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Can the Ruia brothers pull off a rescue act at Essar Steel again?

Though the company came out of the CDR in 2006, a little more than a decade later it finds itself in trouble again.

January 02, 2018 / 04:12 PM IST
Prashant Ruia.

Prashant Ruia.

Even as banks seek suitors for Essar Steel, which has been referred to the bankruptcy court, brothers Shashi and Ravi Ruia could well find inspiration from similar circumstances almost 20 years ago. Then too, they were facing the ignominy of a possible loss of their steel business.

In 1999, Essar Steel had earned the dubious distinction of being the first Indian company to have defaulted on its floating rate notes worth $250 million.  The crisis deepened as steel prices, bogged down by the Asian Financial Crisis, dived to unsustainable levels.

As imports increased, demand for domestic steel also plunged. By 2002, the company had debts of nearly Rs 3,000 crore, and was forced to go into a corporate debt restructuring (CDR) package approved by its creditor banks. The group’s reputation had taken a hit, though Prashant Ruia, Shashi’s son, would call it a smear campaign.  The company’s only comfort was that its peers like Jindal Steel and Ispat Industries were also forced to restructure their debts.

Though the company came out of the CDR in 2006, a little more than a decade later it finds itself in trouble again. And the Ruias, who faced severe backlash from investors for delisting the company in 2007, would be experiencing a sense of a déjà vu.  Essar Steel’s overseas acquisitions, including that of Canada’s Algoma Steel for $1.8 billion in 2007, had ended in misadventure. Within a decade, both Algoma and Minnesota Steel - the US-based company was also acquired in 2007 - had filed for bankruptcy.

At home, the expansion of its facility in Hazira did not go to plan. The viability of the additional capacity, a giant gas-based sponge iron plant, became a question mark after the gas supply was cut off by the government. “This happened even though the company was promised an uninterrupted gas supply for the facility,” said an official who did not want to be named.

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By 2017, the company was groaning under debts of nearly Rs 40,000 crore. And just when there seemed to be light at the end of the tunnel, the promoters suffered a setback; and they can blame Vijay Mallya for that. Within a few days of informally agreeing to recast Essar Steel’s loans in January, bankers developed cold feet after the arrest of five IDBI Bank officials, including its former CMD, for lending to the defunct Kingfisher Airlines. In August, the NCLT formally began bankruptcy proceedings against the company.

The Ruias’ last hope of retaining their steel business now seems to be in the clarification by Finance Minister Arun Jaitley. The Minister told the Parliament last week that promoters could bid for their distressed companies after clearing interest and penalty dues with their banks. An official close to Essar Steel confirmed that the promoters are keen to bid for the company. According to reports, the Ruias will have to shell out about Rs 3,000 crore to become eligible bidders. Even if they do manage to reopen their accounts in the banks, Shashi and Ravi will have to contend with competitors from home and abroad keen to acquire their company. Ever since they founded the Group in 1969, the brothers have survived many a downswing in fortunes. Will they be able to do it once more?
Prince Mathews Thomas heads the corporate bureau of Moneycontrol. He has been covering the business world for 16 years, having worked in The Hindu Business Line, Forbes India, Dow Jones Newswires, The Economic Times, Business Standard and The Week. A Chevening scholar, Prince has also authored The Consolidators, a book on second generation entrepreneurs.
first published: Jan 2, 2018 03:53 pm
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