Explained: How Uttam Galva Steels lost its sheen amid mounting debts

The promoter group's deal-making capabilities have come back to haunt it

The Mumbai-based Miglanis were known for eye-catching deals. In 2009, a stake in their flagship Uttam Galva Steels Ltd (UGSL) paved the way for the world’s largest steelmaker, ArcelorMittal, to gain a foothold in India after aborted attempts at setting up greenfield plants. In 2015, when South Korea’s Posco failed to make any headway with its mega steel plant in Odisha, it signed a memorandum of association (MoA) with group company Shree Uttam Steel and Power, for setting up a much smaller plant of three million tonnes. But five years on, the outcomes of the deals remain unrealised for different reasons, while three companies controlled by the Miglani family have landed in bankruptcy court.

On October 1, the Mumbai Bench of the National Company Law Tribunal (NCLT) admitted a petition filed by the State Bank of India (SBI) for initiating insolvency proceedings against Uttam Galva Steels (UGSL). A year prior, NCLT admitted two other group companies — Uttam Value Steels (UVSL) and Uttam Galva Metallics (UGML).

UGSL’s debts stand at Rs 7,469 crore and the combined admitted claim of financial creditors of the interlinked companies — including UVSL and UGML — is Rs 7,190 crore.

A cold rolled steel manufacturer with a capacity of one million tonne, UGSL procures hot rolled steel and processes it into cold rolled and further into galvanised and colour-coated coils. It was one of the country’s largest cold rolling units and exporters till primary steel producers built downstream capacities. 

UVSL and UGML are interlinked as the latter’s pig iron facility is a key raw material supplier to UVSL’s steel plant. In April, the resolution plans for UVSL and UGML submitted by a consortium including CarVal Investors LLP and Nithia Capital Resources Advisors were approved by the NCLT.

As for UGSL, according to sources in the know, ArcelorMittal is expected to submit a bid; the NCLT route would give it a clean asset with no hidden liabilities. ArcelorMittal declined to comment. But if that happens, the wheel would have turned a full circle.

Rewind to 2009. Inordinate delays had derailed ArcelorMittal’s plans of setting up 12 million tonne greenfield plants in Jharkhand (the agreement for which was signed in 2005) and Odisha (2006). But it did gain a toehold in the country with a 32 per cent stake buy in UGSL years later.

The story goes that it took all of five minutes to seal the deal. It was group chairman Rajinder Miglani’s long association with M L Mittal, father of Lakshmi Mittal, chairman and chief executive officer, ArcelorMittal, that swung the deal.

For the Miglanis, it was the best of times. After all, they facilitated the entry of the world’s largest steelmaker.

“For ArcelorMittal, it served as one of the first entry points into India. It helped the company understand the market and Uttam was present in high quality segments,” said an official familiar with the development.  

An exclusive marketing and sales arrangement with ArcelorMittal International for Africa, West Asia, Latin America, Russia and other CIS countries reaped benefits for UGSL. They had some key customers in the automotive and appliance segments and it was all good. 

Then in 2012, the Miglanis acquired a controlling stake in Lloyds Steel Industries, later renamed Uttam Value Steels. “They had just bitten off more than they could chew,” said an official of a company with a working relationship with UGSL.

Though the acquisition cost wasn’t high, the promoters had invested about Rs 2,000 crore in upgrading and modernising the plant. 

In 2015-16, UGSL reported its first losses (see chart) and the net losses of the acquired company Uttam Value Steel widened to Rs 521.74 crore from Rs 33.77 crore in the previous year. With its net worth wiped out, it was referred to the Board for Industrial and Financial Reconstruction.

As the companies slipped on performance, banks started tightening funding, with the effect that projects suffered. “It is one of the reasons the Posco project never took off. They delayed paying for construction of the project,” an official said.

Part of the problem was the sharp rise in raw material costs in 2015, a factor exacerbated by cheap Chinese imports on hot rolled coils that attracted safeguard duties. Consequently, UGSL started delaying payments to lenders. By March 31, 2016, the UGSL account was classified as a non-performing asset (NPA) by Canara Bank and Punjab National Bank. 

Under a Reserve Bank of India (RBI) circular issued in June 2017, banks were directed to resolve debt with Rs 5,000 crore threshold by December 13, 2017. Accordingly, proposals were submitted by the companies (UVSL and UGML turned NPAs by 2017) before the joint lenders’ forum, but failed to pass muster. 

For ArcelorMittal, UGSL being classified as an NPA, turned out to be a hurdle when it bid for the assets of Essar Steel. An amendment to the insolvency law prevented a promoter of a defaulting company from bidding for assets under the Insolvency and Bankruptcy Code.

So ArcelorMittal sold its UGSL shares to promoters at Rs 1 a share to become eligible (the shares were bought at Rs 120 a share) for Essar Steel, which was being auctioned under the insolvency law. However, the Supreme Court ruled that this deal did not make it eligible for Essar Steel but allowed it to pay off UGSL’s NPAs. 

Accordingly Arcelor paid Rs 6,100 crore of UGSL’s dues in 2018. As a consequence, the global steelmaker became the Mumbai-headquartered company’s most significant creditor. 

Meanwhile, UGSL defaulted on its remaining debts and the State Bank of India moved a petition in March under the IBC, the second time it was doing so (In 2018, it had withdrawn its petition after ArcelorMittal paid UGSL’s dues.)

Having lost control of key companies, what the Miglanis will now do is not clear, but sources indicated the focus was to ensure a smooth handover to the winning bidder.