London fund, preferred as Electrosteel manager, says dump debt rejig

FIG emerges as unanimous choice of bankers to oversee the firm

Bankers are considering changing the management of Kolkata-based Electrosteel Steels in favour of the London-based First International Group and China's Laiwu Steel Group combine outside the strategic debt restructuring mechanism introduced by the Reserve Bank of India last year.

FIG, which was a unanimous choice for lenders, proposed at a meeting on Wednesday that the change in management be done through the alternative route to the SDR.

"Lenders are considering the FIG proposal. We will have to deliberate and then take a call," a banker who attended the meeting said.

The SDR was introduced by RBI last June to tackle the issue of burgeoning debt by allowing banks to acquire control of a defaulting company by converting loans into equity. Then they are to bring in new promoters after which sticky assets are to be upgraded to standard ones.

In September, however, the RBI came out with another circular, on a non-SDR mechanism. This allows banks to upgrade credit facilities for borrowers whose ownership has been changed outside the SDR to the standard category, provided the stress was due to operational or managerial inefficiencies.

However, whether under the SDR mechanism or outside, bankers have decided to go ahead with the change of Electrosteel's management. If lenders decide against changing the management through the alternate route and FIG sticks to its stand then Tata Steel's offer will be back on the table, provided it improves on the package.

"Bankers decided in favour of FIG because it was a much better package. But now that FIG has come up with this new proposal we have to weigh the pros and cons," the banker explained.

The existing promoters appear to be ready to pave the way for the change in ownership. "The First International Group (FIG) and Laiwu group have an agreement. Laiwu has 25-28 million tonnes of steel making capacity, we will support the new management in whatever way is required," said Umang Kejriwal, Electrosteel's existing promoter.

While FIG will be bringing in funds, the Laiwu group support the operations of the project.

The Laiwu group, which was an equipment supplier to the 2.51-million-tonne steel and ductile iron pipe project, has receivables of around Rs 100 crore, which will be converted into equity subject to approvals from the Chinese and Indian governments. The steel project as conceived by Kejriwal was an import from China, with the complete design and engineering, in what was meant to be a case study for the industry.

"FIG will have to buy out the existing promoters and other shareholders to take its holding to 51 per cent. It will also have to make a public offer," a source close to the development said. The existing promoters could retain a minority stake in the company. The Electrosteel stock today closed at Rs 3.66 on the BSE (formerly Bombay Stock Exchange).

Electrosteel happens to be the first company where the SDR mechanism was applied last year. What happens in this case could become a precedent for other SDR companies. Banks have so far invoked SDR in cases worth Rs 81,000 crore and are bent on making Electrosteel a success, according to banking sources.

If the Electrosteel deal happens in the immediate term, it will be well within the 18-month SDR window, given that lenders applied the mechanism last July.

However, whether banks will recover dues will depend on improvement in cash flow under the new management, as pointed out by an India Ratings and Research note. Electrosteel has 27 lenders and an outstanding debt of around Rs 8,000 crore after partial conversion of debt into equity.

In 2013, 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.

TIMELINE

June 2015
RBI introduces SDR mechanism

July 2015
Lenders take management control of Electrosteel Steels

December 2015
Lenders approve converting part of debt into equity

January 2016
Bankers zero in on FIG; FIG proposes non-SDR route