The Miglani family-controlled Uttam Galva Steels is in the process of entering into a raw material supply agreement with JSW Steel, in a bid to mitigate risk to the company in the wake of insolvency proceedings.

"The agreement is a long-term agreement and is aimed at ensuring that raw material payments are not stopped," sources close to the development said. Uttam Galva Steels has raw material requirements of around Rs 350 crore a month, supplied by five companies, which would now be replaced by one. The arrangement, however, is subject to approval of the company's board and lenders.

Uttam Galva's contingency plan is in the event that a professional is appointed to manage the company. A supplier, DF Deutsche Forfait, had filed insolvency proceedings against Uttam Galva in the National Company Law Tribunal, a couple of months back, under the Insolvency and Bankruptcy Code, 2016. Uttam Galva has, however, obtained a stay on proceedings till the next date from the National Company Law Appellate Tribunal.

Under the bankruptcy code, an interim resolution professional is appointed to manage the company and come up with a workable solution to repay loans within 180 days, which can be extended to another 90 days. The board remains suspended. If a solution doesn't emerge in 270 days, then it goes into liquidation.

"The initial 45 days is critical for the plant. If there is a plant shutdown then it becomes very difficult to restore the plant. There will be an escrow account for the raw material arrangement with JSW so that the plant keeps running, JSW's money is not at risk and the banks will not be disturbed," sources indicated. The independent resolution professional will take charge of day-to-day charge which would also include raw material purchases among others.

Like most steel companies Uttam Galva ran into debt. In FY17, the company's debt stood at Rs 5,637.9 crore. Weak demand and a surge in cheap imports, especially from China, had taken a toll on most steel accounts. Lenders wanted Uttam Galva to bring in a strategic partner and discussions were on with private equity players when the insolvency proceedings were initiated.

In 2009, the ArcelorMittal group had picked up a 33% stake in the company.

Uttam Galva, one of the largest manufacturers of cold rolled steel and galvanised steel, will be sourcing hot rolled coils from JSW. Currently, the Uttam Galva plant is running at 50,000 tonnes per month, on an average. The target is to take it to 80,000 tonnes per month in the next couple of months and the long-term goal is to take it to 1,00,000 tonnes per month.