While 2020 will be remembered for COVID-19, 2016 will be remembered for something that was very significant in the corporate world. An event which will go down in the history of corporate business. An event which will be a watershed moment in Indian history and has modified the way things work. It's the year where the IBC or the Insolvency and Bankruptcy Code was put into place.
As great as it sounds, something bad also happened in the very same year. It was the year when Essar Steel was declared bankrupt and was brought under the very IBC that was amended.
Before we jump into the details, let us get into the various facts that led to the very situation.
History of Essar Steel
Essar Steel is India's oldest and leading conglomerate, operating in the private sector.
The Essar group is owned and controlled by the Ruia family. Founded in early 1969, the group has a lot of business in hand out of which Essar steel is notable. It is the second-largest steel-producing entity in the country.
The Essar Group had been involved in pellet making, iron making, and other steel-related manufacturing activities and was performing fairly well until 2002.
The Wake of Trouble
In 2002, Essar Steel's balance sheet showed a huge debt of 2800 crore. The company was left with no option than to restructure its entire debt. As a result, the company managed to stay above water. However, it did not stop with that.
Essar Steel then decided to expand its operations and borrowed huge sums of loans for the same from banks like SBI, ICICI, Syndicate bank, etc. They planned to spend this amount on the development of a steel plant in Hazira. But then, things did not go according to the plan.
The expansion activity saw a dead end due to the delay caused in obtaining the environmental approval and shortage in the availability of natural gas. Hence, all this put the company on the edge of the cliff, once again.
Further, following the financial crisis, the entire world economy underwent drastic changes bringing down the price of steel in the global and domestic markets. As a result, the company accumulated a debt of 42,000 crores by the end of 2015.
The banks which lent the money to Essar Steel understood the severity of the situation and proposed an idea. They suggested the company turn a major portion of their debt into equity and sell it to potential investors.
However, that did not render the expected result, owing to the tainted image that prevailed in the market. In short, Essar Steel now had a debt of 43000 crores payable to banks and 11000 crores payable to other creditors and suppliers.
The Insolvency and Bankruptcy Code (IBC)
While the lenders were puzzled as to how they would come out of the situation and recover the dues, the government amended the IBC. Before understanding how IBC saved the bankers and other creditors who lent to Essar steel, let's have a glimpse as to what it is and its importance.
Nowadays, if a company continuously defaults its credit repayment, the banks can move it for resolution by sorting the help of the National Company Law Tribunal (NCLT). But before 2016, the story was entirely different.
A lender was hardly protected by any laws and hence, had no option than to dance to the tunes of the company which had borrowed from it. They underwent huge haircuts as well. All this left a bad impression on the country's credit culture.
The introduction of IBC has changed it all. It put a limit of 180 days on credit repayment, which can be extended to a further 90 days. Within this period, the company is required to come up with a resolution plan which is acceptable by all.
If a concise decision is not arrived at, then the company will be dissolved, and its assets will be sold to pay off the debt. Thus, lenders were protected from defaults and the resulting increase in NPA.
Problems with the Sec 29A
Coming back to the story of Essar Steel, the Reserve Bank of India (RBI) was quick enough to list 12 stressed units, and Essar steel was one among them. The company was placed before the NCLT.
A committee was formed and headed by Satish Kumar Gupta who looked after the resolution proceedings. In December 2017, the committee called for proposals. And two companies, ArcelorMittal and Numetal, came forward with their resolution plans.
But unfortunately, both of them were rejected based on Section 29A.
As per this section, Numetal was considered ineligible, stating that about 25% stake in Numetal was held by Rewant Ruhia. And as per the law, family members of the promoter cannot make a proposal. However, later on, Rewant Ruhia quit the company.
ArcelorMittal, on the other hand, was rejected stating its stake in bankrupt company Uttam Galva and some other unpaid dues. However, after a series of legal battles in the Supreme Court, ArcelorMittal was back in the game.
Despite all the obstacles, the road ahead still seemed to have some troubles. The court declared that all creditors would be treated equally, and this created turmoil. Both Operational and financial creditors demanded clarity on the same.
However, by the end of 2019, this issue was also sorted out with the court declaring that the financial creditors will be given primary importance over operational creditors.
The Revival of Essar steel
The resolution plan of ArcelorMittal offering 42000 crore repayment, received the committee's nod and the acquisition was also complete in no time. The company was renamed as ArcelorMittal Nippon steel India (AM/NS INDIA) and was ready to start a new journey.
For ArcelorMittal, it was a golden opportunity as it was for years looking for a possible way to enter the Indian steel market. And as expected, Essar Steel helped Lakshmi Mittal to fulfil his dream.
Apart from that, the acquisition will bring a lot of professional expertise to the table, which will be useful in the long run for both the company and the industry at large.
With ArcelorMittal, Essar Steel seems to be in safe hands. It's president Aditya Mittal has claimed that he believes that "the growth story of the company is intact ".
They claimed that despite the negative news around the consumption of steel and its respective markets, the demand has only increased by 4% and that it will increase more.
The capacity of the plant has climbed by 40% from its acquisition, which is also impressive.
To Sum Up
After more than 2 years of struggle and hardships, Essar Steel was finally able to see the light of the day. Everything seems to finally be in place for the company.
As it's always said, "Every great story has a bump at the beginning." And for Essar steel, with the end of the tragedy, we can only visualize the greatness to come sooner than later.