The company is planning to seek a temporary reprieve from redeeming the FRNs and go back to the bondholders with a concrete proposal over the next few weeks. A clutch of investment bankers had already made presentations before the company to clinch the mandate for redemption.

Union finance minister Yashwant Sinha, when asked at a press conference here on Thursday on the Essar FRN issue, had said ``even if Essar defaults on the FRN repayment it will not affect the credibility of the Indian paper because the notes were neither secured nor guaranteed''. Essar Steel will be the first ever default by any Indian corporate entity in the overseas market.

Essar Steel is likely to be forced to cough up a highercoupon on its FRN to roll it over. The five-year FRN was raised at 260 basis points over Libor. If the company fails to convince the FRN holders for a rollover, it may face problems in disposing of Essar Power which is set to be picked up by Marathon at $170 million. It may also jeopardise the plans for selling 51 per cent stake in Essar Minerals and 26 per cent in Essar Oil.

The chiefs of major institutions, who met here on Tuesday, decided against bailing out the FRN issue. ICICI which has already crossed the exposure limit to Essar has refused to take any more exposure in the Essar group. UTI has decided not to take any more corporate debt as a matter of policy. GIC and LIC are not interested in the issue at all.

The Ruias have already signed an agreement to sell the Essar group's entire stake in Essar Power, the 515 mw power company, to Marathon Power of US for Rs 720 crore. Essar Steel had earlier submitted a exposure-neutral proposal to the financial institutions, seeking a Rs 1075 crore loan toredeem its entire FRN outstanding following its failure to secure an export performance guarantee from the State Bank of India. It has also proposed a rights issue for raising around Rs 300 crore. The total FI exposure to the Essar group now works out to around Rs 8,000 crore.