Essar Steel has to be the crown jewel out of the twelve companies bundled into insolvency proceedings by the RBI sometime in mid-2017. The fact that ArcelorMittal, the world’s largest steelmaker, has marched into town to stake its claim and shown willingness to battle on to the bitter end, should be proof enough of this fact. In the other corner seem to be the Ruias themselves, the erstwhile owners of Essar Steel, through Rewant Ruia (the son of Ravi Ruia) and his Russian partners, leading a joint venture called “NuMetal”. NuMetal are serious enough about Essar Steel (and have long enough pockets) to have bought a majority stake in Odisha Slurry, a company which supplies raw material to Essar Steel’s crucial Paradip steel plant, a cunning move obviously aimed towards decreasing the attractiveness of Essar to other suitors.
However, there is one huge problem that both ArcelorMittal and NuMetal cannot wish away. They are both clearly, obviously barred from bidding for Essar Steel by the Insolvency and Bankruptcy Code’s soul-sucking Section 29A. 29A was introduced by an amendment that took effect in November 2017, after bids were solicited for the company.
Call it a businessman’s innate optimism, but both contenders seem to be convinced that they are eligible. Lawyers are no doubt rejoicing as their various legal challenges make a pinball-like journey up and down the legal system.
Ironically, both behemoths are hit by the very same sub-section of 29A – a rule that prohibits a company that directly, indirectly or even tangentially has an account that has been classified as a “non-performing asset” (NPA) as per RBI guidelines and has remained so for over a year.
Let us consider their cases one by one.
NuMetal was not even a company till Rewant Ruia decided to be a part of a joint venture that wanted to take over Essar Steel. It was incorporated only after bids were called, and was initially owned 100% by Rewant through a trust (which owned a company which owned a company which owned NuMetal). Ruia’s 100% share is now a still-substantial 25%, with the rest gone to other partners. NuMetal is therefore connected to a giant NPA – Essar Steel itself!
ArcelorMittal is stuck with the baggage of two past deals that went wrong, and is therefore disqualified twice over. Its investment in Uttam Galva Steels went the NPA way, and its Chairman, LN Mittal, exercises control over a company called KSS Petron which is similarly belly up (It needs to be noted that based on a legal opinion, the resolution professional running the Essar Steel insolvency actually opined that Mr. Mittal’s control over KSS Petron was not sufficient to disqualify ArcelorMittal, but the National Company Law Tribunal disagreed).
Predictably, when their cases reached the Tribunal, both aspirants were held to be ineligible. In a rambling, sometimes meaningless order, the Tribunal decided that the two unfortunate competitors were still entitled to have their bids considered if, and only if, they could pay off the NPAs. It relied on a seemingly-forgotten proviso in Section 30 of the Code to support this conclusion.
For NuMetal, paying off its NPA is a non-option. It can hardly afford to pay off all of Essar Steel’s dues – even its bid for the whole of Essar Steel contemplated a 60-65 % haircut for financial creditors. ArcelorMittal has made noises about paying off the dues of Uttam Galva, but I have seen the facts, and I am sure they need to pay off the dues of KSS Petron as well – they are properly connected to that company.
The other, cheaper option is to bide one’s time till (hopefully) a re-bid is called, and then jump back in the fray having cut off all connection to the poisonous NPAs. For NuMetal, this will mean junking Rewant Ruia, and for ArcelorMittal, it will mean ceding all direct and indirect control over Uttam Galva and KSS Petron. They seem to be on it. Reports suggest that NuMetal may be dropping Rewant and ArcelorMittal has already severed its connection with Uttam Galva and KSS Petron by a hasty sale of shares. Both parties will be hoping that either the NCLAT or the Supreme Court, where this is definitely headed, will say the magic words and call for fresh bids.
All this silliness could have been avoided if there was no Section 29A. But it’s there, and like a bouncer blocking the way to a nightclub, everyone has to put up with it no matter how much they resent it.
