The FIs have asked Essar group to set up an escrow account worth more than Rs 1,000 crore, which includes Essar Steel's share of proceeds from Marathon the deal, to facilitate more exposure of the FIs for bailing out the beleaguered company. But the company has not been able to set up the escrow account so far.

``Even if they set up aescrow account in the next seven days, the FIs can think of a bailout,'' the source said, adding the FIs may fund the entire redemption amount to Essar Steel directly.

In a related development, an Essar team -- which met FRN investors in the US -was in for a shock as the investors refused to sell their FRNs at a discount in the secondary market. The plan was for the FIs to buy the FRNs at a discount from the original investors, which could be rolled over subsequently. Later, Essar was to redeem the FRNs at its face value of $100 and the FIs would have booked profits on the difference.

But the inability of Essar to set up an escrow account and the unwillingness of the original investors to offload the FRNs at a discount just before the redemption date has come as a major setback to the bailout plan. ``We've asked the company to get ready for a default,'' say the sources.

``We hope that a default by Essar Steel will not be interpreted as a sovereign default,'' they add. The sale of the power plant was oneof the conditions laid down by the FIs, led by IDBI, to bail out Essar Steel by taking on their books the firm's FRN liabilities as it did not have the finances to do so.

The sources say the Marathon deal was to be the first step towards getting Essar's FRN clearance so that the risk of default is reduced by one-third. The FIs have now sought a positive committment about the conclusion of the sale of Essar Oil's equity to BPCL and mineral subsidiaries.

Marathon Power of US has bought the entire Essar group stake in Essar Power, the closely-held 515mw power plant that was hived off by flagship Essar Steel, with a bid of $170 million (Rs 720 crore).

The deal, at the expected Rs 14 a share, will be consummated by August 31. Marathon will also take up Essar Power's liabilities of Rs 1,550 crore. Essar Power has an equity base of Rs 523 crore. The sale will fetch Essar Steel Rs 310 crore for its 42 per cent stake in the power company and another Rs 200 crore of subordinate debt that will be passed on withthe deal. This will help Essar Steel, under pressure to redeem its S250-million FRNs by July 13.

According to company officials, the balance amount from the sale that will be apportioned to Essar Oil (9 per cent) and the Mauritius-based private company of Ruias (Prime Hazira 49 per cent) will go towards repaying their respective outstanding liabilities.