Ramping up capacity critical for ensuring good valuation: Essar's RP Satish

Essar Steel Resolution Professional Satish Gupta
How significant is the resolution of Essar Steel in the context of IBC?

The resolution of Essar Steel, the largest of the 12 accounts referred to insolvency under IBC by the RBI in June 2017, is the single-largest resolution in terms of quantum and percentage of amounts realised by creditors. It is the largest acquisition transaction and foreign direct investment for the year, attracting investment from the largest steel producer in the world, ArcelorMittal.


IBC was put to test several times during Essar Steel’s corporate insolvency resolution process. What were the important contentions that were resolved?

During the course of the resolution, IBC as a mechanism has been comprehensively tested with two rounds of litigations going right up to the Supreme Court (SC). Various precedents have been established such as successful resolution applicant starting on a clean slate according to SC judgment dated November 15 and recent IBC (Second Amendment) Bill barring attachment/ring-fencing of assets of corporate debtors for prior offences.


How challenging was managing the process?

Various challenges were faced including managing various stakeholders for maximising value, improving operations and litigations in different forums. In the early period, the key challenge was stabilisation of operations, as operational creditors withdrew credit limits on initiation of insolvency. Existing cash and carry limits being provided by MSTC and a few other suppliers were extremely useful. After the National Company Law Tribunal’s judgment, accruals from operations were also ploughed back to take advantage of a buoyant steel market. As a result, the average output could be increased from an average of  460,000 tonnes to 600,000 tonnes per month with support from the committee of creditors and executive management of the firm. It was critical to demonstrate to the potential resolution applicants that the plant was capable of operating at higher levels, which enhanced its valuation and resulted in higher bids.


What were the total claims filed by the creditors?

Total claims of about Rs 82,000 crore were filed by financial and operational creditors. Based on documents, claims of about Rs 54,500 crore were admitted, balance being disputed or not substantiated by proper legal documents.  


You were caught in the middle of an eligibility test between two resolution applicants. How difficult was the situation?

Decision on Section 29A eligibility test was the most difficult and complex decision, which, as an RP, had to be taken and confirmed to the committee of creditors (CoC). Section 29A, being a new clause, was being interpreted for the first time, and finding both resolution applicants ineligible was indeed a testing time. Various challenges with respect to eligibility under Section 29A became a matter of a protracted litigation and was resolved with the SC judgment that upheld the decision of ineligibility. In the process, however, the banking system realised about Rs 7,500 crore towards dues of two non-performing assets.


How has Essar Steel performed during the CIRP?

Essar Steel achieved its highest production and Ebitda (earnings before interest, tax, depreciation and amoritisation) during the CIRP period. It had achieved rolled steel output of 5.47 million tonnes in FY17, which increased to 6.78 million tonnes in FY19 and benefited all stakeholders, including employees.


Did the promoters and management cooperate during the CIRP?

Though the promoters/related entities/Numetal pursued litigations in various legal forums, operations of the company were run according to the IBC rule book.


As operations were ramped up, associate companies of the promoter group, engaged in power, port, shipping, etc., also benefitted significantly. All payments to related parties providing services were checked by an independent team and approved in consultation with CoC.  Lenders to Essar Steel, led by State Bank of India, already had a mechanism of ‘Trust and Retention Account’ for monitoring cash flow prior to initiation of insolvency, which was being complied to by the promoters and the management.


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