Is SC’s Essar Steel verdict key to solving India’s bad loan problem?

By Swansy Afonso and Upmanyu Trivedi


ArcelorMittal’s $5.9 billion takeover of an Indian steel mill is a shot in the arm for lenders, which have been armed with legal backing to tackle bankruptcies in a country that has one of the world’s worst bad-loan ratios.

Friday’s decision by the Supreme Court not only ended tycoon Lakshmi Mittal’s long wait to enter the world’s second-biggest steel market, but also empowered banks to set the terms of the distribution of sale proceeds between different creditors. The court allowed Arcelor to pay creditors for Essar Steel India Ltd. and scrapped a bankruptcy appellate tribunal’s order that gave secured and unsecured lenders equal right over the proceeds.

“There is no principle of equality between secured and unsecured creditors,” Justice Rohinton F. Nariman said while reading out the judgment in court on Friday. Bankruptcy courts don’t have a say in deciding the distribution of funds between creditors. They can only examine the legality of the resolution plan approved by the panel of lenders of an insolvent company, the court ruled.

The verdict is likely to reduce legal wrangling between creditors and accelerate resolutions. The court’s decision along with rules unveiled by the government on Friday to help lenders recover loans due from large shadow lenders will attract investors who were getting wary of the nation’s bankruptcy process.

“The Supreme Court has made it very clear that the decision taken by the committee of creditors is final and binding,” Prashant Kumar, chief financial officer of the State Bank of India, the biggest lender to Essar, said in an interview with BloombergQuint. “This clarity is not only important for the Essar case, it would also be very important for all other cases which go through the process of IBC,” he said referring to the law known as the Insolvency and Bankruptcy Code.

The verdict is likely to be the final approval in a more than yearlong battle by Arcelor to take over Essar, which would make the Luxembourg-based mill India’s fourth-largest producer. While companies can seek a review of the decision by the same bench of judges, the success of review petitions is rare.

The world’s largest steelmaker, ArcelorMittal, and its partner Nippon Steel Corp. had offered to pay 420 billion rupees ($5.9 billion) in cash to creditors and pump another 80 billion rupees in the mill last year. While that offer was approved by a bankruptcy tribunal in March under the insolvency process, the payment was kept on hold by the Supreme Court after a dispute arose between lenders on the distribution of funds.

The decision to place secured creditors like banks at par with unsecured ones such as suppliers had raised concerns from banks to foreign funds including SC Lowy who said in July that the appellate tribunal’s verdict set a “very dangerous precedent.” The latest move by the Supreme Court alleviates these fears and will be good for the banks, according to the Hong Kong-based company.

“It’s the right judgment,” Theron Alldis, Asia loan trader at SC Lowy, said in an email response to queries after the latest verdict. “For distressed debt investors, it gives the certainty to commit capital” and that is important as Indian banks can now again access offshore capital to reduce their non-performing assets, he said.

India is trying to attract foreign capital to its bad loan cleanup, as it battles the worst nonperforming loan ratio among the world’s major economies. However, multiple legal challenges between former owners, lenders, bidders and in some cases anti-money-laundering agencies have deepened conflicts between the bankruptcy law and other regulations that pre-date them.

“The apex court has given due recognition to the commercial wisdom of the lenders and has made the committee of creditors the king,” said Sapan Gupta, partner at law firm Shardul Amarchand Mangaldas & Co. “This will boost the success of the IBC manifold and attract investors to stressed assets.”

India’s currency, and creditors to Essar extended gains after the ruling. The rupee rose 0.3%, while State Bank of India added 5.2% and Canara Bank surged as much as 7.2%. Syndicate Bank, which expects 12 billion rupees of recovery from the sale, also gained 3.5%. Arcelor jumped as much as 3.1% in Amsterdam.


Slowing Growth

Arcelor, which first bid for Essar when the local steel industry was booming, is set to take possession of the Indian plant at a time the South Asian nation’s economic growth slows to a six-year low and steel consumption expansion almost halves. Arcelor is also battling a slowdown in demand globally, idling capacities worldwide and flagging that it could sell as much as $2 billion in non-core assets over the next two years to lower debt.

“For Arcelor, there isn’t any right or wrong time to enter India,” and to have a mill of Essar’s scale would be a reasonable addition for Arcelor’s portfolio over a period of time, Vishal Kulkarni, executive director at Nomura Holdings Inc., said by phone from Hong Kong.

“India is probably one of the only few spots where steel demand is relatively healthy and in a positive territory, whereas the other markets that Arcelor is in are barely growing,” he said. “Indian margins are weaker than the recent high levels but they are not the weakest in the world.”

The Supreme Court on Friday also said the timeline for insolvencies can be extended in exceptional cases and the 330-day deadline prescribed by the government for completing insolvencies, including the litigation period, can’t be mandatory.