Essar Steel is the flagship company of the Essar Group.

Over last few decades the groups has

diversified into several businesses spanning from steel to power to petrochemicals to
telecommunications. However, since 1990s, the profits of the groups started declining rapidly.
The company went into red as its profitability was eroded by the increasing interest burden.
Many of the reasons for this situation were internal to the company. However, there was a
cascading effect because of simultaneous, negative external developments. The company became
the first Indian Corporation to default on its international debt repayment.
Debt Restructuring Initiatives of Essar
Original Debt Restructuring Plan:
To fulfill the pre-conditions set by the lenders, Essar Steel had to lower its debt of Rs 4,800 crore
which, on a net worth of Rs 2,414 crore, amounted to a gearing ratio of 2:1. Essar was required
to spin off its 3.30 million tonnes per annum (MTPA) pelletisation unit as a separate company,
Essar Minerals, and earn Rs 997 crore from the transfer of the assets.
As per the deal, Essar Steel was to be allotted 33.40 crore shares (face value: Rs 10), amounting
to 64 per cent of Essar Minerals' equity capital of Rs 518 crore. Significantly, the other
shareholder in Essar Minerals will be the State-owned National Minerals Development Corp. It
would hold a 36 per cent stake in the company. Thus, another Rs 184 crore was to come with
government sanction.
Of the remaining Rs 663 crore, Essar Minerals was to take on Rs 143 crore of Essar Steel's debt
incurred for this project onto its books. It was also to pay Rs 520 crore in cash to Essar Steel,
which was to use a part of the money to pay back Rs 300 crore to the financial institutions. To
complete the loop, Essar Minerals had to borrow the Rs 520 crore from the same financial
institutions.
However, this deal had following conditions: Ruias must pump in an additional Rs 765 crore to
pay back the financial institutions, as a result of which Essar Steel's debt would fall to Rs 3,687
crore. Of the promoters' contribution, Rs 450 crore must come from the sale of a 41 per cent
equity stake in Essar Power, for which the Ruias were looking for a buyer. But then, the financial
institutions will send the money right back to the Essar Group in the form of Rs 378 crore to
Essar Steel for capital expenditure, and Rs 372 crore to partly bankroll Essar Minerals' Rs 1,553crore 8-mtpa beneficiation unit and 8-mtpa slurry pipeline.
The other riders which were attached to the package of loans sanctioned to the Essar Group--as
revealed by a confidential IDBI Appraisal Memorandum (dated February 5, 1999) of Essar
Minerals--include:

For Essar Steel, Essar Minerals, and Essar Oil, the fresh disbursements will be put in
trusts and retention-accounts, and monitored by auditors.

Stringent cost- and time-schedules will be imposed. For instance, the Essar refinery
project will have to be completed by the Ruias at the current estimated cost of Rs 6,725
crore by April 1, 2000.

The Ruias will be asked to pump in fresh equity--Rs 765 crore in Essar Steel and Rs
1,200 crore in Essar Oil--according to a rigid time-table.

Funds diverted to other projects will be retrieved by forcing the Ruias to sell their stakes
in those companies.

The Ruias will have to pay for cost overruns in the projects, and will not be permitted to
make any new investments until the existing loans are repaid.

The Ruias will not be allowed to invest the fresh disbursements in either advances or
inter-corporate deposits. Every capital expenditure of more than Rs 5 crore will require
the approval of the newly-formed Project Management Committee as well as the Audit
Sub-Committee.

Essar restructured substantially all of its rupee-denominated debts pursuant to the CDRM
Package and was able to restructure its then outstanding US$ 250 million FRNs through a
consent solicitation, exchange offer and cash tender offer.
The Company reached an agreement with UTI as of September 30, 2004, pursuant to which the
Original UTI Loan was restructured and a payment schedule was agreed. Also as a result of the
agreement, the Company was required to repay to UTI principal and interest an aggregate
amount of Rs. 9.3 billion prior to December 31, 2005, of which approximately Rs. 1.1 billion had
been repaid as at March 31, 2005.
The company lost a case in London court to Argo Mutual Fund and had paid US$29.5 million +
US$ 12.69 million. Also, it paid US$ (10.5 + interest) million in full satisfaction of amounts due
to the US$ Syndicated Loans.
Essars had proposed 3 options to the FRN-holders: extend the maturity of loan by 12 years or
extend maturity of loan by 5 years as unsecured credit or redeem FRN at a future date. 65% of
the lenders agreed to an immediate repayment at 39% discount. Remaining 35% agreed for a
roll-over provided it was against additional security and additional 2% interest rate. To make this
plan functional Essar approached IDBI for $104 million loan to repay the FRNs. However, IDBI
refused to provide the funds citing its over exposure to this sector as well as the failure of Essar
to meet past commitments.
However, Essar could not even fulfill its commitment of paying 10% of the first installment and
therefore some FRN holders filed a case against it.

Other possible options for Essar and the way forward:

Essar Steels revenues in FY13 were R22,000 crore and was projected to rise to R33,000 crore in
FY15 once the plant is fully operational. Essar Group conglomerate, is also trying to reduce its
interest cost by refinancing its rupee debt via funds raised in dollars. Last month, the company
raised $1 billion (approximately R6,800 crore) through external commercial borrowings and has
plans to raise $2 billion more through pre-export finance, which will be borrowed against
confirmed orders from foreign buyers, by the end of the year. This will help the company reduce
its average interest rate from an average level of 12.5% to 6.5%.
Essar paid Rs 6,000 crore to banks since March, 2011, the scheduled date of commercialization,
as per the original loan schedule. Since its raw material plant in Orissa will only be completed by
December, 2013, Essar has made a case for an additional loan, arguing it was making the
payments before the actual commercial operations date (CoD).
Essar has taken many initiatives for cutting costs and increasing margins. The company also
plans to sell high-strength and low-alloy products, and has already started supplying steel for
building the Indian Navys warships, which was earlier being imported.
It has exported 1.1 million tonnes of steel during 2012-13 and is also planning to increase its
exports to 1.4 million tonnes for 2013-14. The company also has recently completed the
expansion of its steel manufacturing capacity, which is the largest single-location steel plant
commissioned at a capital outlay of Rs 37,500 crore, from 4.6 mtpa to 10 mtpa at Hazira. Essar
Steel has completed its project at a highly competitive capital cost i.e. Rs.37,500 per tonne of
capacity (including pellet capacity) vis-a-vis Indian industry benchmark for new capacity of over
Rs 60,000 per tonne. The company has also got access to the national power grid which will save
us them a further Rs 300-400 crore.
The CDR and Financial restructuring would need to be supported by a strong leadership team.
Also, the project management has to be far better than what their track record suggests. The
company should consider an optimal capital structure. Essar should explore other options like
Rights Issue or Preferential Shares to partly fund its business plans. Essar has already hived off
some of its non-core and non-performing businesses. Essar should continue to focus on its core
activity of steel making. The company should focus on making value added products like low
alloys steel to improve its profitability.
Essar should consider converting some part of the debt into equity. This would reduce its holding
in the company but provide a long lasting solution from the interest burden. Also, the
involvement of the FIs in the management would bring more professionalism and transparency.
The FIs could also provide it a picture of the business environment.
However, I feel that Essar still has a long way to go to catch up with its peers and become
sustainable. The biggest fault lied in the financial planning that went behind it. The very first step

should have been to have a proper financial planning which must include the requirements of
funds ,time, when fund is require, allocation of funds and finally best strategy for repayment
of debt and other obligation in proper time.