Insolvency: Lenders take Bhushan, Essar and Electrosteel to NCLT

Three steelmakers have combined debt of nearly Rs 1 lakh cr

A  forum of lenders, led by the State Bank of India (SBI), on Thursday sent three large non-performing accounts — Bhushan Steel, Essar Steel and Electrosteel Steels — to the National Company Law Tribunal (NCLT) for further action under the Insolvency and Bankruptcy Code (IBC). 

The three companies have almost Rs 1 lakh crore of debt that has turned bad. 

While unlisted Essar Steel had consolidated debt of Rs 37,284 crore, Bhushan Steel’s debt stood at Rs 44,478 crore at the end of 2015-16. The latest financial numbers of both companies are not available as yet, but bankers said the debt would have gone up in the last one year. Kolkata-based Electrosteel Steels had a debt of Rs 10,274 crore at the end of March 2016.

The Reserve Bank of India (RBI) made the shortlist of cases based on  the 2015-16 debt position. A senior public sector bank executive said lenders would now have to protect the value of assets and minimise haircuts on these loans. Large haircuts would eat into already scarce capital, especially of the public sector banks. 

Though the fortunes of the steel sector have improved because of a rise in steel prices in the last one year and imposition of the import duty on cheap Chinese imports, this was not enough to take these companies out of the woods. 

“Some steel companies did manage to pay the interest component, but this is not enough to pay the principal part of the loan. For that steel prices would need to go higher,” said a banker who did not wish to be named. 

He added the prospects would improve only on a pick-up in demand, predominantly from construction and infrastructure sectors. Steel players continue to be under pressure, given the glut in the market. SBI Capital Markets, a subsidiary of the SBI, is already working on restructuring plans for some ailing big-ticket steel companies, an SBI official said. These plans could be taken up as a pre-approved package before the NCLT. 

While the tribunal would comb through the plan, it would certainly reduce the time taken for finalising the resolution package, the executive added.

While firms had given debt-recast proposals to the banks in the past, lenders were not taking a call as they feared persecution by investigating agencies at a later date. 

The arrest of former IDBI Bank Chairman Yogesh Agarwal in January this year for clearing a loan in 2010 to Kingfisher Airlines had spooked bankers.

According to the Essar proposal, the company would bring in investments of Rs 2,500 crore as fresh equity, with promoters’ contribution of Rs 800 crore and Rs 1,700 crore from a private equity partner. The banks would then convert a part of their loans into equity, thus reducing the promoter’s stake from 100 per cent to 44 per cent. 

Bhushan Steel & Essar Steel consolidated data and Electrosteel Steels standalone data; Compiled by BS Research Bureau. Source: Capitaline

There were two proposals for Bhushan Steel with lenders. It had submitted a proposal for loan recast under the Scheme for Sustainable Structuring of Stressed Assets (S4A). The proposal had said that nearly 52 per cent of its debt was sustainable. 

In January, JSW Steel had also approached banks with a proposal to take over Rs 25,000 crore of Bhushan’s debt along with its assets. 

On the other hand, Electrosteel Steels plan was to bring in fresh equity into the company from Abhishek Dalmia of the Renaissance group and infusion of another Rs 1,500 crore as loan from Edelweiss. 

All these proposals would be discussed at the NCLT, along with other rival proposals, if any, said lawyers.

On June 13, the RBI had evaluated top 500 non-performing accounts (NPA) in the banking system and, as its first action on resolution of these accounts it had set a criteria of Rs 5,000 crore of exposure and 60 per cent of this exposure as NPA at the end of FY16 for cases to be referred under the IBC. 

Of these, the RBI had identified 12 cases, including these three steel companies, constituting 25 per cent of the gross non-performing assets to be processed under the IBC immediately. With orders from the NCLT, the insolvency resolution process can be initiated against the three companies now. 

The process can go on initially for 180 days, and be extended by another 90 days. During this period, the lenders would analyse the company, hear rival proposals and make up its mind about the next course of action. If the account is not resolved during these 270 days, then the company will go for liquidation.

On Thursday, the Bhushan Steel stock fell by 10 per cent to Rs 69.15 on the BSE, while Electrosteel Steels stock traded flat at Rs 4.42.