MUMBAI - India’s fight against errant tycoons was never going to be easy. The Ruia brothers have made a $7.4 billion offer to remove their prize asset, Essar Steel, from bankruptcy proceedings. It’s a last-ditch attempt to stop rival ArcelorMittal taking ownership. Creditors will fare better with the former owners, but the move threatens to undermine efforts to usher in a new era of governance.

Just over a year ago, the Reserve Bank of India forced Essar Steel into bankruptcy alongside 11 other companies, known as the “dirty dozen”. It was an effort to clear up bad debt, and an unprecedented move that sent a clear message: India was fixing the rotten relationship between big business and state lenders.

In its determination to stop tycoons buying back assets on the cheap, New Delhi even barred the owners of defaulting firms from bidding for their stressed assets. That clause forced ArcelorMittal to settle $1 billion of outstanding dues at two small local companies it once backed, in order to ensure their bid for the prize steelmaker was deemed eligible.

Nonetheless, the Ruias have tried every trick to win back control of their company. One family member teamed up with Russia’s VTB Bank to bid in consortium, before that was effectively blocked by the courts. The latest effort aims to remove Essar Steel from the insolvency process altogether, leaning on an amendment passed in June. ArcelorMittal says the provision isn’t applicable retrospectively.

On purely financial grounds, the Ruia offer is hard to resist, as it would allow secured financial creditors to recover all their cash, while others receive some relief too. Analysts reckons ArcelorMittal’s mooted bid would leave the former group with a haircut of around 20 percent – still generous in comparison with similar local cases, reflecting the high quality of the underlying assets. Any hit, though, would be borne by mostly state lenders and, ultimately, taxpayers.

But something bigger is at stake here. India is trying hard to become more market-, creditor-, and shareholder-friendly, rather than favouring entrenched tycoons. Allowing Essar Steel to return to its proud original owners after a prolonged effort to resolve its debts would be a giant step backwards.

CONTEXT NEWS

- Essar Steel on Oct. 25 offered to pay 544 billion rupees ($7.4 billion) to creditors to settle their claims and remove the company bankruptcy proceedings.

- The offer consists of an upfront cash payment of 475 billion rupees to all creditors, including almost 456 billion rupees to senior secured financial creditors that would recover 100 percent.

- The steelmaker, owned by the Ruia brothers, has made the bid under a June amendment to the insolvency and bankruptcy code passed in 2016.

- ArcelorMittal has said that amendment does not apply to Essar. On Oct. 19, the European steelmaker said it had been chosen as the highest and preferred bidder for Essar through the insolvency process.

- India's insolvency code bars owners and associates of defaulting firms from bidding for stressed assets. Essar was one of a group of companies that were pushed into the insolvency court last year, after a central bank order aimed at clearing bad loans in the banks.

(Editing by Clara Ferreira Marques and Katrina Hamlin)

© Reuters News 2018