Essar Steel Ltd’s promoters are negotiating a restructuring deal with their lenders to ensure the control of the firm does not leave their hands, three people with direct knowledge of the matter said.
In closed-door meetings, the Ruia family has informed bankers to Essar Steel that while they are open to restructuring the company’s Rs40,000-crore debt and bringing in equity from external investors, they weren’t going to give up control, the people cited earlier said.
“The promoters said they had already sold most of their stake in the group’s oil company. They weren’t going to now give up their hold on the steel company as well. However, they have agreed to cooperate with banks in a mutually approved restructuring plan," said the first of the three people cited earlier, seeking anonymity as the discussions are confidential.
According to the restructuring plan that is in the final stages of talks, the promoters have brought in some capital through a financial investor. They will also be converting some part of debt into a 30-32% stake in Essar Steel which the bankers will own, the person said.
Farallon Capital Management LLC will bring in Rs1,700 crore in exchange for a 24% stake in the company, but will not involve itself in daily functions of the company, said the second person. On 26 October, The Economic Times had first reported that Farallon Capital might be looking at investing in Essar Steel.
Essar Steel is fully owned by its promoters. Most lenders in the consortium to the firm have classified the account as a non-performing asset (NPA).
“We have submitted a proposal to the lenders, which is under discussion. Hence, it is inappropriate for us to comment on ongoing discussions with the lenders till it is finalized," an Essar Steel spokesperson said in an email response.
Farallon Capital did not respond to an email query sent on Thursday.
“Prospects at Essar Steel are looking up. We are functioning at about 70% capacity. The project is already completed. We will reach close to full capacity in two quarters," said Prashant Ruia, director, Essar Group in a 17 October interview with Mint. “Whatever were the problems of the past, (they) have now been overcome. Essar Steel will soon become the crown jewel of the group, just like Essar Oil was."
The solution arrived at in the Essar Steel case is important for the stressed asset situation in India where banks have been struggling to manage the risk on their books for the last few years.
The approach of Essar Steel’s banking consortium has changed considerably in the matter since talks of finding new investors started in November 2015. The consortium appointed ICICI Securities and SBI Capital Markets to find a buyer for the company, so that they could replace the current management. However, this process did not yield any tangible results.
Later, lenders tried to use the scheme for sustainable structuring of stressed assets (S4A) issued by the Reserve Bank of India (RBI) in the case, so they may convert unsustainable debt into long-term equity-like instruments while the company served the sustainable part of the debt. However, the strict conditions under S4A did not allow Essar Steel to qualify.
In September, Mint reported banks were left with only two options to deal with Essar Steel, either sell the account to asset reconstruction companies (ARCs) or to acquire a 30% stake that the promoters were offering while allowing them to run the company.
“If you want a new buyer to come in and run the company, you have to offer them the right price by right sizing the debt. For that to happen, bankers have to either receive higher recapitalization or a longer amortization period. In the absence of these things, banks are doing the best they can to deal with stress," said Nirmal Gangwal, managing director, Brescon Corporate Advisors Ltd, a corporate restructuring advisory firm.