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Essar Global Fund Limited is an Indian conglomerate group based in Mumbai, India. Essar’s
parent organization was engaged in various businessesincluding power, telecom, shipping, oil
and iron and steel. Essar was the second largest private sector steel manufacturer in India
(TISCO is the largest). The history of the essar Group dates back to 1956, when its founder,
Nand Kishore Ruia (NKR) began undertaking independentcontract works (mostly in the
construction and shipping business) under the name of Essar Construction and Carriers Ltd. In
1969, after NKR’s demise,his brothers Shashi Ruia and Ravi Ruia took the business
responsibilities. During the 1970s and 1980s, the company diversified its operations by entering
into the power, steel and oil businesses. Over the years, the essar group continued to grow in
related fields i.e. offshore construction, pipeline laying, contract drilling and marine transport.
The liberalization of the Indian economy in the early-1990s opened up many opportunities for
the Essar group. The ruias tried to diversify further and emerged as a conglomerate of
companies.

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Essar steel
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FRN
The plant was to be commissioned in October 1992. However, in October 1992, the company
announced that it had changed the scope of the project. As a result, the cost of the project
increased from initial Rs 13.94 billion to Rs 33.5 billion. The company then planned to
commission the plant in June 1994. However, the project was further delayed, which resulted in
cost overruns of 33%, taking the cost to Rs 44 billion. As the need for funds was not fulfilled by
the domestic loans, the company decided to raise funds from other countries by issuing FRNs.

The company faced several other problems. According to analysts, the problems at Essar
started with a three-year delay in the functioning of the Hazira plant. The plant, which was
scheduled to begin production in 1994, began production only in July 1997 and incurred huge
cost overruns. In addition to this, commissioning of the Vizag plant was also delayed by 18
months due to the lack of funds. This also increased costs by Rs 2 billion.

As the above developments unfolded, rumors of Essar‟s impending repayment default

began spreading and the FRN began to be quoted at a discounted price (just over $ 70 for a face
value of $ 100). The FIs now advised Essar to seek a rollover of the FRNs by notifying the FRN-
holders. The notification was to be made by June 29, 1999. However, the company failed to
notify the FRN-holders by the due date and was thus, left with only two options: either to
redeem the FRNs on the due date or default in the repayment.

In January 2003, Essar came up with a new proposal to pay off the FRN-holders. As per this
proposal, Essar gave two options to its FRN-holders; one, redemption of the FRNs at a deep
discount of about 75-80% (with Rs 5 billion new loan from Indian banks), and two, repayment
over a period of 14 to 15 years. The proposal was due for finalization by the corporate debt
restructuring committee (CDR), which constituted
FIs and banks in February 2003. However, given Essar‟s poor track record in FRN
issue, there were few buyers for these new options.

In October 1999, Essar proposed three options to its FRN-holders: to extend the maturity of the
loan by 12 years (making the FRN-holders as secured creditors), to extend the maturity of the
loan by 5 years (FRN holders would remain as unsecured creditors) or to redeem the FRNs (at a
future date that was yet to be fixed). In response to this package, around 65% of the FRN-
holders opted for cash payment at 39% discount to the face value. The due date for this
payment was set for January 31, 2000. If payments were not made on the due date, the FRN-
holders could approach the courts for liquidation of the company. The remaining 35% of the
FRN-holders, which mainly constituted Indian banks (including the Bank of Baroda, SBI, UCO
Bank and the Bank of India, holding FRNs worth $ 40 million), agreed for a rollover, provided
that the notes were backed by some security and the interest rate of the notes was increased
by at least 2%.
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Essar Steel, a flagship of Ruias Essar Group, announced that entire debt of Rs 2,800 crore under
the corporate debt restructuring has been paid to the lenders eight years in advance.
"Essar Steel has come out of the purview of CDR. It has repaid the entire debt. At the time of
CDR package approved by the company's lenders in October 2002, the debt was Rs 2,800 crore.
It has since repaid CDR lenders within four years as against a tenure of 12 years," company
officials said.
In the process, the company has brought down the average interest cost from 11.6 per cent to
between 8 and 9 per cent annually resulting in huge savings. The company, however, declined
to give details.
It may be recalled that Essar Steel had fully repaid the UTI debt of Rs 927 crore. Of which about
Rs 700 crore were paid out of internal accruals and the balance through refinancing.
The company is believed to have raised funds from state owned banks including State Bank of
India to refinance some of the expensive loans.
Essar Steel has been working on reducing its finance cost for some time now. The average cost
of funds of Essar Steel under the CDR program was 11.6 per cent and it had planned to be out
of CDR net by March 2006.

(On the operational front, Essar steel went through a rigorous program to improve efficiency
and productivity. It included acquisition of Hy Grade Pellets Limited which operates four million
tonne plant at Vishakhapatnam and 1.2 million tonne cold rolling complex at Hazira.)
(Elaborating on the operations front, Essar officials said with the acquisitions of Hy Grade
Pellets plant and cold rolling complex, Essar Steel has become a fully integrated steel plant.
The notable point, they said, of these acquisitions was that it was financed out of equity and
not through debt. Besides, the company has also embarked on an expansion programme of
steelmaking capacity from 2.4 million tonne to 4.6 million tonne at a cost of about Rs 2,000
crore.)

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Essar oil
It started in 1995 when Essar Oil came with a public offering to set up a refinery at Vadinar in
Jamnagar district. The Gujarat state government was then offering a five-year sales tax break
for companies setting up plants there. Essar Oil claimed it would start the refinery by 1998, but
a cyclone that year destroyed the coast of Gujarat, in turn delaying the project.

In April 2002, Essar informed the state government that construction would begin in June 2002
and production by November 2004, and sought an extension of the tax holiday. Environmental
clearances and litigations delayed the process adding to financing woes of the project. The
refinery did not start until 2006.
Essar Oil (EOL), the country’s second-largest private sector refiner, has completed the process
for exiting the Corporate Debt Restructuring (CDR) loan facility set up in December 2004 to help
cover the construction of its Vadinar refinery in Gujarat.
(the debt taken for Essar's refinery was referred to the CDR cell in 2004 and it took nine years
for the company to come out of it, thanks to the benevolence of its lenders.) The CDR facility
had been replaced with a new debt facility of about Rs9,100 crore on commercial terms from a
group of lenders. A consortium of 14 banks, including ICICI Bank, Punjab National Bank, IFCI and
IDBI Bank, had lent money to the company.

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In March 2015, HDFC Bank sold Essar Steel India's loans to Edelweiss ARC. In December, other
banks started classifying the company's account as a non-performing asset (NPA) and
appointed SBI Capital and ICICI Securities to find buyers for Essar Steel. Edelweiss bought loans
of ICICI, Axis and Federal Bank later at a discount, owning a total 8 per cent of the bad loan
share.
Essar Steel officials claim that they had repaid about Rs20,000 crore to lenders in the past three
years as interest and principal, besides the equity infusion of Rs9,000 crore by the promoters. In
September 2016, the company submitted a restructuring plan, seeking conversion of debt to
equity and extending repayment period of loans.
the Ruias decided to sell off the refining business to pare off debt.

The expansion of the refinery's capacity to 20 MTPA from 10.5 MTPA took another five to six
years.
When refining was peaking in Essar, they decided to sell off the Vadinar refinery. According to
the definitive agreements, Rosneft, the world's largest publicly-traded oil company, will hold
49-per cent of Essar Oil, while Singapore-based commodities trader Trafigura Group Pte and
Russian private equity firm United Capital Partners, will hold 24.5 per cent each of Essar Oil - at
an enterprise value of Rs72,800 crore ($10.9 billion) for refinery, power plant and retail
business and Rs13,300 crore ($2 billion) for the port. The remaining 2 per cent will be held by
minority shareholders after delisting of Essar Oil. The 20-million-tonne Vadinar refinery which
accounts for 9 per cent of India's total refining capacity is supported by a 1,010 MW captive
power plant and 2,700 fuel retail outlets.

The proceeds from the deal would be used to repay debt at Essar Global Fund and infuse capital
into the steel and power businesses.
The proceeds from the sale of refinery assets will be largely used to bring down group debt.
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The following key developments have taken place in the Essar Steel’s IBC resolution process:
June 2017: The Reserve Bank of India declared the Essar Steel as a Non-Performing Asset (wilful
defaulter) and notified to initiate the IBC resolution process. (In June, the Reserve Bank of India
(RBI) released a list of 12 companies constituting 25% of India’s total NPAs (Non-
Performing Assets) under the name ‘Dirty Dozen’ after being vested with new legislative
powers to initiate proceedings under the newly adopted Insolvency and Bankruptcy Code.)
August 2017: NCLT Ahmedabad began hearing the Essar Steel’s case while a CoC and resolution
professionals initiated the IBC resolution process.
April 2018: NCLT ordered the CoC to reconsider resolution plans submitted by NuMetal
Mauritius and ArcelorMittal India. While one of the owners of NuMetal is Rewant Ruia, a
member of Essar Steel promotor family, ArcelorMittal was founded by LN Mittal.
October 4, 2018: The Supreme Court granted one more opportunity to ArcelorMittal and
NuMetal to bid for Essar Steel if they clear their Non-Performing Asset (NPA) dues in two
weeks.

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October 25, 2018: Essar Steel’s CoC voted in favour of handing over the debt-laden company to
ArcelorMittal after it cleared pending dues of about Rs. 7000 crore of its associated companies -
Uttam Galva and KSS Petron. ArcelorMittal’s resolution plan envisaged an upfront payment of
Rs. 42,000 crores to lenders and an additional Rs. 8,000 crores towards capital expenditure.
On the same day, Essar Group’s ESAHL proposed to the CoC that it will repay Essar Steel’s total
debt of Rs. 54,389 crore and reclaim its subsidiary.

January 16, 2019: SBI, a major lender of Essar Steel, announced to auction its entire loan
exposure worth Rs. 15,431.44 crore.( i.e. SBI plans to sell Essar Steel’s NPA to recover dues).
However, considering Essar Group’s efforts to delay the IBC process or the bidding of NuMetal,
it is evident that the group has been desperate to retain its steel manufacturer company
despite its inability to repay massive debts.

January 29, 2019:It's advantage ArcelorMittal, as NCLT rejects Essar Steel promoters' plea to
repay debt.

And the case is going on. Verdict is yet to come.

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When the going was good and the government had just relaxed debt-equity norms, banks were
tripping over each other to lend. Ruias borrowed heavily and locked horns with every possible
business house - Tatas and Jindals in steel and power, Airtel in telecom and Adani in ports. They
also challenged the might of the Ambanis with the Vadinar refinery being in teasing distance
from Reliance's Jamnagar refinery. The inordinate delay in setting it up got tongues wagging
about rivalry and corporate influences.
It has already exited the telecom and BPO businesses. The 20 mtpa refinery sale is in process. If
lenders have their way, Ruia risks losing control of the steel business. The power business
remains stressed while the shipping and ports businesses are yet to gain size.

(Even though the next NCLT judgment in this case can be challenged in the Supreme Court and
the SBI gets out of the IBC process, the IBC law is failing its purpose.
As per the official data, of the more than 900 cases in which the IBC process has begun since
March 2017, only 18 cases have been closed under the resolution plans and 76 cases related to
smaller businesses have been liquidated, so far.)

The case discusses Essar Steel's financial crises and its re-engineering. It also discusses how
financial problems affected the liquidity of Essar Steel and the several financial strategies
formulated by Essar Steel to tide over the problems. It also helps to evaluate the re-engineering
strategy undertaken by Essar Steel to repay the debt and expansion of related projects.
It may remind him of a statement in William Shakespeare's Hamlet: "Neither a borrower nor a
lender be; for loan oft loses both itself and friend".
Caught in a debt trap, Ruia has been forced by lenders to sell and restructure to pay off hefty
loans it is struggling to service.