Lenders are close to finalising a new owner for Kolkata-based Electrosteel Steels, the first company where the strategic debt restructuring mechanism was applied last year, after the Reserve Bank of India allowed banks to take management control of defaulting companies.
The existing promoters, the Umang Kejriwal family with a 45 per cent stake in Electrosteel Steels, will focus on Electrosteel Castings and Sri Kalahasthi Pipes (formerly Lanco Industries).
The move to ratify the deal by lenders will be the one of the last of a series of steps taken to initiate the change of ownership.
In December, lenders had approved converting a part of the company's debt into equity following which the Electrosteel Steels' board approved conversion of debt aggregating to Rs 2,507 crore into 2,507.5 million equity shares of Rs 10 each. The board also approved the increase in authorised share capital of the company. An extraordinary general meeting for shareholders' approval was held earlier this month.
Bankers have approached quite a few companies, including Tata Steel, for this deal. "Finally it was decided to go ahead with this foreign company having roots in London and China," the source said.
Industry sources, however, indicated the deal could be transacted at a price lower than the current book value.
An India Ratings and Research (Ind-Ra) note on strategic debt restructuring said while the conversion of debt into equity would help companies by lowering their debt servicing burden, their long-term viability would depend on improvement in cash flow under the new management.
Electrosteel Steels' problems started with raw material supply for its 2.51 million tonne steel and ductile iron project. It had an irrevocable offtake agreement with Electrosteel Castings, a promoter group company, for procurement of coking coal and iron ore at a cost plus mark-up during the loan agreement with lenders.
Electrosteel Castings had been allotted the Parbatpur mine in Jharkhand with reserves of 231 million tonnes. It also had an iron ore mine and non-coking coal mine in Jharkhand. But the Supreme Court order on deallocation of coal blocks in 2014 and the new mining rules changed the prospects for the company.
Electrosteel Steels had to buy raw material from the market at high prices while finished product prices crashed. Operating losses rose to Rs 172 crore in 2014-15 and interest costs grew from Rs 177 crore in 2013-14 to Rs 452 crore in 2014-15.
In 2013, a consortium of 27 banks and financial institutions had supported a corporate debt restructuring proposal for the company that would translate into cash generation of Rs 2,000 crore. But the deallocation of coal blocks sent that plan crashing.
Till September 2015, the steel sector accounted for 21 per cent of the total number of corporate debt restructuring cases, having an aggregate debt of Rs 56,000 crore. The sector's share in total stressed accounts of scheduled commercial banks is 10-11 per cent.