Pragmatic call

| Updated on November 04, 2018 Published on November 04, 2018

Essar Steel’s case is a good illustration of the impact the IBC is having on promoter behaviour

A bird in hand is worth two in the bush. This is perhaps why Essar Steel’s committee of creditors took the pragmatic decision last week, to go with ArcelorMittal’s winning bid to acquire the ailing steel-maker. Not entertaining the last-minute offer by the promoters to repay ₹54,389 crore to settle in full, has meant foregoing a shot at higher realisations. But while the Ruias’ offer, on paper, was superior to the ₹42,000-crore bid from ArcelorMittal, there were question marks over both its credibility and legal admissibility. Given the many missed deadlines on Essar Steel’s resolution process since it was admitted to the NCLT in June 2017, any rethink on the bidding process at this juncture would have set a bad precedent for other IBC cases.

There were three imponderables attached to the Ruias’ eleventh hour offer. One, Section 12A of the Bankruptcy Code, which allows a company to withdraw from bankruptcy proceedings subject to certain conditions, came into being only in June this year. As it took effect prospectively, and the NCLT proceedings in the Essar Steel case began in August 2017, it isn’t prima facie applicable to this case. Two, even if promoters were granted a special dispensation to invoke this amendment, Section 12A clearly specifies that the application for withdrawal must be made before the deadline for submission of bids by third parties. This deadline for Essar Steel expired in October 2017. ArcelorMittal has also jumped through several hoops to be declared the winning bidder. After being disqualified as the ‘promoter of a non-performing account’ in the initial round of bids, it coughed up over ₹7,000 crore to settle dues at Uttam Galva Steel to get back into the race. Finally, it is far from clear how the Ruias’ after defaulting on their original dues, would have bankrolled this offer. The lack of a bank guarantee also undermined its credibility. One therefore hopes that the creditors’ decision prevails should the Ruias or operational creditors appeal it in Court.

Overall, while Essar Steel’s creditors may secure a reasonably good deal after these tortuous proceedings under the IBC, they should brace for a far tougher resolution journey with ailing power or infrastructure assets. While the recent upturn in the steel cycle has made Indian steel assets under the IBC quite sought-after, power and infrastructure assets suffer from clear viability issues. But if there is one welcome conclusion from Essar Steel’s complicated resolution process, it is that India’s new Bankruptcy Code has had India Inc’s defaulting promoters running for cover and empowered its long-suffering lenders. In the past, big-name borrowers could skip loan repayments to banks with impunity, relying on the labyrinthine legal system to indefinitely delay punitive measures. But if the IBC succeeds in instilling in the promoters of India Inc a real fear of losing control over their assets and shapes better behaviour, that will still count as its biggest triumph.

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Published on November 04, 2018
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