The Essar Steel case is taking an interesting turn. The promoters have come up with the highest bid for the assets of Essar Steel after the Arcelor bid was accepted and finalized by the NCLT. The bankers will obviously be interested in a higher bid as is evident from the keenness shown by SBI. What is the road ahead for Essar Steel?
Ruias want to better Arcelor
Based on the NCLT bids, Arcelor Mittal emerged as the highest bidder for Essar Steel at Rs.42,000 crore Against a total outstanding loan of Rs.53,000 crore, that still leaves some room for a hair cut on the total price. However, the twist came when the Ruias, promoters of Essar Steel, agreed to bid for the assets at a price of Rs.53,000 crore. The Ruias contended that with their bid, they would be able to fully pay the financial creditors like the banks and also the operational creditors. Speaking at the World Economic Forum in Davos, Aditya Mittal of the Arcelor Mittal group called it delaying tactics by the Ruias. His question was that if the promoters really had the capability to pay the full sum then why Essar Steel should have gone into bankruptcy in the first place. The final decision has to be taken by 31st of January and it will not only be interesting but also set a precedent for any such cases in future. To understand this case, we also need to understand the SC decision today quashing a petition to change the Bankruptcy Code.
Background to the SC verdict
As per the original regulations of NCLT, promoters and promoter groups are barred from bidding for the assets under NCLT. That is why Essar Steel had opted to go out of the NCLT and work out the deal privately. There was a petition filed in the Supreme Court raising questions over the fairness and equity of not permitting promoters in the bidding process. The SC decision today, quashing the petition, virtually sets the debate to rest. In the Essar case and in future such cases, the promoter will not be allowed to bid for the assets.
Why this is the right path
In a way, the SC decision has hit the nail on the head. Allowing promoters to bid is an invitation to promoters to buy back their own assets at a lower price and putting the burden on the banks. That has to be barred in the interest of equity. Secondly, promoters may also try to create dummy bids by related parties so as to continue to retain control over the company even after their exit. Thirdly, as Aditya Mittal rightly pointed out, if the promoter had the capacity to bid and the intent to repay the loan, then the company would not have gone into bankruptcy in the first place. Lastly, the NCLT is a great idea to put pressure on unscrupulous business owners. Diluting the NCLT will not serve the basic idea of the Bankruptcy Code. The SC is bang on target! ©