ArcelorMittal bid queers the pitch for local bidders of Essar Steel

ArcelorMittal’s entry in the final bidding round for debt-laden Essar Steel’s assets has changed the scenario for auction sale of the country’s second-largest steel producer, with the world’s largest steel company now pitted against local steel producers in the last lap.

Arcelor Mittal’s entry in the final bidding round for Essar Steel follows the declassification of ArcelorMittal Netherlands BV as a promoter of bankrupt Uttam Galva Steels Ltd on Saturday.
Following the declassification, ArcelorMittal Netherlands BV, whose bid for Essar Steel was earlier rejected by the resolution professional under Section 29A of the Insolvency and Bankruptcy Code, has become eligible to re-bid for Essar Steel.
However, ArcelorMittal’s entry in the auction sale could further delay Essar Steel’s bankruptcy resolution as the resolution professionals have received differing advices from law firm Cyril Amarchand Mangaldas (CAM) and senior counsel Darius Khambata on the eligibility of the bids made by ArcelorMittal.
While CAM said ArcelorMittal must pay the dues of the lenders to Uttam Galva Steels and KSS Petron to become eligible for bidding, Khambata was of the opinion that it was not required as long as ArcelorMittal and L N Mittal sold stakes in Uttam Galva and KSS Petron, respectively, and was declassified as promoter.
Uttam Galva and KSS Petron owe banks Rs6,000 crore and have been referred to the National Company Law Tribunal (NCLT) for debt resolution.
ArcelorMittal held 29 per cent in Uttam Galva Steels and Mittal personally owned 33 per cent in KazStroyService of Kazakhstan, which, in turn, held 100 per cent in KSS Petron.
ArcelorMittal and Mittal sold shares in both the firms just before the deadline to submit bids for Essar Steel in February.
Reports quoting sources in the committee of creditors who attended the 21 March meeting said while lawyers were unanimous on Numetal’s ineligibility, the eligibility of ArcelorMittal India was tested on the company’s and the promoter’s investments in Uttam Galva and KSS Petron. 
On ArcelorMittal’s stake in Uttam Galva, both CAM and Khambata were of the view that “positive control” constituted control in terms of Section 29A(c) of the Insolvency and Bankruptcy Code (IBC).
Positive control is the shareholder’s ability to push through or initiate certain actions. However, according to Khambata, if ArcelorMittal completes its declassification as a promoter of Uttam Galva, Section 29A(c) of the IBC will not apply. On March 24, ArcelorMittal was declassified as Uttam Galva Steels’ promoter by the stock exchanges.
However, in CAM’s view, as ArcelorMittal Netherlands exercised positive control over Uttam Galva, merely selling the shareholding prior to submitting the resolution plan by ArcelorMittal India cannot undo the disqualification of the parent unless it pays its dues.
On KSS Petron, in CAM’s view, negative control over an entity also constituted control for the purposes of testing under Section 29A(c) of the IBC. Negative control is the shareholders’ right to hold back a company from carrying out certain decisions.
Hence, according to CAM, KSS Petron was also a reason on account of which ArcelorMittal India was disqualified while according to Khambata, negative control did not constitute ‘control’ and, accordingly, KSS Petron did not give grounds for disqualifying ArcelorMittal.
On account of differing views, CAM recommended to the resolution professional to take the opinion of Khambata and rely on his advice. The resolution professional stated that relying on Khambata’s view, ArcelorMittal could not be said to be in control of KSS Petron and hence, KSS Petron was not a reason for disqualifying it.
Both CAM and Khambata advised against accepting rival bid by Numetal because a trust owned by Rewant Ruia, son of Ravi Ruia, a promoter of Essar Steel, owned 25 per cent in Numetal, making him  a "connected person" under the IBC clause that prevents promoters of defaulting companies from bidding.
VTB group owns 40 per cent and Ruias 25 per cent of Numetal. VTB Bank of Russia is planning to buy out the Ruia trust shares before the end of March to become eligible to bid for Essar in the second round.
SSG Capital, Numetal, Arcelor-Mittal, Vedanta Resources, Tata Steel and Nippon are among the six entities that initially showed interest in acquiring the steel company owned by the Ruia family. The resolution professional, Satish Gupta, has set 2 April as the last date for giving binding bids for Essar Steel that owes over Rs49,000 crore to banks.
Banks led by State Bank of India, last week, voted in favour of inviting bids from six companies which had submitted expressions of interest (EoI) after the resolution professional declared that both the bids — from ArcelorMittal and Numetal — as ineligible.
Numetal moved the Ahmedabad bench of bankrupcy court stating that the structure of their bids be considered eligible for acquiring the distressed company under bankrupcy law.
“The company has sought for an early hearing so that clarity emerges before the date of submission of binding bids,” said a senior official. Last week, nearly 99 per cent of lenders by value of loan voted for a second round of bidding by inviting only those who gave expression of interest. This would make large companies like JSW Steel eligible to give binding bids.
Lenders say that SSG Capital may submit a bid in partnership with a strategic investor or a steel company. ET has reported that Tatas and Vedanta Resources may not be interested in bidding for Essar Steel. Prior to ArcelorMittal’s bid being rejected, Japan’s Nippon Steel has announced that it would partner with ArcelorMittal to acquire Essar Steel if their bid is selected. It is not yet clear if the two will partner for the second round of bidding.
Both the bids of ArcelorMittal and Numetal were rejected on technical grounds and a second round of bidding will enable them to rectify the structure of their proposal so that they are eligible, said the official quoted above.