The Essar Steel takeover tussle may reach a conclusive state after a significant judgement handed out by the National Company Law Appellate Tribunal (NCLAT). The ruling assumes importance on more than one count. At least three key points can be highlighted; the entry of Arcelor Mittal, arguably the largest steel maker in the world to India, the NCLAT judgement itself giving equal status to the operational creditors in an insolvent company and the impact this $6 billion deal can have on the foreign exchange market. Here are the details.
The second point above is being taken here first. In a departure from the general practice that the financial creditors to a corporate entity have a predominant claim over the operational creditors, this judgement has treated them equally. In fact, the Chairperson of NCLAT, Justice S.J. Mukhopadhaya has gone on record to say “Operational creditors cannot be discriminated against and financial creditors cannot act like selfish cells. These cells are what cause cancer". That’s a very strong statement to make and turns the conventional stand taken on such issues on its head. This judgement will therefore be discussed and debated for weeks and months to come. For the record, the NCLAT has ordered that Rs 42,000 crore, the amount Arcelor Mittal will release to settle the money owed to creditors will be shared between the financial creditors and the operational creditors involving payout of Rs 30,030 crore and Rs 11,969 crore respectively. This means they will get around 61% of their claims. If you are not familiar, the operational creditors represent the vendors and other creditors to the company while the financial creditors are those who have directly loaned funds, mostly banks.
The Ruias of Essar had opposed Arcelor Mittal on eligibility grounds but the NCLAT did not accept their argument and said the deal should go through. They may contest this judgement though there is no confirmation on that right now. The company says they will wait for the full judgement to be studied before taking a call.
Essar Steel’s 10 million tonnes per annum steel mill in Gujarat turned insolvent in August 2017, with debts of over Rs 54,000 crore. ArcelorMittal, with an offer of Rs 42,000 crore is the highest bidder and this amount will be distributed among the financial and operational creditors if there are no hurdles.