Lenders likely to reject ArcelorMittal's conditional offer for Essar Steel

ArcelorMittal is ready to pay Uttam Galva's debt. The company held a 29% stake in the steel company

ArcelorMittal has made an offer to repay the debt of Uttam Galva Steels, a bank defaulter, but with a rider that it should be declared the winner of the bid for Essar Steel. The offer to repay Rs 530 billion of Uttam Galva’s loan was made by ArcelorMittal in a letter to banks last week.

However, Essar's lenders are not enthused by the conditional offer, and are expected to reject it in this week's meeting as they are anticipating aggressive bids from Numetal, Vedanta and JSW Steel in the next round.

ArcelorMittal held 29 per cent stake in Uttam Galva Steels. Moreover, its chairman L N Mittal personally held 33 per cent stake in Kazakhstan's KazstroyService, which in turn held 100 per cent stake in KSS Petron, another bank defaulter.

Just before the bids for Essar Steel were to be submitted in early February, ArcelorMittal sold its stake in both Uttam Galva Steels and KSS. But its bid did not find favour with the banks’ lawyers and the NCLT Ahmedabad, which has asked ArcelorMittal to pay the debt of the defaulting companies before making an offer.

Banks have given a week’s time to both ArcelorMittal and Numetal to rectify their first round offers. In February, lenders had rejected the first-round bids by both ArcelorMittal and Numetal Mauritius, following which, both companies had moved NCLT Ahmedabad.

Even as the banks called for a fresh round of bidding, JSW tied up with Numetal and Vedanta made a surprise entry into the race. However, the second round of bids too didn't spring a winner as NCLT declared it invalid.

According to a source in the know, the ArcelorMittal offer doesn't include payment of KSS Petron's default amount. A banking source said that by making a conditional offer, ArcelorMittal wants to make sure that once it pays Uttam Galva's debt, it wins the race for Essar Steel. "Section 29A of the Insolvency and Bankruptcy Code (IBC) was very clear on the cure for the defaulting promoters. They have to repay bank loans just to become eligible to bid and not to win the company even when there are three cash-rich suitors waiting with better offers,” said a banker asking not to be quoted.

Anil Agarwal-owned Vedanta has already told banks that it is willing to better any offer made by competitors. As Vedanta and JSW Steel have already been declared highest bidders for Electrosteel Steels and Monnet Ispat, respectively, banks would be interested in bids from the two companies as there will be less legal complications.

In the lenders’ meeting on March 21, law firm Cyril Amarchand Mangaldas had said that ArcelorMittal, Netherlands exercised positive control over Uttam Galva and merely divesting the shareholding prior to submission of the resolution plan could not remove its disqualification under Section 29A(c) of the IBC, unless cured by payment of the overdue amounts. 

However, in senior counsel Darius Khambata’s view, if ArcelorMittal Netherlands has legitimately divested its shareholding in Uttam Galva and completed all formalities relating to its declassification as a promoter of that company, prior to its submission of the resolution plan, it would be an eligible bidder. This means that ArcelorMittal will not be subject to the disqualification under Section 29A(c) of the IBC for having a non-performing asset of more than a year. NCLT Ahmedabad, however, has asked Arcelor to pay Uttam Galva’s debt.

ArcelorMittal and Numetal face a second hurdle as well. Recently, a report by New York-based corporate investigations and risk consulting firm Kroll Inc said both bids are ineligible as they face several regulatory cases in various jurisdictions. The Kroll report has been taken on record by the lenders and would be taken up for further discussion at the next lenders' meet this week. Kroll had examined the operations of both ArcelorMittal and Numetal across the world, in over 80 jurisdictions. Some of the lenders are of the opinion that both companies should be allowed to bid so that the next round of bidding is more competitive.

Lenders have also asked their lawyer Shardul Amarchand Mangaldas to give them options in the next meeting, taking into account the Kroll report. A source said lenders would decide internally and come prepared with options in the next meeting.