Lenders opt for non-SDR route for Electrosteel Steels

75% of lenders have agreed in principle to change mgmt in favour of London-based First International Group and China's Laiwu Steel Group

The change of management at Electrosteel Steels, the first company where lenders had applied the Strategic Debt Restructuring (SDR) last year, is now going to be through the non-SDR route.

Seventy-five per cent of the lenders, in value, have agreed in principle to change the management in favour of London-based First International Group (FIG) and China's Laiwu Steel Group, outside the SDR mechanism.

"We are waiting for a letter from the lead lender, State Bank of India," said an Electrosteel official. SDR was introduced by the Reserve Bank of India last June to tackle bad loans, by allowing banks to acquire control of a defaulting company by converting the loans into equity, partially or fully. That was to be followed by bringing in new promoters after which sticky assets would be upgraded to standard ones.

Shortly after the mechanism was introduced, the central bank came up with another circular on a non-SDR mechanism, allowing banks to upgrade the credit facilities of borrowers whose ownership was changed outside an SDR to the standard category. For this, however, the stress should be because of operational or managerial inefficiencies.

At a lenders' meet in January, London-based FIG, along with Laiwu group, emerged as the preferred choice. The new promoters proposed the change in management be done outside the SDR mechanism.

"In the non-SDR mechanism, the loans are not converted into equity, so the equity base is not expanding. Hence, it is a better option," said a promoter of another SDR company. According to the contours of discussion, the haircut on the FIG proposal is Rs 1,539 crore on the funded interest term loan. Also, Rs 2,000 crore of the loan would be converted into preference shares.

FIG would buy 19 per cent from Electrosteel Castings, promoter of Electrosteel Steels. "The price will be decided by FIG and Electrosteel Castings, but we expect it to be around the book value, which is Rs 4.54 per share," a company official said. Electrosteel Castings has a 45.23 per cent stake in the company.

Thirty-two per cent will be bought from other shareholders, to bring it to a level of 51 per cent. Stemcor Cast Iron Investment has a 16.64 per cent stake in the company, according to the December shareholding pattern filed with stock exchanges. Electrosteel Castings would retain 26 per cent in the company. FIG would also have to make a public offer. The Electrosteel stock closed at Rs 3.38 on the BSE on Friday.

The existing promoters of Electrosteel Steels had told Business Standard earlier that it would hand-hold the new promoters till required. Electrosteel has 27 lenders and debt of Rs 8,000 crore after partial conversion of debt into equity. In 2013, the lenders had supported a corporate debt restructuring proposal for the company that would translate into cash generation of Rs 2,000 crore.

But, that plan went haywire with the deallocation of coal blocks.