SBI asks Odisha to take equity in Bhushan Steel

Steel firm, facing insolvency, also sought equity support of 26% from the state

State Bank of India (SBI), the country’s largest lender, might have found a way out for Bhushan Steel, currently going through a Reserve Bank of India-mandated insolvency process. In a rare move, SBI Chairman Rajnish Kumar has written to Odisha Chief Minister Naveen Patnaik seeking equity participation in the stressed steel firm. Prior to SBI’s letter, Bhushan Steel Vice-Chairman and Managing Director Neeraj Singal had also written to Patnaik for equity support to the tune of 26 per cent. 

A senior Odisha government bureaucrat has confirmed the receipt of the letters, but said they could not respond in haste. “It needs adequate scrutiny and evaluation. We have asked for the views of steel mines and finance departments. Also, we need to examine whether the proposal is legally tenable,” the official said.

Kumar feels the government’s equity participation could be taken as vital support in the process of resolution and provide much-needed confidence and comfort among the lenders. SBI happens to be one of the lead bankers for Bhushan Steel. The bidding process for the steel firm is expected to be a pitched one. JSW Steel and Tata Steel are expected to bid. ArcelorMittal is also understood to have evinced a formal interest. 

In his October 18 letter, Kumar said: “Under the insolvency code, resolution mechanisms have to be formulated after receipt of proposals from several stakeholders. We believe that the state government is an important stakeholder. I would request equity participation support from the state through its entities, and also request to provide an arrangement for long-term supply of iron ore to the project.”

SBI officials pointed out that Bhushan Steel’s raw material supply was a concern. “All other steel companies admitted to the National Company Law Tribunal (NCLT) had better raw material tie-ups. The motivation for seeking equity participation from the Odisha government was raw material,” they said. However, the Bhushan Steel move was case-specific. 

Kumar's letter also said: “This plant is a national asset, built in Odisha with your support, and employs a large number of people. Bhushan Steel had entered into a memorandum of agreement (MoA) with the state government in November 2005 for setting up an integrated steel plant in Odisha. The said MoA had commitments of support in terms of land, water and raw materials on part of the state government.”

Kumar then went on to explain the reason why Bhushan Steel had been admitted to the NCLT. “The company has fallen into this situation due to cancellation of captive mines pursuant to changes in policies of coal and mineral allocation through auction. The problems further aggravated with the dumping of steel from China and other countries, which led to deep stress in the entire steel sector in India,” the letter said. 

Bhushan Steel is one of the first 12 large accounts recommended by the Reserve Bank of India for insolvency under the insolvency code. Bhushan Steel's resolution professional has invited proposals from prospective bidders by December 23. 

In his July letter to the Odisha CM, Singal had said: “One of the options by way of which the Odisha government can lengthen its support to the company would be that it may acquire equity stake in the company to the tune of 26 per cent. The terms and conditions for such acquisition may be mutually discussed and finalised. This supportive action of the state government of acquiring equity stake in the company would enable the banks and financial institutions to regain confidence and trust in the company and also ensure continuous operations and running of the mega integrated steel plant.”  Bhushan Steel, despite its heavy financial burden, had participated in iron ore e-auctions in Odisha and emerged as the successful bidder for the Kalamang west captive iron-ore block in the state's Sundergarh district.