Electrosteel Steels: A test case of RBI’S debt rejig scheme
THE HITCH: THE NEW PROMOTER WANTS THE CHANGE OF MANAGEMENT TO BE OUTSIDE OF THE SCHEME’S MECHANISM
The Strategic Debt Restructuring scheme introduced by the Reserve Bank of India is set to change the managements of the companies which have failed to repay bank loans despite repeated extensions. What ails these companies and why is Kolkata-based Electrosteel Steels, the first company where lenders invoked the strategic debt restructuring (SDR) after the Reserve Bank of India (RBI) allowed banks to take management control of defaulting companies last year, set to get new promoters?
Bankers have zeroed in on London-based First International Group (FIG), partnered by China’s Laiwu Steel Group, having a capacity of 25-28 million tonnes (mt). The Chinese firm’s association with Electrosteel Steels is not new. It was an equipment supplier to the steel plant and has receivables of Rs 100 crore, which would be converted into equity subject to necessary approvals.
However, there is a twist to the tale. While FIG was a unanimous choice for bankers, it sprang a surprise on January 27 at a lenders’ meet. The fund wants the change of management to be outside of the SDR mechanism.
If lenders don’t agree, then negotiations with other companies that had made offers, including Tata Steel, could be reopened.
Subsequent to the SDR mechanism introduced last June, RBI came out with another circular for a non-sdr mechanism. This allows banks to upgrade credit facilities for borrowers whose ownership had been changed outside an SDR to the standard category, provided the stress was due to operational or managerial inefficiencies.
The basic difference, as pointed out by bankers, is that the SDR mechanism is less flexible and lenders have a greater say. “The SDR route is always beneficial for the banks, as they have a greater say in the company as they are the majority shareholder,” Karan Sachdeva, analyst with RBSA Advisors, explained. Bankers are yet to decide whether it would accept the FIG proposal of going for the non-sdr route, but they are under pressure to make a success out of Electrosteel Steels.
“It is extremely critical for lenders and new buyers to discover a price so that the haircut is minimal. If the new promoters are in the same line of business or a business of strategic importance, it is advantageous for the lenders as well as the new promoters,” said Vibha Batra, group head, financial sector rating at Icra. A Religare report suggested the haircut to attract a new promoter for Electrosteel could be around 65 per