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Resolution Plan of Electrosteel Steel Limited

Electrosteel Steel Limited is one of the dirty dozen identified by RBI for immediate bankruptcy proceedings. Out of the twelve from the list only two crossed the approval of Resolution Plan by Adjudicating Authority, while the others are on their way for approval, few on the verge of liquidation. With the intervention of RBI, the number of petitions filed by Financial Creditors for initiation of corporate insolvency resolution process (CIRP), has increased.  But still its not a cake walk for those companies either for revival or liquidation.

Electrosteel one of the first list of companies by RBI, which has paved its way for the revival of the Company, its CIRP would definitely be a learning curve for may others to follow.  

Electrosteel CIRP

State Bank of India, filed petition for initiation of CIRP of Electrosteel, under section 7 of Insolvency and Bankruptcy Code, 2016.  It was admitted by National Company Law Tribunal, Kolkata Bench, on 21st July, 2017.   It waded through all the obstacles and got a revival plan approved by the Adjudicating Authority in April, 2018.

Date of commencement of insolvency: 21st July, 2017

180 days ended on 16th January, 2018

CIRP extended upto 17th April, 2018

Issue of EoI for submission of Resolution Plans: 27th September, 2017

Last date for submission of Resolution Plans: 4th January, 2017

Approval of Resolution Plan by CoC: 29th March, 2018

Approval of Resolution Plan by NCLT: 17th April, 2018

Resolution Plans submitted to CoC

During CIRP, the Resolution Professional has submitted four Resolution Plans submitted by (a) Vedanta Limited (b) Tata Steel Limited (c) Renaissance Steel India Private Limited and (d) Edelweiss Alternative Asset Advisors Pte Ltd, to the Committee of Creditors (CoC) for their approval on one of them. The Resolution Plan provided by Vedanta Limited, being H1 bidder, was approved by CoC by 100% voting power. Approval of CoC and certification by Resolution Professional were not sufficient.  The approved Resolution Plan was put before the Adjudicating Authority for its approval.

Objections on Vedanta Resolution Plan

Meanwhile objections were raised by Renaissance Steel India Private Limited one of the four bidders and SRG Earth Resources Private Limited, an operational creditor

(a)  Objection by Renaissance -

Renaissance contended (1) Firstly that CoC in disobedience of the direction passed by AA did not consider the eligibility of Vedanta as per Code; (2) Secondly,  that Vedanta being not eligible Resolution Applicant under Section 29A, the Resolution plan submitted by Vendanta is in violation of Code and hence prayed for rejection of CoC approved Resolution Plan. It also objected the Resolution Plan by Tata Steel Limited on the ground of ineligibility of applicant under section 29A.

Views of Adjudicating Authority:

“Bearing in mind the legislative object of introduction of Section 29A to the Code and object of enactment of the Code and upon the above said reasons in our considered opinion, the resolution applicant Vedanta Limited cannot be said to be ineligible to submit the Resolution Plan.  Accordingly we answer the point in negative and hold that Vedanta Limited is eligible resolution applicant”.

“The reasons from deviating the direction of the Bench as highlighted above though not inspire our confidence we are not inclined to reject the resolution plan since it otherwise meets all the requirements mandated by the provisions of the Code and Regulations. This point is answered accordingly”

(b)  Objection by SRG Earth Resources Private Limited

SRG Earth Resources Private Limited an operational creditor challenged the plan contending that its claim in full is not considered by the Resolution Professional.

Views of Adjudicating Authority:

“…we do not find that uploading the claim of the applicant and admitting a porting of the claim and rejection of other portion of claim is not at all found in violation of any provisions of the Code or any of the provisions of the Regulation.

Moreover, it is significant to note here that the liquidation value of the corporate Debtor, here in the instant case, is Rs.2899 crores.  As per the records, the total admitted financial debt of the Corporate Debtor is Rs.13,395/- Therefore liquidation value due to operational creditor is NIL and therefore grounds alleged are not sustainable and application is dismissed.”

On hearing the contenders of the Resolution Plan and the Resolution Professional, Resolution Applicant, Committee of Creditors and the Corporate Debtor, NCLT finally approved the Resolution Plan submitted by Vedanta Limited and dismissed the petitions of the Renaissance and SRG Earth, on 17th April, 2018.

Terms of Resolution Plan

As an integral part of the Resolution Plan, Electrosteel shall-

a)    undertake conversion of unsustainable debt of financial creditors into equity

b)    capital reduction and consolidation of share capital

c)    post consolidation it will issue shares to Vedanta

d)    on completion of a), b) &c), Electrosteel would stand delisted

Resolution Plan also provides an exit price to be offered to the public shareholders of the Electrosteel.  Though the liquidation value to equity shareholders is nil, as per the Resolution plan, the shareholder of the Company will be paid INR 0.19 per equity share they hold as on date (“Pre-capital Reduction Price”). On completion of  capital reduction and consolidation, Vedanta will make the delisting offer to the then shareholders of the Company. The equivalent per share exit price post completion of a) to c) above, is INR 9.54 per equity share (“Post-capital Reduction Price”). Both, Pre-capital Reduction Price and Post-capital Reduction Price, are calculated in accordance with the Resolution Plan.

Considering the terms of plan and exit price provided, hair cut to Financial Creditor is approximately 59% and existing shareholders are in better position considering Nil liquidation value to the equity holders as per waterfall mechanism.

Appeals to NCLAT by dissatisfied Bidder and Operational creditor

Renaissance and SRG Earth not satisfied with NCLT approval, made an appeal with Appellate Tribunal.

On 30th May, 2018, NCLAT kept the appeals pending upto 10th July, 2018 and it was decided that during the pendency of the appeal, the parties may act in terms with the approved resolution plan and the Successful Resolution Applicant may deposit the upfront amount in favour of the Committee of Creditors, subject to the decision of the appeals. It is made clear that if the appeal preferred by the Appellant is allowed and tribunal sets aside the approved plan, in such case the Committee of Creditors will have to refund the amount. 

Consequent to NCLAT Order

a)    Steering Committee  vide its meeting dated June 2, 2018 passed a resolution to fix June 13, 2018, as the RECORD DATE for the purpose of determining the eligible shareholders whose shares shall stand reduced, pursuant to the approved Plan

b)    Vedanta Star Limited (wholly owned subsidiary of Vedanta Limited) (“VSL”) has on June 4, 2018 deposited INR 5,320,00,00,000 in an escrow account of the Company (“Escrow Account”)

c)    June 4, 2018 is determined as “Effective Date” of Resolution Plan

d)    Allotment of shares

On 6th June, 2018, as per the terms of approved Resolution Plan, Electrosteel has issued and allotted 7,399,132,055 equity shares of INR 10 each on a preferential / private placement basis to financial creditors of the Company, pursuant to conversion of loan equivalent to INR 73,991,320,550 in terms of Resolution Plan

Still to happen:

a)    Capital Reduction and consolidation of share capital

The existing equity shares of the Company i.e. 240,92,35,023 of INR 10 each and the New Equity Shares issued pursuant to conversion of debt i.e. 739,91,32,055 of INR 10 each shall stand reduced by reducing the face value of the equity shares, from INR 9808,36,70,780 divided into 980,83,67,078 equity shares of INR 10 each fully paid-up to INR 196,16,73,416 divided into 980,83,67,078 equity shares of INR 0.20 each fully paid-up. Immediately thereafter, 50 (fifty) equity shares of INR 0.20 each as reduced shall be consolidated into 1 (one) fully paid-up equity share of INR 10 each;

b)   Issue of equity shares to VSL

VSL shall be issued and allotted 176,55,06,078 fully paid up equity shares of INR 10 each of the fully diluted share capital of the Company.

Upon allotment of the aforesaid equity shares of the Company, VSL will hold 90% of the paid up share capital of the Company. The remaining 10% of the Company’s share capital will be held by the Company’s existing shareholders and the financial creditors who receive shares in exchange for the debt owed to them.

c)    Payment of upfront fee to financial creditors

On issue of shares to VSL, the upfront payment of INR 5320,00,00,000 will be remitted to the creditors from the Escrow Account.

d)   Delisting

As an integral part of the Resolution Plan, the Company would stand delisted. The financial creditors holding shares of the Company and existing shareholders holding equity shares shall be offered an exit at a price which shall be calculated as per the Resolution Plan.

Conclusion:

Though the ultimate decision of approval of Resolution Plan is still pending at NCLAT, we can still say CIRP battle won by Electrosteel.  It’s a good option for the Financial Creditors and the existing shareholders.  However, the mode of settlement to operational creditors and payments of dues, if any, to the statutory authorities are still to be known, as Resolution Plan as a whole, is not accessible to public.

To enhance the disclosures, Resolution Plan may be made a public document. It may be part of order of approval by the Adjudicating Authority.