Essar Steel bidders caught in eligibility rule web
Calcutta: Strategies deployed by ArcelorMittal and Nu Metal & Steel to extricate themselves from the legalese of the dreaded Section 29A of the Insolvency & Bankruptcy Code, 2016, will determine the future of Essar Steel's corporate resolution process that has rolled into a decisive phase.
As consultancy Grant Thornton and solicitor firm Cyril Amarchand Mangaldas scrutinise the eligibility of the bids before they are opened by the committee of creditors, arguments are being made from both sides of the aisle to establish the legal validity of one's bid while trashing the other.
The dreaded section
Section 29A (c) reads as follows: "A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor."
However, there is an escape route: "Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan," the section adds.
Spin against ArcelorMittal
It is being argued that the bid of the world's largest steelmaker may run into rough weather as it was the promoter of bankrupt Uttam Galva Steel Ltd when it submitted an expression of interest for Essar Steel.
Moreover, Lakshmi Niwas Mittal, who is the chairman and CEO of ArcelorMittal and also its largest shareholder, had a personal stake in KSS, whose Indian subsidiary is KSS Petron Pvt Ltd, a bankrupt company engaged in the oil and gas sector.
In order to adequately steer clear of Section 29A, Arcelor Mittal sold shares in Uttam Galva and KSS Petron days before the submission of the financial bid for Essar Steel and hoped by doing so the ineligibility criteria in the code would not apply to them.
However, ArcelorMittal was the promoter of Uttam Galva when the company became NPA and continued as the promoter of the company for the 12-month period. It did not pay the overdue amount in either case.
Moreover, it is being argued that reclassification from being a promoter to a non-promoter could take place only if Uttam Galva shareholders approve it through a general meeting. So far it has not taken place.
However, it has been pointed out that L.N. Mittal has never been classified as promoter of ArcelorMittal in the stock exchanges (London, Luxembourg etc) where it has been listed. But whether it will help him in Indian circumstances remains to be seen.
ArcelorMittal, which prides itself in being involved in 50 mergers and acquisitions in the last 25 years and turning around several under-performing assets across continents, junked the argument.
"As we have previously said, we do not believe there is any legal basis under which ArcelorMittal will not be considered eligible to participate in the resolution process. ArcelorMittal was never the promoter of Uttam Galva. We had no board representation and no involvement in the management of the company even before selling our shareholding. ArcelorMittal is an internationally renowned, financially strong credit-worthy investor with an AA rating. We have invested successfully in many countries and developed a reputation for our ability to turn around distressed or under-performing assets. Section 29A was not designed to prevent reputed, financially strong businesses, with no prior involvement with the asset in question from participating," an ArcelorMittal spokesperson said.
Nu Metal headache
The presence of Rewant Ruia, son of Ravi Ruia - who is founder of Essar Steel along with his brother Shashi - in the consortium with VTB Capital, could muddle the water for Nu Metal.
If Rewant Ruia is held part of Essar's promoter group, Nu Metal had to pay the overdue amount to become eligible for the Essar bid. It did not.
To extricate itself from the pickle, Rewant Ruia was made a beneficiary of an offshore trust based in Mauritius, with no links to the management of any Ruia companies.
The trust is said to be not a promoter group of any Ruia company either. Moreover, it is being pointed that the trust will hold minority stake (25 per cent) with no board representation or management control.
Nu Metal's logic
"Nu Metal is a fully eligible resolution applicant and has already submitted its plan for Essar Steel. Rewant Ruia holds an indirect minority interest in Nu Metal, but is neither its promoter, nor is he in management or control of Numetal. He will also not have any role in the management of Essar Steel. Accordingly his indirect minority interest is of no relevance as regards eligibility of Nu Metal," a spokesperson for the company said.
Legal battle ahoy
The Essar matter is likely to head to the court as the bidders are likely to challenge the eligibility of each another. The downside risk to it is the asset could head for liquidation if the corporate resolution process was not completed within the strict 270-day deadline mandated in IBC.
Given the tardy legal process in India, only a further amendment to relax the 270-day deadline could save Essar - which owes over Rs 75,000 crore to lenders and operational creditors - and its huge plant with annual capacity of 9.5 million tonnes from going bust.