Essar Steel knew of insolvency move: RBI to Gujarat High Court

Central bank counters steel company's claim of restructuring in Gujarat High Court

The Reserve Bank of India (RBI) on Wednesday told the Gujarat High Court that Essar Steel’s claim of nearly completing its restructuring and being unaware of insolvency proceedings was false.

Darius Khambata, RBI’s counsel, said the minutes of the meeting between Essar Steel and its lenders revealed that the company was “far from reaching any restructuring settlement”, and Essar Steel was also aware of insolvency proceedings initiated against it at the National Company Law Tribunal (NCLT). 

Essar Steel moved the Gujarat High Court on July 4 to quash insolvency proceedings against it, initiated by a consortium of 22 lenders led by the State Bank of India, and the Standard Chartered Bank. The court adjourned the matter till Thursday. 

On Wednesday, the RBI countered the company’s claim that it was being singled out — Khambata said the proceedings would actually help the company. 

Essar Steel had debt of Rs 45,655 crore, of which Rs 31,671 crore had turned non-performing assets (NPAs) for banks by March 31, 2016. This increased to Rs 32,864 crore by March 31 this year. Khambata said the objective of proceedings at the NCLT was to recover “maximum value in a minimum time-bound manner”. 

“The IBC (The Insolvency and Bankruptcy Code) is not for winding up a company but to resolve and restructure… to avoid winding up,” Khambata said. 

He also said the list of 12 large NPAs against which the RBI had advised banks to initiate insolvency proceedings had been drawn up to prevent the loss of public money. “The NCLT follows a time-bound, structured process, under statutory provisions. Its purpose is to maximise the value of assets and put it back into the system.”

Explaining the process to be followed, the RBI said insolvency professionals would act in the interest of the company concerned.

Once banks approach the NCLT to initiate insolvency proceedings, it appoints a professional to manage the company, and suspends the board. The professional gets 180 days — this can be extended by 90 days — to find a workable solution for repaying the company’s loans. If the company cannot find a solution, a liquidator will be appointed.

The RBI also told the court that it was banks’ decision whether they would go after the 12 accounts it had identified, or if they would also try to resolve other accounts as well.

The central bank would issue a corrigendum to its June 13 press release that had asked the NCLT to accord priority to these 12 accounts. Countering Essar Steel’s claim that the threshold of Rs 5,000-crore debt that the RBI had chosen for selecting the 12 accounts was arbitrary, the central bank’s counsel said a scientific process had been followed. 

These accounts together are 25 per cent of the total NPA of the banks. The court had in July 4 sought clarification from the RBI on the matter.

The central bank said it had drawn up a list of 500 large accounts, after studying monthly returns by the borrowers in the Central Repository of Large Credits (CRLC). Sixty per cent of these were declared as NPAs in March 2016. Of these, the RBI had chosen the top 12, which had an outstanding debt of Rs 5,000 crore or more. Its counsel told the court that SBI had declared Essar Steel an NPA as far back as February last year.

In its arguments before Justice S G Shah, Essar Steel’s counsel had said the RBI should have considered the company’s past record apart from the operating profits as well as opinions of various banks and financial institutions about the viability of the company before advising banks to initiate insolvency proceedings.