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India’s bankruptcy regime requires pragmatic touch

Updated March 07, 2018


MUMBAI: India’s pursuit of perfection could backfire. Bids for the bankrupt Essar Steel could fetch around $6 billion, plus billions of dollars more in capital expenditure, with interest from separate groups led by ArcelorMittal and Russian bank VTB.

Both sit awkwardly with tough new rules barring large shareholders in defaulting entities from buying stressed assets. It is better to get good proceeds for creditors than to be a purist and fail, however.

Essar Steel is the last major holding of the troubled Ruia brothers. The company, with prized assets including a state-of-the-art plant in Gujarat, is one of a dirty dozen forced into a new insolvency regime by the central bank, which is trying to clean up bad debt. Creditors face a haircut of around 40 to 50 per cent on outstanding claims worth $12bn.

One potential hurdle is eligibility. ArcelorMittal, the world’s largest steelmaker, has teamed up with Japan’s Nippon Steel. The European company was a minority shareholder in a smaller Indian group called Uttam Galva that defaulted.

Chairman Lakshmi Mittal also invested in a Kazakh business which ended up with a failing Indian unit. Although both shareholdings were sold before the bid for Essar Steel, they could still cause a problem.

VTBs bid more clearly breaks the spirit of the rules, which are intended to curb unruly tycoons. The Numetal consortium includes Rewant Ruia, son of Ravi Ruia, vice-chairman of the Essar Group. VTB is seen as a proxy for the Ruias, having financed part of Essar Oil’s $13bn sale to Russia’s Rosneft. Even if VTB drops Ruia, Western sanctions on the state lender could complicate future investment in this strategic asset — hardly ideal from a political point of view.

Neither bid is perfect. Blocking either could reduce the recovery for creditors and for New Delhi, given its majority ownership of lending banks. A veto could also unleash a wave of lawsuits, delaying the overall resolution. If India shuts the door on a credible industry buyer like ArcelorMittal, it would send a particularly bad message to foreign investors keen to buy Indian distressed debt. As well as being tough, India’s bankruptcy regime needs to be pragmatic.

ArcelorMittal, the world’s largest steelmaker, on March 2 said it would form a joint venture with Japan’s Nippon Steel & Sumitomo Metal Corp to bid for bankrupt steelmaker Essar Steel India.

The company said it submitted a plan on Feb 12 to India’s National Company Law Tribu­nal, which deals with insolvency and company disputes, to bid for Essar Steel in partnership with Nippon Steel.

Essar Steel was one of a dozen of India’s biggest debt defaulters that were pushed to bankruptcy court last year by an order from the central bank.

Kosei Shindo, president of Nippon Steel, told reporters in Tokyo that ArcelorMittal will take a majority stake in Essar Steel, but should not be much higher than Nippon Steel’s interest, declining to give further details.

A separate bid was submitted by Numetal, a consortium led by Russia’s VTB. One minority shareholder is Rewant Ruia, the son of Essar Group Vice Chairman Ravi Ruia. In an interview with Mint newspaper, VTB said other shareholders were prepared to buy out Ruia if needed.

India’s insolvency code bars owners and associates of defaulting firms from bidding for stressed assets.

Published in Dawn, March 7th, 2018