Finance ministry officials, according to sources, have been working closely over the last 10 days with the FIs to work out a face-saving formula for Essar group to ensure that it does not default on the FRN. The bailout package is being worked out so that Essar case do not become a problem for other corporates raising money abroad.

Both banking secretary CM Vasudev and finance secretary Vijay Kelkar denied to The Financial Express that the ministry was involved in the bailout plan, claiming that the government did not wish to interfere with the working of financial institutions. But the reality is otherwise.

The ball got rolling in North Block last week when Essar group chairman Shashi Ruia met Kelkar with a bailout package and with the news that he had struck a Rs 1,000 crore compositedeal for sale of Essar Power and Essar Oil's power plant to the US-based Marathon. Ruia briefed Kelkar on group's divesture plans so that the exposure of banks and FIs are brought down to reasonable levels.

Deliberations in the ministry continued over the week and culminated in the finance secretary having a detailed meeting on the bailout plan with Vasudev on Wednesday.

Financial institutions in Mumbai, however, denied any plan to bailout Essar Steel. "We are not in favour of extending fresh loans to the company to redeem the $250 million FRN as it does not make commercial sense to us," said an ICICI source said. IDBI chairman GP Gupta was not available for comment.

An Essar release said "the company is currently awaiting the final decison from FIs... Under the terms of the prospectus (of the FRN offer document), the company has the right to access the bondholders through trustees at a very short notice. Only when any change is required in the terms of the bond issue does the company require abondholders' meeting with requisite quorum and voting rights."

In effect, the company has not ruled out the possibility of a rollover at the last moment in case the FIs decline to join the rescue act.

A period of time is to be specified within which Essar group will have to meet a number of conditionalities that are expected to be laid down in return for the bailout on the FRN. Among them are time bound divestment in Essar Minerals and Essar Oil. While the money from the Marathon deal is expected to come in by August - too late to save the FRN issue - it is not known yet when funds from the proposed sale of 51 per cent of Essar Minerals to Stemcor of the US is expected. The consensus in the finance ministry is that the FRN cannot be allowed to lapse as it would have repercussions for other corporates. The ministry is reported to have informed the FIs that the cost to the country in case a bailout is not in place will be much more in terms of higher interest spreads on future Indian paper.

As for thebailout plan, the argument of the ministry is that additional exposure of FIs will only be temporary, as the Essar group will be forced to pay up the outstandings in a limited period of time through watertight caveats.