Essar Steel Blames Government For Debt Woes, Says RBI Action Arbitrary

“Hostile, arbitrary and unreasonable” is how Essar Steel describes RBI’s action against it.

A worker dressed in heat protective clothing passes red hot metal in a furnace. (Photographer: Oliver Bunic/Bloomberg)
A worker dressed in heat protective clothing passes red hot metal in a furnace. (Photographer: Oliver Bunic/Bloomberg)

“Hostile, arbitrary and unreasonable” is how Essar Steel Ltd. describes Reserve Bank of India’s action to include it in the list of 12 companies referred to insolvency proceedings at the National Company Law Tribunal.

In its petition filed in the Gujarat High Court earlier this week, the Ruia family owned, privately held company has sought to challenge that decision of the RBI, the insolvency proceedings initiated by State Bank of India (consortium lead) and Standard Chartered Bank and the “failure of the consortium of banks to continue the implementation of the revival package approved by the Board of the Petitioner and approved in principle by the bankers”.

Not Our Fault, Says Essar Steel

The petition tells a story of how Essar Steel fell upon bad times, mostly due to the government’s decision to cancel the supply of gas to its manufacturing facility in Hazira. As a result of which, the company claims, production came to a halt and it incurred a loss of Rs 26,000 crore.

The loss caused to the company as a result of reduction in gas supply is one of the chief causes for reduction on production and resultant inability to make payment to the lenders.
Essar Steel Petition in Gujarat High Court

Seeking Settlement

The petition details efforts by the company and its lenders over six months starting November 2016 to arrive at a debt restructuring package under the S4A guidelines of the RBI.

On March 15, 2017 Essar Steel’s board approved a revival package for submission to banks.

The restructuring package approved by the board of directors of the Petitioner Company was then submitted vide letter dated 19.05.2017 for approval to the bankers. It may be noted that the Petitioner has been aggressively following up with the bankers for formal and final approval of the restructuring package…
Essar Steel Petition in Gujarat High Court

Meanwhile the company says it was working on the basis of agreed terms with bankers.

  • The banking operations of the company were being run with consent of the Core Committee appointed by the banks.
  • Between April 2016 and June 2017 an amount of Rs 3,467 crore was repaid to SBI and other lenders.
  • All major capital investments were done only with the concurrence of the banks.

The company says there was no hint that the banks would ignore the restructuring proposal and initiate proceedings under the Insolvency and Bankruptcy Code instead.

Hence it was “shocked and surprised” to know from news reports that it featured in the list of 12 companies that, as per a June 17, 2017 RBI circular, were to be referred to insolvency proceedings.

Based on the RBI circular, SBI and Standard Chartered Bank, which incidentally was not part of the Joint Lenders Forum led by SBI, filed cases at the NCLT in Ahmedabad.

Both were listed for hearing on July 6.

RBI’s Decision Is “Wholly Arbitrary And Unreasonable”

Essar Steel’s petition argues that RBI “has taken into consideration irrelevant factors in determining the accounts to be referred under Insolvency and Bankruptcy Code and has ignored all relevant factors”.

The company contends that the central bank arbitrarily picked a March 31, 2016 cut-off date that ignores its improved performance over the last year.

  • That it should have considered the Rs 3,467 crore Essar had paid in interest since April 2016.
  • That a restructuring package had been approved by lenders.
  • That Essar Steel should have been included in the alternative list of companies that have been granted 6 months to arrive at a resolution plan.
  • And that Essar Steel should have been given an opportunity to be heard before RBI decided to name it in the list of 12.

The petition also states that the JLF led by SBI “has in a wholly arbitrary and discriminatory manner proceeded to follow the directive of RBI to initiate bankruptcy proceedings without any independent application of mind”.

What Does Essar Steel Want?

At one place in the petition it states that it wants the court to direct the banks to implement the revival package approved by its board on May 19, 2017. Or that the NCLT be directed to consider the revival package before proceeding any further.

In the final prayer, the company says it wants the high court to

  • Set aside the RBI directive against it.
  • Quash the proceedings by SBI and Standard Chartered Bank.
  • Restrain NCLT from proceeding further.
  • Place the company in RBI’s alternative list of companies that have six months to finalise a resolution plan

Earlier in the week a single judge bench of the Gujarat High Court admitted this petition of Essar Steel and stalled any NCLT proceedings against it. Efforts by Standard Chartered to appeal against this came to nought.

The high court will hear the matter further on July 7.

It will soon be clear if Essar Steel has succeeded in winning a reprieve and how many other promoters will be emboldened by that.