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Essar Steel case hearing today, a litmus test for debt resolution via insolvency code

LiveMint logoLiveMint 12-07-2017 Alekh Archana

Mumbai: The outcome of the Essar Steel Ltd’s petition, to be heard at the Gujarat high court on Wednesday, challenging the Reserve Bank of India’s (RBI) directive to banks to initiate insolvency proceedings against the company, will decide the future path of the debt resolution process.

In many ways, the outcome is seen as the litmus test for the resolution process through the Insolvency & Bankruptcy Code (IBC).

The outcome will also decide on whether lenders—State Bank of India (SBI) and Standard Chartered Bank—can proceed with their petitions at the National Company Law Tribunal (NCLT).

In its petition, Essar Steel had argued on two main points. Firstly, it blamed the change in the government’s gas allocation policy for its financial woes, which led to loan defaults. Secondly, it said the central bank chose “objective and non-discretionary criteria” for selection, which ignored factors such as operational performance and the resolution process that was underway.

“As far as the ‘reasons’ that RBI may have had for selection of the 12 accounts are concerned, to my mind it is somewhat of an academic question—real question being whether these 12 accounts are large NPA (non-performing assets) cases or not,” said Sitesh Mukherjee, partner at law firm Trilegal.

“If they are indeed defaulters then the financial creditors may be entitled to bring action against these borrowers under the Bankruptcy Code, whether or not there is a directive from RBI.”

According to the Essar Steel’s petition, in March 2011, the then government changed its gas allocation policy and cut off the supply to the company after categorising the steel sector to “non-core arear” from “priority”. This was done because of shortage of supply of gas from Krishna Godavari D6 field. Subsequently, in July 2011, the supply was completely stopped, leading to halting of the production capacity. The company had to bear a loss of approximately Rs26,000 crore between 2011 and March 2016 due to non-supply of gas, it said.

“The loss caused to the company has a result of reduction in gas supply is one of the chief causes for reduction on production and resultant inability to make payment to the lenders,” the petition said.

The company also stated, at length, the improvement in its operation, a fact, which the RBI failed to take into consideration, according to Essar Steel.

It said that operational performance of Essar Steel improved with production levels zooming from 3.8 million tonnes in fiscal year 2016 to 5.7 million tonnes in FY17.

It also said that the annual turnover in the last two years was an average of Rs12,000 crore per year and is estimated to be Rs21,700 crore in the current fiscal.

Essar Steel argued that it repaid Rs3,467 crore from its day-to-day cash flows during the period from April 2016 to June 2017.

In December 2016, the lenders, with SBI as the consortium leader, discussed a restructuring proposal submitted by Essar Steel.

After a series of meetings, the company’s board in May 2017 approved a revival package for submission to the banks. Nominee directors, representing SBI and IDBI, were part of the board meeting which approved the loan restructuring package.

Essar Steel said that it has been co-operating with lenders to restructure debt.

“None of the meetings with the bankers ever disclosed any decision or proposal by the bankers to ignore the restructuring proposal and initiate proceedings before the NCLT under the Bankruptcy Code.”

The outcome of the case will provide key inputs in other cases where banks have dragged companies to the tribunal, according to lawyers and bankers.

In a 13 June circular, the RBI said that its internal advisory panel had identified 12 cases, including Essar Steel, which can be tried at NCLT. Combined debt of these dozen borrowers stands at around Rs2.5 trillion.

The steel maker had challenged the decision of the central bank on the grounds that the selection was arbitrary. It had also questioned the criteria used for selection.

According to the 13 June statement, the central bank’s criterion in picking 12 entities for bankruptcy proceedings was that the total exposure of banks to a company should be at least Rs5,000 crore and 60% of this should have turned non-performing by March 2016.

Depending on the outcome of the case, it may prompt other borrowers to follow suit because the points argued by Essar Steel have some similarity with those of others.

In most of these 12 cases, especially those from the steel sector, there has been some impact on their performance due to external factors, including change in the policy environment and court judgments. Some of these cases have also been part of various resolution schemes of the central bank.

For instance, in case of Monnet Ispat & Energy, one of the 12, rival JSW Steel had in February 2017 submitted a bid to take over 51% stake which was owned by the lenders following debt conversion under the RBI’s strategic debt restructuring scheme. However, there has been no development since then.

On Wednesday, the Mumbai bench of NCLT is also scheduled to hear SBI’s plea against Monnet Ispat. Separately, the Ahmedabad bench of the tribunal will hear SBI’s petition against Alok Industries, among the 12 shortlisted identified cases, for admission under insolvency code.

So far, the tribunal has approved proceedings against power infrastructure company Jyoti Structures Ltd.

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