made by Numetal and ArcelorMittal to the resolution professional concerned and the CoC, and pointed out that payment of overdue amount was a cure for resolution applicants who were promoters of non-performing assets for more than a year.

The sale of shares and declassification did not absolve them of their responsibility, it had observed in the case of ArcelorMittal. However, the CoC was not to be influenced by the tribunal’s observations and was asked to take an independent view on eligibility.

Numetal is likely to challenge the NCLT order in the National Company Law Appellate Tribunal, and banks would prefer to wait for the outcome.

By arrangement with Business Standard.

Battle for Essar Steel: JSW Plans to Go Solo If Fresh Bids Are Allowed

There is no express bar on the right of committee of creditors to invite a fresh bid.

JSW Steel may go it alone as the committee of creditors (CoC) for Essar Steel decides to consider a fresh round of bids altogether.

JSW Steel is pointing towards a part of the NCLT order, which was uploaded on Saturday, which says “in the option no. 1, it has been suggested to initiate a new process for inviting bids from all interested parties (starting with initiation of new expression of interest) and follow the entire process as per new request for proposal as approved by the CoC, which were not considered as viable and appropriate by the CoC keeping in view of the time constraint, while in our humble view to be more sound reasonable and legally transparent… therefore, we feel while remanding back the matter to the CoC for reconsideration of the resolution plan and resolution applicant, to look at option 1 as per the deliberation made in the CoC meeting dated March 21, 2018…”.

Seshagiri Rao, joint managing director and chief financial officer, JSW Steel, said, JSW Steel had evinced interest earlier to bid for Essar. But the CoC decided to invite bids from only shortlisted expression of interest (EoI) which ruled it out citing time constraint.

Subsequently, JSW partnered NuMetal in a step-down subsidiary, Nu Metal & Steel. Asked if JSW would bid alone if the CoC did decide to invite a fresh round of bids and not restrict to the shortlisted EoIs, Rao replied in the affirmative and said that is what we wanted. “We would be able to submit the bids on time,” he added.

The committee of creditors is expected to meet shortly to take a call on the bids after Thursday’s order by the Ahmedabad bench of the National Company Law Tribunal (NCLT). Some suggested the meeting could even take place on Monday.

The CoC has a host of issues to consider.

The NCLT bench has directed the resolution professional to place before the CoC the first round of bids from NuMetal and ArcelorMittal.

However, whether the CoC will give Numetal and ArcelorMittal 30 days to cure their bids or invite a fresh round of bids during the time has been left to the CoC.

The 270-day stipulated date for Essar was April 29, but the NCLT bench has excluded the period from March 20 to April 19, the day of the order, from the mandatory 270-day window of the insolvency process, as laid out by the IBC (Insolvency and Bankruptcy Code). With this, the deadline now stands extended by a month.

The order said the CoC did not follow the prescribed procedure to afford reasonable opportunity to the resolution applicants to make overdue payment to remove disability of the resolution applicants or to make good of the disability.

Section 29A (c) refers to a provision that disallows a person from submitting a resolution plan if he has an account that has turned a non-performing asset (NPA) for more than a year unless he makes payment of all overdue amounts with interest thereon before submission of a resolution plan.

The proviso says that if the resolution applicant is ineligible under clause (c) of Section 29A, the resolution applicant shall be allowed by the CoC such period, not exceeding 30 days, to make payment of overdue amounts, in accordance with the proviso to clause (c) of Section 29A.

The CoC may also deliberate on whether declassification by ArcelorMittal in Uttam Galva and KSS Petron will make it eligible for Essar.

The bench has observed ArcelorMittal will have to pay overdue amounts to lenders on account of Uttam Galva Steels and KSS Petron to become eligible. “Mere sale of shares and declassification as promoter after the companies have gone into default cannot absolve them of responsibility,” the tribunal observed.

An ArcelorMittal spokesperson said, “We are currently reviewing the order and will comment further in due course as appropriate.”

However, while directing the resolution professional to place the first round of bids before the CoC, the bench has said it did not wish to rule on the issue which is required to be considered by the CoC and not be influenced by the observations of the bench.

ArcelorMittal had sold its shares in Uttam Galva and L.N. Mittal in KSS ahead of the Essar Steel bid to become eligible. Uttam Galva is an NPA for more than a year as is KSS Petron, a subsidiary of KSS.

In KSS Petron, L.N. Mittal, chairman and chief executive officer of ArcelorMittal group, (through holding companies) exercised negative control, whereas in the case of Uttam Galva, ArcelorMittal Netherlands (AM Netherlands, a connected person of AM India) exercised positive control on Uttam Galva.

In the case of KSS Petron, the views of resolution professional advisors, Cyril Amarchand Mangaldas (CAM) and Darius Khambata differed.

CAM’s view was that negative control also constituted control for the purposes of testing under Section 29A(c). In Khambata’s view, however, negative control for the purposes of Section 29A(c) and accordingly KSS Petron did not constitute ground for disqualifying AM India.

The court observation however stated that Section 29A did not distinguish between positive and negative control.

NuMetal’s legal counsels believe the order provides scope for the company to change the shareholding in order to qualify for the bid whereas ArcelorMittal will have to pay dues.

NuMetal had mentioned in its first bid that if Aurora Enterprises, in which Rewant Ruia is the ultimate beneficiary, was found ineligible then it could be dropped. If Ruia is dropped then the question of payment of overdue amount may not arise.

“What the NCLT order is trying to say is that whatever ineligibility we have found in the plan for 29(A), as per 30(4) we have to give them 30 days’ time to rectify the same. In case of NuMetal, now where the bidders have only changed, as per the order they can now rectify their disability as per 29(A). In case of ArcelorMittal, it appears that the court wants the payment to be done,” one of the CoC counsels told Business Standard.

By arrangement with Business Standard.

Ministerial Committee May Pave Way for ArcelorMittal’s Essar Steel Bid

ArcelorMittal is facing an eligibility test on the ground that the company and its promoter, L.N. Mittal, had investments in non-performing Uttam Galva Steels and KSS Petron, respectively.

ArcelorMittal is facing an eligibility test on the ground that the company and its promoter, L.N. Mittal, had investments in non-performing Uttam Galva Steels and KSS Petron, respectively.

Credit: Reuters/Francois Lenoir/Files

The insolvency law committee is meeting on Monday to finalise the recommendations to amend Section29A. The section has a provision that bars those related to debtor companies having toxic assets that are classified as non-performing for a year or more from taking part in the bidding process under the Insolvency and Bankruptcy Code (IBC).

The amendments are expected to change the definition of ‘connected-party’, thereby, allowing bids from companies such as ArcelorMittal. The world’s largest steelmaker is facing an eligibility test on the ground that the company and its promoter, L.N. Mittal, had investments in non-performing Uttam Galva Steels and KSS Petron, respectively.

The committee, looking at the issue of persons being indirectly barred for being connected or related to those ineligible to bid, will give its final recommendations to the corporate affairs ministry.

Lawyers in Mumbai say any such amendment could lead to more litigations, as the regulations are being changed when the insolvency process is already on against 40 companies identified by the Reserve Bank of India.

Banks are expected to call a second round of bidding for Essar Steel after the Parliament approves the changes in the IBC laws. Both ArcelorMittal and Numetal Mauritius, a company majority owned by VTB Bank of Russia, are fighting a pitched battle to take over Essar Steel.

ArcelorMittal sold its 29% stake in Uttam Galva just before Essar Steel’s bidding deadline closed. Mittal, too, sold his 33% personal stake in KSS Petron’s parent company in Kazakhstan before taking part in the process. ArcelorMittal has said that its bids for Essar Steel were eligible.

Numetal’s bid has also been found ineligible as a trust with Rewant Ruia as a beneficiary owns 25% stake in company.

The Ruias were promoters of Essar Steel when the company turned into a non-performing asset. The Ruia trust has offered to sell its stake to VTB Bank so that Numetal becomes eligible for bidding. Both Mittal and VTB Bank officials met top government leaders to lobby for their bids.

The committee is also finalising bidding for medium and small enterprises. The committee will also send recommendations on the bankruptcy code for corporate guarantors, persons going bankrupt and cross-border cases.

This article was first published in Business Standard. You can read the original article here. 

Ruia Trust Offers to Exit Numetal to Participate in Essar Steel Bid

The company’s proposal to buy Essar Steel says Ruias ready to sell entire 25% stake.

The company’s proposal to buy Essar Steel says Ruias ready to sell entire 25% stake.

Essar Steel. Credit: PTI

Mumbai: The Singapore-based trust that owns a 25% stake in Numetal, the bidder for Essar Steel, has offered to sell its stake to other shareholders of Numetal if the trust is found ineligible to participate in the bid.

Rewant Ruia, son of Essar group promoter Ravi Ruia, is the beneficiary of the trust. The offer to exit from Numetal has been made in the bid proposal submitted by Numetal, according to a source close to the development.

VTB Bank of Russia and another Russian partner own a 75% stake in Numetal and, if needed, they will raise their stake to 100%.

Numetal and ArcelorMittal are the two companies to submit bids for Essar Steel. The 10 million tonne per annum steel company is facing proceedings under the
Insolvency and Bankruptcy Code (IBC) after the company defaulted on loans of Rs 440 billion.

The results of the bids are expected by next Monday.

Lenders had earlier raised objections to the offers made by both Numetal and ArcelorMittal. This was because ArcelorMittal Netherlands NV held a 29% stake in Uttam Galva Steels, a non-performing asset (NPA).

Besides, ArcelorMittal’s promoter, L.N. Mittal, personally held a 33% stake in KSS of Kazakhstan, which, in turn, held a 100% stake in KSS Petron, another NPA in India. Both ArcelorMittal and Mittal sold their stakes just before the bid deadline closed.

ArcelorMittal, however, said its bid was eligible and Mittal lobbied with the government last week on its offer.

On the other hand, there were objections to Numetal’s offer on the grounds that the Ruias were promoters of Essar Steel when it turned into an NPA.

And hence, Ruia as a trust beneficiary will not clear the eligibility test.

With the offer of the Ruias to sell their minority stake in Numetal to other shareholders, the chances of the Numetal offer being accepted are higher. But a final decision will be made by legal advisor Cyril Amarchand Mangaldas to the resolution professional.

The government had introduced Section 29A in the IBC to exclude all defaulting promoters and those connected to them. As finance minister Arun Jaitley explained the rationale later during a discussion on the amendment in the Rajya Sabha, if the government did not have such a broad exclusion list then the same people or related persons who ran the company to the ground would come back to buy the stressed asset at a 40-60% discount to the debt taken from Indian banks.

According to Section 29A if a person is acting jointly or in concert with a person meeting any of the above criteria then the person will stand disqualified. However, the person will be eligible to submit a resolution plan if such a person makes payment of all overdue amounts with interest and charges relating to the non-performing asset (NPA) accounts before the submission of the plan.

According to legal opinion taken by Numetal from a former Supreme Court judge, the trust’s 25% stake in the company will not attract provisions of Section 29A as the Ruias will not have any management control or directors on the board of Numetal. This opinion is also included in the Numetal bid document.

By arrangement with Business Standard.

Market Cap of India’s Public Banks Have Plunged Since 2014, Raising Questions About Reform Measures

Eleven PSBs have seen an erosion of anywhere between 11.37% to 75.5% in their market capitalisation.

Eleven PSBs have seen an erosion of anywhere between 11.37% to 75.5% in their market capitalisation.

Representational image. Credit: Reuters

New Delhi: The combined market value of all listed public sector banks has plummeted below that of one private lender – HDFC Bank – in a development that raises questions over the efficacy of reform measures like the Indradhanush scheme and the Insolvency and Bankruptcy Code (IBC) unveiled by the NDA government.

Since the Modi government took charge in May 2014, the Nifty PSU Bank index has fallen from 3776 to 3171 even as the broader market index, Nifty 50, has risen to 10,397 from the level of 7318, registering a nearly 43% gain.

The Wire examined the stock market performance of 14 public sector banks (PSBs). Out of this total, eleven banks have seen erosion of anywhere between 11.37% to 75.5% in their market cap, with smaller ones like Dena Bank, Oriental Bank and Allahabad Bank being among those hit hard.

Dena Bank has lost as much as 75.5% of its market value, with Oriental Bank slipping by 68% and Allahabad Bank losing 60%.

Bank of India, a mid-sized PSB, too is among worst affected, with its market cap falling by 60.7%. Andhra Bank has lost 51% of its stock market valuation, Union Bank (48.3%), Punjab National Bank (44.5%), Canara Bank (28%) and IDBI Bank (21%) and Bank of Baroda (20%).

State Bank of India’s share value has pared all the gains that it had made and its market cap on February 23 stood at Rs 2,38,331 crore, just 2.2% higher than its level on May 26, 2014.

Only Indian Bank and Vijaya Bank have bucked the market trend.

Private killing

In contrast, most private banks have seen impressive increase in their market cap during the period. For example, HDFC Bank’s market value has jumped by 135% to Rs 4,87,256 crore. The market cap of Axis Bank and ICICI Bank has risen by 43% and 22% respectively.

PSBs’ bad loans continue to rise inexorably despite Prime Minister Narendra Modi sparing no opportunity to tom-tom his government’s policy measures to streamline their functioning.

But the ground reality has hardly changed. Take, for example, the much-hyped Indradhanush scheme launched by the government in 2015. The seven-point scheme promised to revamp the functioning of PSBs but has failed to live up to expectations.

The seven elements of the scheme include appointments, the Banks Board Bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms.

Comparative stock market performance of select PSBs and private banks

PSB Market cap as on Feb 23, 2018 (Rs crore) Market cap as on May 26, 2014 (Rs crore) %change Share price as on February 23, 2018 (Rs/share) Share price as on May 26, 2014 (Rs/share) %change
HDFC Bank 487,256 207,012 135 1879.80 798.30 135
ICICI Bank 206,363 169,625 22 321.30 264.10 22
Axis Bank 137,586 96,099 43 536.55 374.76 43
SBI 238,331 233,048 2.2 276.10 269.98 2.2
Bank of Baroda 33,640 42.086 (-20) 145.6 182.16 (-20)
PNB 27,506 49,593 (-44.5) 113.4 204.46 (-44.5)
IDBI Bank 20,374 25,804 (-21) 77.10 97.65 (-21)
Canara Bank 18,743 26,050 (-28) 313.80 436.15 (-28)
Indian Bank 15,306 8,393 82.37 318.70 174.75 82.37
Bank of India 15,287 38,913 (-60.7) 129.05 328.5 (-60.7)
Central Bank 13,646 15,397 (-11.37) 69.35 78.25 (-11.37)
Union Bank 9,306 18,005 (-48.3) 109.60 212.05 (-48.3)
Vijaya Bank 6,331 5893 7.4 57.05 53.10 7.4
Allahabad Bank 4,169 10,522 (-60) 52.10 131.50 (-60)
Andhra Bank 4,011 8,326 (-51) 45.55 94.55 (-51)
Oriental Bank 3,661 11,573 (-68) 105.75 334.30 (-68)
Dena Bank 2,358 9,658 (-75.5) 20.85 85.4 (-75.5)

Source: BSE

With former Comptroller and Auditor General Vinod Rai as its first chairman, the Banks Board Bureau replaced the erstwhile appointments board. However, by all accounts, the bureau has failed to make a difference on the ground.

The scheme also failed to properly assess the PSBs’ additional capital requirement. It pegged the capital requirement of state-owned banks at Rs 70,000 crore over 2015-19. Under the scheme, PSBs are required to raise Rs 1.10 lakh crore from markets, including follow-on public offer, to meet Basel III requirements, which would kick in from March 2019.

However, only a few large PSBs could hit the market.

What illustrates the shortcomings of the Indradhanush scheme is the fact that the government was forced to announce another Rs 2.11 lakh crore recapitalisation plan for PSBs last October.

The impact of IBC, Modi government’s another flagship reform that was touted as a game changer for the banking sector and came into effect in December 2016, is yet to be felt on the ground.

Also read:

  • Why pushing for privatisation as a solution to the PNB scam is to ignore history

  • M.K. Venu on why Modi and Jaitley cannot pretend over-invoicing doesn’t happen in India at a massive scale

  • T.T. Ram Mohan on how public sector banks don’t have a monopoly over fraud

The risk of litigation flagged by experts in ongoing bidding for Essar Steel assets shows that corporate insolvency resolution is going to be a messy and protracted process.

The government amended the Insolvency and Bankruptcy Code (IBC) last November to bar wilful corporate loan defaulters from bidding for their own assets. But now it turns out that the legal filter is not impenetrable for unwelcome suitors. At least, that is the impression that one gets from expressions of interest (EoIs) submitted for assets of Essar Steel.

Nu Metal and ArcelorMittal are the two players that have submitted EoI for Essar Steel assets. But prima facie, both are ineligible to participate in bidding if we go by the amended IBC Code.

Nu Metal is a consortium led by VTB Capital, and involves as partner Rewant Ruia, the youngest scion of Essar Group. Barred from bidding by the amended code, Essar Steel promoters have found this ‘innovative’ way to try their luck at getting their assets back.

ArcelorMittal’s bid too is seen as legally untenable as it was the promoter of bankrupt Uttam Galva Steel when it submitted EoI for Essar Steel assets. Lakshmi Mittal, Chairman and CEO of ArcelorMittal, recently met Finance Minister Arun Jaitley, in what is being seen as an attempt to push ArcelorMittal’s bid through.

Numetal has released a detailed statement on its intent for Essar Steel, apparently in an attempt to dispel the flawed public impression about its EoI.

Why growing clamour for privatisation of PSBs?

In the wake of PNB scam, a case is being made for privatising PSBs. Their mounting bad loans, which stood at Rs 7.34 lakh crore as the end of September 2017, are being cited to buttress the case for changing ownership of state-owned banks.

The argument being given is that entry of private players would make banks more vigilant and less-risk prone.

However, if we look closely at the trend in the Indian banking sector, an informal privatisation of state-owned banks is already under way, with private players eating into the market share of PSBs in terms of loan assets.

Reeling under bad loans, PSBs have been reluctant to sanction fresh loans. Private players have stepped into the hole left behind.

The share of private banks in outstanding loans has increased from 19.9% as at the end of March 2014 to 27.5% as at the end of March 2017.

Going by the current trend, the market share of private sector banks in banking sector advances is expected to increase to 38%-40% by FY’ 2020, said credit rating agency Icra in a recent report.

Arcelormittal, Numetal Bids for Essar Steel Fail Eligibility Test

Matter could land in higher courts, as stakes for both Mittal and Ruias are high; bankers to call for fresh bids.

Matter could land in higher courts, as stakes for both Mittal and Ruias are high; bankers to call for fresh bids.

Credit: Reuters/Francois Lenoir/Files

The bids of both Numetal, a VTB Bank majority company with Ruias as minority partner, and ArcelorMittal for Essar Steel have failed the eligibility test of the legal advisors appointed by the resolution professional as both bidders had connections to non-performing assets (NPAs) in India. The committee of lenders is expected to meet the next few days to take a call on the fate of the company.

As per the IBC procedures, the final decision will be taken by the NCLT.

If the bids are ultimately rejected, this would mean that either or both ArcelorMittal and Numetal may move the courts, as both think they are eligible for bidding under the IBC, 2016. Both bids were backed by opinions from noted legal firms, with Numetal taking advice from former Supreme Court judges and former Indian government law officers.

Cyril Amarchand Mangaldas and Grant Thornton did the legal eligibility test on both bids. When contacted, a Numetal official said the company has not yet heard from the RP.

An ArcelorMittal spokesperson declined to comment.The rejection of bids came after the IBC was amended recently, through an ordinance, to keep out defaulting companies and their promoters from participating in the auction for stressed assets through the NCLT process.Lenders had clearly said they would look at the promoter status at the time of company turning into a NPA and not when the shares were sold by a promoter just to become eligible for the bidding. But that did not deter either Mittal or the Ruias from bidding.

According to a filing with the BSE, ArcelorMittal Netherlands BV held 29.05% stake in Uttam Galva Steel as a foreign promoter at end of December 2017. The Miglani family and its companies held 31.82% stake in Uttam Galva, which has defaulted on loans taken from lenders. It is now a non-performing asset (NPA) and is facing the NCLT proceedings under the IBC, 2016.

In a February 7 filing with stock exchanges, however, Uttam Galva said that the entire shareholding held by ArcelorMittal Netherlands BV has been transferred to Sainath Trading Company Private Limited by way of inter-se transfer for one rupee a share. Consequently, the co-promotion agreement dated September 4, 2009 among certain shareholders has been terminated. This, according to legal opinion taken by Numetal, makes ArcelorMittal ineligible under Section 29A (c) of IBC 2016.

It is not allowed to submit a resolution plan as it is a promoter of Uttam Galva, which is classified as a non-performing asset by banks.”ArcelorMittal’s own conduct establishes this, inasmuch as it is selling the equity shares held by it in Uttam Galva only after the coming into effect of Section 29A,” the legal opinion taken by Numetal from a former Indian government law officer said. This opinion, along with those from former Supreme Court judges, was submitted to the RP.

As per Section 29 A (c), the promoter of a debtor that has been an NPA for at least a year before the commencement of NCLT proceedings, is ineligible to submit a resolution plan.

ArcelorMittal had earlier said that its bid for Essar Steel meets all the eligibility criteria. However, as per the co-promotion agreement signed with the Miglani family in 2009, ArcelorMittal Netherlands BV was having the right to appoint half the non-independent directors of Uttam Galva. Besides, under that agreement, a number of decisions relating to Uttam Galva such as business plans of company, corporate restructuring, employee and director compensation, capital expenditure, loans and investments exceeding a threshold etc required the consent of an ArcelorMittal representative.

Legal opinion taken by Numetal said the only procedure provided for such an ineligible person to become eligible to submit a resolution plan is already provided in Section 29A – that is, if the person makes payment of all overdue amounts with interest thereon and charges relating to the NPA account before submission of resolution plan. “The method adopted by Mittal to qualify itself to submit a resolution plan by selling 29% stake in Uttam Galva is not a procedure prescribed under the Act,” the former law officer said. “The stratagem adopted by ArcelorMittal is a device to circumvent the mandate of 29A (c) of the IBC,” the opinion, reviewed by this newspaper, said.

Earlier, domestic lenders, led by State Bank of India, had also asked L.N. Mittal, billionaire-promoter of ArcelorMittal, to repay a debt of Rs 13.40 billion taken by KSS Petron Private Limited after the latter defaulted on its loans in India. Mittal owned 33% stake in KazStroyServices (KSS) of Kazakhstan, an oil infrastructure provider, in his personal capacity. KSS, in turn, holds 100 per cent stake in KSS Petron, which became an NPA in 2015. In this case also, Mittal sold the stake in KSS just before the bidding commenced for Essar Steel.

In the case of Ruias, Essar Steel had defaulted on bank loans, which led to the bankruptcy proceedings against the company. Ruias own 25 per cent stake in Numetal through a trust, while VTB Bank of Russia owns 75 per cent in Numetal along with other partners. Rewant Ruia, son of Essar group promoter Ravi Ruia, was named as the beneficiary of the trust. Essar Steel had defaulted to bank loans worth Rs 440 billion.

“The whole purpose of amendments to IBC was to keep out defaulters. And if they want to be in the race then they must clear outstanding dues. This is the government directive and we cannot go against it,” the CEO of a public sector bank had told this paper, asking not to be quoted.

SBI chairman Rajnish Kumar had earlier warned that promoters must clear their dues so that they can become eligible to bid for the stressed assets. But both Mittal and Ruias ignored the warning.

This article was first published on Business Standard. You can read the original article here.