Calcutta: JSW Steel is going to challenge ArcelorMittal's eligibility as a resolution applicant over the validity of the latter's share sale in bankrupt Uttam Galva Steel Ltd (UGSL), complicating the process to find a new owner for Essar Steel further.

Sajjan Jindal's company may move the National Company Law Tribunal challenging the validity of the sale, arguing that Lakshmi Niwas Mittal's company could not have possibly disposed of its 29.05 per cent share and, thereby, shed promoter status, without a consent from lenders.

JSW is pitted against ArcelorMittal and Vedanta Ltd after joining Numetal, Russia's VTB Bank PJSC-led consortium, to participate in the second round of bidding for Essar.

The fate of the first round of bid for the Hazira-based plant will be known this week when NCLT Ahmedabad passes its order.

The Jindals are likely to highlight the breach of a non-disposal agreement that ArcelorMittal Netherlands BV, acting as a sponsor, had signed along with the other promoters of Uttam Galva with the State Bank of India, which acted as the facility agent for a Rs 1,400-crore loan UGSL took in 2011.

According to the view taken by JSW of the agreement, ArcelorMittal Netherlands could not have sold its stake to the Miglani family, the other promoter of Uttam Galva, because of the event of default that took place in UGSL.

Mittal claim

"The NDU was a tool to ensure that a 51per cent block would be maintained between the Miglanis and ArcelorMittal. That was clearly maintained when we sold our shareholding to the Miglanis. The IBC was introduced to find capable owners for India's bankrupt companies. Sadly, an unhelpful side show has arisen where many of those participating are more eager to draw attention to frivolous details than to allow the discussion to focus on what matters most - which is the financial offers to creditors and the ability of the bidders to add value to the companies," an ArcelorMittal spokesperson said.

"ArcelorMittal in partnership with Nippon Steel is a very powerful combination that could bring considerable value and technological know how to essar steel. we believe we are eligible and we believe we have made a strong and competitive offer in the best interests of all stakeholders," the spokesperson added.

ArcelorMittal Netherlands sold its stake to Sainath Trading, a Miglani family entity, and due to the inter-se nature of the transfer, the combined promoter holding remained the same even after the transaction took place.

JSW logic

A JSW official pointed out the clause 2.1 (d) of the agreement to claim that ArcelorMittal's argument is not valid.

The clause reads: "Not withstanding anything to the contrary contained in this agreement and provided no event of default has occurred, each sponsor shall be permitted by the facility agent, to transfer the NDU shares, held by it, to the other sponsors subject always to the sponsors jointly and together (1) legally and beneficially continuing to hold equity shares which are equivalent to at least 51 per cent of the issued share capital of the borrower; and (2) continuing to retain the control over the borrower. Upon the occurrence of such transfer, schedule 1 shall be amended to reflect such transfer and, from the date of such transfer, the equity shares transferred to the relevant sponsor shall be treated as the NDU shares of such sponsor for the purposes of this agreement and the other financing documents."

"Inter-se transfer was permitted by the facility agent (SBI) as long as the promoters maintain 51 per cent. Such a scenario was possible only when there is no default. But an event of default has happened as UGSL could not pay back the loan and it is now at NCLT for insolvency process. As a result, even the inter-se transfer was not permissible under the non-disposal agreement," a JSW official explained.

ArcelorMittal Netherlands sold its stake in UGSL on February 7 and asked the bourses to declassify it as a promoter on February 8 and submitted a resolution plan for Essar on February 12. However, since the declassification came on March 21, first bid of ArcelorMittal India Pvt Ltd's (AMIPL) was disqualified. By the time of second bid on April 2, AMIPL was declassified and hence it need not pay the dues.

According to section 29A of IBC, a promoter or connected person of the promoter of a company whose account is classified as non-performing asset for more than a year before the submission of resolution plan will not be allowed to bid for a stressed asset.Accordingly, AMIPL can qualify if it is declassified as promoter or it pays the overdue amount in UGSL. However, the payment of the overdue amount can take place only before the submission of bid, which is not possible with respect to Essar unless another round of bidding takes place.

Industry sources point out that Jindal's move indicates that ArcelorMittal's latest effort to enter the Indian steel market will not be easy despite its superior technological prowess or financial might.

L. N. Mittal has to overcome the legal challenges of the entrenched players before he can meaningfully set up presence in the country where he was born and grew up.