Essar Steel India Ltd’s plans to stop insolvency proceedings suffered a setback after a court ruled that the bankruptcy case against the debt-laden mill owned by the billionaire Ruia brothers will proceed and the company will not be granted any relief.
The Reserve Bank of India’s decision to ask banks to initiate insolvency action was not unjust or arbitrary, Justice SG Shah of the Gujarat high court ruled yesterday after hearing arguments from the steelmaker, the central bank and some lenders. However, the court said the central bank must be careful while issuing press releases and should not been seen giving directions or guidelines to any judicial bodies. It asked company law tribunals not to pay heed to RBI’s directive of giving priority to such cases.
For investors and creditors, it’s a test case. A victory for the central bank emboldens its fight to reduce the world’s highest level of stressed assets and revive lending, which is expanding at the slowest pace since 1992. The RBI is trying to force bankruptcy proceedings against large debtors after the regulator got more powers to resolve as much as $180bn of soured loans. Essar Steel filed a case against the central bank to halt the action, calling the move arbitrary. The company says it repaid Rs35bn ($544mn) of debt in the year to March 31 and is making “serious efforts” to revive its operations and repay the rest of its obligations, according to the civil application filed to the court. The steelmaker controlled by Shashi and Ravi Ruia has about Rs400bn of loans, data from the company show.
The company can challenge the order before a larger bench in Gujarat High Court and also appeal to India’s Supreme Court. Essar Steel is one of 12 big delinquent borrowers that banks have been ordered to send to the insolvency courts by the central bank. The lenders were also authorised to create committees to help with recoveries.
The fate of Era Infra Engineering Ltd – another of the 12 borrowers – is stuck at the National Company Law Tribunal, while lender State Bank of India has initiated an insolvency resolution process for Monnet Ispat & Energy Ltd and Bhushan Steel Ltd, with petitions pending before the tribunal.
The Gujarat court verdict “is very positive for banks and a faster resolution of these cases is very important,” said AK Prabhakar, head of research at IDBI Capital Market Services Ltd, by phone from Mumbai. Once these are resolved, then other promoters, who have been waiting to see how these cases are handled, will come up and pay, he said.
State Bank of India’s shares reversed losses to gain as much as 0.9% in Mumbai after the Gujarat court’s ruling and ended the day up 0.5% at Rs293.
In the past decade, many steel and construction companies borrowed to fund expansion at a time when the Indian economy was growing by 9% to 10% a year. But the loans turned sour as growth slowed, weakening demand for steel used in construction projects.
The proceedings come at a time when most of the biggest steel companies are once more making profits and boosting output to a record as Prime Minister Narendra Modi boosts infrastructure spending.
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