Essar Steel's Lead Banker SBI puts its Entire Loan Exposure for Sale

Adding a fresh twist to the Essar Steel's ongoing insolvency case, its leading lender in the Committee of Creditors (CoC), SBI (State Bank of India) has decided to recover its loan of INR 15,431 crore to the company by putting on sale the entire loan amount on its auction website. It has put an advertisement inviting expression of interest (EoI) from banks/asset reconstruction companies (ARCs), non-banking finance companies and financial institutions.

How much amount can be recovered?

The minimum reserve price for the loans that have been set by SBI is INR 9,587 crore and the bank has disclosed that as per the ArcelorMittal resolution plan, approved by Essar Steel's CoC, the minimum recovery amount on these loans is INR 11,313 crore.

A reserve price is a hidden minimum price that the seller is willing to accept for an item. In this case, reserve price has been calculated using an 18% discount on the minimum recovery amount from the ArcelorMittal plan and pricing in a one-year period for the deal to close, as per the notification put up by SBI in its website. A clawback option has also been mentioned by the bank where if resolution happens in less than a year the discount could be reduced and the entity buying these loans would have to pay more to SBI.

The added complications

If the auction of SBI's non-performing financial assets with total dues of INR 15,431.44 crore goes ahead as planned, it could further complicate the resolution of Essar Steel that is awaiting order from the National Company Law Tribunal (NCLT) over admissibility of a fresh bid put forward by its shareholders, proposing full settlement of all claims of financial and operational creditors.

The list of financial creditors put up by Essar Steel's resolution professional in January 2018 shows that SBI is the largest lender to the company, with claims worth INR 13,310 crore to the account. Edelweiss Asset Reconstruction Company Ltd. is the second largest lender with claims worth INR 5,352 crore admitted.

The expert opinions

The industry experts have opined that this is a very curious development, as it negates the whole purpose of IBC that allows creditors to work out a resolution plan for a debt-ridden company within a timeframe or proceed with liquidation. If individual creditors look for settling their share of debt outside the IBC, a resolution plan will never be worked out and the process will go into further legal complications.

However, a legal expert said that this sale of loans will not impact the Essar Steel resolution process, because if the NCLT approves the ArcelorMittal resolution plan the payment has already consented between the lenders and the resolution applicant and that does not change upon the assignment or securitisation of loans as that arrangement and accrued right is available to the buyer. And if the NCLT orders the CoC to consider the Ruia offer then the assignee or the beneficiary of the securitisation will decide on the basis of his free will.

Essar Steel is among the list of top 12 large corporate debtors, referred as 'dirty dozen' that was referred by the RBI for resolution in insolvency courts. Though priority was accorded to resolve this bankrupt entity as per timelines are given in IBC, its resolution process has been anything but immediate. The case is way past its 270-day timeline even as some of the similar bankrupt steel firms have found new owners.