Top court okays Essar resolution plan approved by committee of creditors
Mittal’s bid has been beset by legal cases but he can now enter India as the steelmaker to reckon with
MUMBAI/NEW DELHI :
For steel magnate L.N. Mittal, it would have been an arduous 650 days. Now, the finish line is in sight. Since first showing interest in the bankrupt Essar Steel asset back in February 2018, Mittal’s bid has been beset by legal cases, but he can now enter India as the steelmaker to reckon with.
On Friday, the Supreme Court upheld ArcelorMittal, Nippon Steel and Sumitomo Corp.’s resolution plan for Essar Steel, as approved by the stressed steel mill’s committee of creditors. The world’s largest steelmaker, ArcelorMittal, and its partner Nippon Steel have offered ₹42,000 crore in upfront cash to creditors to settle outstanding debt on the mill’s books of ₹54,550 crore.
The pair will also invest ₹8,000 crore as equity into the asset over the next few years, to make it India’s fourth largest steelmaker by capacity.
With this, the resolution of the biggest among the original “dirty dozen" bad loans referred to the Insolvency and Bankruptcy Code (IBC) for resolution comes to a close.
ArcelorMittal makes its entry into India at a time when the domestic steel industry is struggling to prop up sales and leading private sector steelmakers are reporting 25-50% fall in quarterly operating profit.
With global steel consumption flailing, too, ArcelorMittal reported a net loss of $539 million for the July-September quarter, hit by lower sales and sticky prices. A foothold in India may prove to be the charm it needs to turn around its fortunes.
Under the approved resolution plan, operational creditors to the stressed steel mill will receive ₹1,200 crore against admitted claims of ₹4,976 crore. Standard Chartered Bank, which holds a corporate guarantee by Essar Steel for ₹3,487 crore to Essar Steel Offshore, will only receive ₹60.71 crore. The rest of the ₹42,000 crore will go to secured lenders led by State Bank of India.
“I think the settlement from ArcelorMittal will come within 7-10 days and we can see change of control happening at the same time," R.K. Bansal, managing director and chief executive officer, Edelweiss Asset Reconstruction Co., said in an interview. Edelweiss, which had acquired the distressed debt from some of the mill’s bankers, holds about ₹8,000 crore exposure to the plant, against which it expects to receive ₹7,500 crore.
“The Supreme Court decision has been very positive for us, and it clarifies the position of secured lender vis-a-vis the unsecured lender, and of the financial creditor vis a vis operational creditors," Bansal said.
“When we acquire distressed debt, we need to know how much we can recover through the legal process. If that clarity is lost, then it’s not possible to make investments. We still have about ₹12-13 lakh crore of distressed debt in India that needs to be resolved. You would have noticed that after the NCLAT judgment (which put financial and operational creditors of Essar Steel on an equal footing), deals in distressed debt stopped altogether. Banks have been trying to sell their debt, but there are no buyers in the market."
The apex court ruled that operational creditors could not be treated on a par with financial creditors of a bankrupt company.
“From a lender’s perspective also, this is good," Bansal responded. “The credit markets would have crashed if the NCLAT decision had been upheld. In that case, financial creditors may as well be just operational creditors. Under the IBC, it is the CoC’s mandate to take commercial decisions, not the court’s."
The SC bench headed by Justice R.F. Nariman, and comprising Justices Surya Kant and V. Ramasubramanian, clarified that “the Corporate Insolvency Resolution Process of the corporate debtor will take place in accordance with the resolution plan of ArcelorMittal dated 23.10.2018, as amended and accepted by the Committee of Creditors on 27.03.2019, as it has provided for amounts to be paid to different classes of creditors."
While emphasizing the important role of financial creditors, the court observed that the adjudicating authority and tribunal should not interfere in the commercial decisions taken by the CoC in insolvency proceedings.
They could, however, ask the CoC for reconsideration, if the need arises. Justice Nariman said: “If the NCLT finds that legal parameters are not met, it can send it back to the CoC, but it cannot tinker with the resolution plan."
The three-judge bench left it open for the NCLT to decide on the extension of the timeline on resolution if required, stating that a 330-day period suggested by the Union cabinet was not mandatory.
A spokesperson for ArcelorMittal said: “We are very pleased with the judgment that our resolution plan has been approved. We look forward to the closing of the acquisition soon."
An Essar spokesperson said: “We wish Arcelor Mittal and Nippon Steel the very best on their entry into the Indian market. They are acquiring a world-class facility in a market that has a long runway for growth."
Mint reported in April that ArcelorMittal had started the process of putting together a team and finalizing office space to set up its India operations. The Essar Steel plant had 3,806 employees as of March 2018, as per its latest annual report, and ArcelorMittal is expected to keep the current team in place. The plant has continued to run through its long drawn out resolution process, reporting operating profit of ₹1,120 crore in the June 2019 quarter.
“The apex court has correctly recognised the difference between secured and unsecured creditors, which is essential for the banking industry, where majority lending is done on the basis of collateral. The apex court has also given due recognition to the commercial wisdom of the lenders and has made COC the king," said Sapan Gupta, partner and national head, banking and finance, Shardul Amarchand Mangaldas.