Mumbai: Creditors of Bhushan Steel Ltd have decided to restructure the Rs45,000 crore loans of the company under the Reserve Bank of India’s (RBI’s) latest norms, two bankers with direct knowledge of the development said.
State Bank of India (SBI) and Punjab National Bank (PNB) lead the lenders who will implement the scheme for sustainable structuring of stressed assets (S4A) at the steel firm, which owes nearly Rs45,000 crore.
If the restructuring goes through, Bhushan will become the largest debtor to have undergone restructuring under any route offered by RBI.
“Presently, Deloitte has been asked to conduct a forensic audit of Bhushan Steel as it has to be established that there has been no diversion of funds in the company. After this, a viability study will be conducted before the final plan is implemented,” one of the two bankers cited above said on condition of anonymity.
Deloitte said the consulting firm does not comment on company-specific issues. Nitin Johari, director of finance, Bhushan Steel, said the company was unaware of any such decision by lenders.
Under S4A, banks are allowed to split the loan into sustainable and unsustainable parts. The unsustainable part is then converted to long-dated securities, which can be redeemed later.
According to RBI norms, banks are required to establish through a forensic audit that there has been no malfeasance on the part of the promoter. If the audit finds anything adverse, S4A cannot be implemented unless there is a change in ownership or management is not vested with the delinquent promoters.
According to the second banker, Bhushan Steel’s promoters had asked for an S4A plan to be implemented at the company, saying a long-term plan is needed to fix balance sheet issues and remove much of the unsustainable debt. “Once the company’s viability study establishes its current cash flows are enough to service the sustainable part of the debt, the proposal will be sent to the overseeing committee and then the implementation will happen,” the second banker said.
On 4 July, The Financial Express had first reported that lenders were considering invoking S4A in the case of Bhushan Steel.
“While academically speaking, reducing unsustainable debt from the book of the company is a possible solution, banks must remember that this also dilutes the promoter’s equity in the company. There needs to be some incentive for the promoter to turn the company around; otherwise lenders will be left holding the risk in the company for a long time,” said Nirmal Gangwal, managing director, Brescon Corporate Advisors, a corporate restructuring and turnaround firm.
Under S4A norms, in companies where promoters are unchanged, they have to dilute their shareholding in exchange for converting a part of the unsustainable debt into equity. These promoters’ shares would be given to bankers, who will continue to hold it till the company turns around, after which lenders can sell this equity.
Promoters will continue to have the first right of refusal on these shares.
The lenders are also looking at the option of carving out some parts of Bhushan Steel’s business and sell it so that some part of the debt can be right-sized, Mint reported on 9 September.
In January-March, lenders to Bhushan Steel had started classifying the account as a non-performing asset under RBI’s asset quality review. This was done after efforts at resolution such as joint lender forum (JLF) discussions and a 5/25 refinancing plan failed. The JLF was set up after the Central Bureau of Investigation arrested Neeraj Singhal, vice-chairman, Bhushan Steel, in a cash-for-loans case in 2014. The 5/25 scheme allows repayment of loans for infrastructure projects to be stretched out over a longer tenure.