Can’t have a one-size-fits-all policy for insolvency, says Prashant Ruia
The Economic Times
Jan 9th, 2019
Distinction is required in IBC as we cant have one-size-fits-all policy for insolvency, says Prashant Ruia.
Promoters should not be penalised for decisions gone wrong: Essar Group CEO
Essar Group CEO Prashant Ruia says there must be a distinction in the bankruptcy code to deal with instances where the promoter has done something wrong and when it is a genuine business decision that has failed. When there is no wrongdoing, “We should not talk about punishment”, especially at a time when India is promoting a startup culture where there are going to be failures, he tells ET, a day after holding company Essar Global Fund announced full repayment of the group’s debt. to the Insolvency and Bankruptcy Code (IBC), first barring promoters from submitting a resolution plan before repaying dues and then allowing for the withdrawal of an asset from the process, were done in a little unfair manner because the first was with retrospective effect and the second, prospective, he says. This, he says, has come in the way of the group’s over Rs 54,000-crore offer to take Essar Steel out of insolvency proceedings. Edited excerpts:
Where do you stand with your Rs 54,389-crore offer for Essar Steel? Why didn’t you make the offer earlier?
We did not make the offer earlier because we were not permitted to do so owing to the rule of 29(A) (it barred defaulting promoters from submitting a resolution plan before repaying dues). We approached the committee of creditors in March and then again in June last year about a restructuring or a proposal, but there was no response. Then in June and in July, the new rule of 12(A) (which allows for the withdrawal of an asset from the resolution process) came out and existing companies (promoters) were permitted to give a proposal which gave us an opportunity, too. Unfortunately, they are now saying that this rule was prospective and we believe that it should not be prospective especially because 29(A) was made retrospective and applicable to us. We feel this is a little unfair. We have given a comprehensive proposal and are now awaiting the the decision of the court.
What is the source of financing for the Essar Steel proposal?
Financing has two components — there will be debt of around Rs 30,000 crore taken on the asset and the rest will be equity that we propose to bring along with partners. We are not at liberty right now to disclose the name of the partner.
Many Indian promoters bring in very little equity into the business and this is a major cause behind them getting into a debt trap…
I don’t think it is because of lack of equity in our case. Essar Global went about a large expansion programme in the year 2010 involving Rs 1.25 lakh crore, which was funded 30-35% by equity and about 65% in debt which was the standard norm for most project financing in India. Our source of equity was largely the $5 billion that we got that we got from the Vodafone divestment. From 2012-13, we started facing regulatory and environmental hurdles like cancellation of gas for steel followed by coal supply being cut for the power business. We infused additional equity of Rs 30,000 crore over the next three years to support these businesses in that challenging phase, including Rs 10,000-12,000 crore for Essar Steel, over and above the committed Rs 1.25 lakh crore. A lot of it was in equity part of it was also in the form of unsecured loans to the company from group companies as well as the holding company. And this was unplanned. Whatever money was required to be invested at that time, we did. It was the restructuring that was not done along with RBI’s decision to put the company into IBC.
Has the system been unfair to you?
I won’t say the system has been unfair — I just feel the circumstances have been unfair. It (IBC) is a new law and a lot of clarity has to come about and as happens in any other law, it takes time to evolve and we just got caught in the middle of that period.
Will you do things differently this time if you get back the asset and as a group will you be more vocal about your challenges?
Certainly, a lot more emphasis will be laid on the risks associated with regulatory issues in terms of our business thesis going forward.
What are your group plans going forward?
We have to see what happens in Essar Steel but putting that aside, for the rest of the group we continue to remain focused on all the four sectors: metals and mining, energy infra and services. Now that we have a stronger and much lighter balance sheet, we will look at opportunities both within these four sectors as well as in some new sectors.
Apart from steel, what are the sectors you are going to invest in?
All the four sectors have potential. In oil and gas, we are in refining and exploration & production. Power is still a portfolio which we need to address fully. Majority of the debt currently there in the rest of the portfolio is in power and because of the problems the sector has faced everybody is in the final stages of addressing them and we are also one of them. Having said that, we still see tremendous potential in the power sector because a lot of the issues that were faced in the past have been addressed.
When it comes to IBC, your offer means full recovery for banks, but the government also wants to send out a message that defaulting promoters will not be spared…
You cannot have a one-size-fits-all policy or rule. Our belief is that there should be a distinction. If there has been a promoter who has done something wrong, then obviously the rules for that scenario have to be different.
But if it’s just a business decision that has failed, then we should not talk about punishment there. If you are doing a business, there is no guarantee that you are going to have success all the time. India is trying to promote a huge startup culture and there are going to be failures. Also, if a business requires restructuring, it’s not necessarily a bad thing. It happened with the steel industry in 1999 and private steel companies were restructured and all of them recovered once the market corrected and they repaid all the facilities to the banks. In the global world also, there is no restriction on existing promoters from participating in the process or in the restructuring.
Over the past 7-8 years, apart from the IBC process, there was the CBI case and it has been a difficult period for the promoter family. What has that taught you?
The CBI case personally affected the family and we are happy that at the end of it our bona fide was confirmed by the court. As far as the business goes, it was a difficult period but I guess you have to be a little conservative in your thought process going forward. Some of the assumptions made earlier have turned out to be untrue and need to be calibrated. Other than that, it is not the first downturn we have had in the group and it is not going to be a smooth one-way sail, and not in an emerging market like India. Also, I believe that as the regulatory and judicial framework is getting clearer, businesses may not face the same kind of issues that people have faced in the past 5-7 years.
Why do you say that?
Because you are finding longterm solutions to regulatory problems. Things like cancellation of coal mining licences are not going to happen in the future because there will be a public auction, etc. Processes like land acquisition and environmental processes will be much less problematic because of the public processes put in place.
Do you see banks getting more comfortable now that you have deleveraged the group businesses?
I don’t think the deleveraging was because of the Indian banks. From a banking perspective, they pretty much have had a full recovery on all the assets that got de-levered, be it Essar Oil or Essar Global. The question is on us, how we look at leverage in a much more conservative way going forward.