An institutional source said there were many options before them, including the one of buying out the issue from the secondary market. "The basic question is whether the institutions want to take a fresh exposure in Essar or not. Whether it is a fresh loan or taking the FRN on our books -- it amounts to taking an exposure in Essar. The question is whether the institutions want that or not," the source said.

In case the institutions agree to bail out the company by buying out the issue from the market, they would require a finance ministry clearance to do so. Going by theexisting norms, institutions are allowed to buy back their own bonds but not that of other corporates. "Time is fast running out and it may not be possible for the institutions to buy out the Essar paper from the market," sources said.

A section of the financial institutions feels that basically the entire issue was a kind of unsecured debt of the company and it was up to the company to handle it.

"Even if the company defaults, it should not be interpreted as a sovereign default," sources said.

The institutions may not like to hike their exposure in Essar Steel by lending either foreign currency resources or rupee resources since both IDBI and ICICI have already decided to inject additional funds as a bail out package for Essar Steel.

Essar Steel had recently received an interim extension of three months to repay its $40 million syndicated loan on March 22.

The Luxumbourg-listed FRN of Essar Steel has been quoting at a heavily discounted price against a face value of $100 on fears of a default forquite some time. With the paper nearing maturity the slide has been accentuated.

The institutions are willing to consider Essar Steel's proposal provided the company is able to sell off its stake in Essar Power, and rope in partners in Essar Oil and Essar Minerals -- thereby reducing institutional exposure in the company -- before the deadline expires.