Banks, Essar haggle over debt rejig

Essar Steel's bankers, led by the State Bank of India, want the company to convert half of their outstanding loans into equity before agreeing to draw up a recast plan for their Rs 36,000-crore debt.

By Jayanta Roy Chowdhury
  • Published 7.09.16
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New Delhi, Sept. 6: Essar Steel's bankers, led by the State Bank of India, want the company to convert half of their outstanding loans into equity before agreeing to draw up a recast plan for their Rs 36,000-crore debt.

Essar Steel has offered to convert some 25 per cent of their loan amount into quasi-equity in the form of long-term preference shares, which will fetch bankers less than 1 per cent interest per annum till redeemed at the end of two decades.

Sources said Essar officials had indicated a willingness to give bankers about 30 per cent of the authorised share capital of Rs 3,200 crore through debt conversion. However, bankers are not impressed by the offer and want to convert up to half of the debt into share capital, which would give them a controlling stake in the company.

A decision on the crucial issue, which has been dogging one of the largest Indian corporate houses, is expected to be taken soon.

"We are facing pressure from both the RBI and the finance ministry to reduce bad assets but we have already given Essar enough leeway, several restructuring options ... any more concessions could well be mis-construed by regulatory and vigilance authorities. We need to secure our loans," said officials.

Essar Steel promoters consider their offer as the most they can do, given the fact that an earlier attempt to repay debts through a strategic share sale had failed. Essar had then appointed ICICI Securities and SBI Caps to find buyers for a part of the equity it was holding.

While promoters Ruias may not agree to convert half of the debt into share capital - something which is provided for under the debt recast rules laid down by the RBI, the bankers are hoping the Ruias would come up with a better offer.

Converting debt into preferential shares on which hardly any interest will be paid would be quite a sacrifice for the bankers.

Banks have already agreed that loans worth Rs 14,500 crore would be restructured under what is called the 5: 25 scheme. Under the scheme, on a loan of Rs 14,500 crore, the company would need to pay just 1 per cent of the principal amount between 2016 and 2020; 2 per cent in 2021 and 2022 and so on - in effect, turning the debt into a longer term loan.

Some bankers who had offered loans to Essar, including ICICI and HDFC, have already sold their debt to others at a discount. However, state-run lenders such as the SBI are yet to make such a move.

Recurring problems

Steel sector loans were recast twice earlier. One in 1997 and once more in 2003. In 2003, the Indian steel sector was laden with Rs 40,000 crore of loans, led by Essar, Jindal Vijaynagar and Ispat. Essar was given some Rs 5,500 crore in debt.

Critics point out that this recurring exercise has left banks poorer, but does not seem to have hit the promoters of the groups much.