Although Essar officials declined to divulge details of the company's precise plans, it is believed that the equity issue is likely to be used to bridge the gap for the company's $ 250 million FRN redemption which the institutions have refused to bail out. However, a press statement from Essar said the proceeds from the issue will strengthen the Essar flagship's balance sheet. However, the institutions are yet to get back to the company with their response.

Essar Steel currently has a paid-up capital of Rs 330 crore on an authorised capital of Rs 500 crore. ``It is not clear whether the company will charge a premium on the issue. It is also not clear how many shareholders will react to the rightsissue after so much talk about bail-outs, fund crunch and loan reschedulements,'' said a merchant banker, adding, ``if other shareholders refuse to take up the shares, then who will subscribe the issue.'' Essar Steel share closed at Rs 13 on the Bombay Stock Exchange on Tuesday.

Meanwhile, Essar officials have already initiated the process of meeting FRN holders and it is believed that Essar Steel is likely to seek a three-month rollover from the bond-holders. The temporary breather will give the company time to execute several fund mop-up plans.

The Ruias have already signed an agreement to sell the group's entire stake in Essar Power, the 515 mw power company, to Marathon Power of US for Rs 720 crore. The deal is expected to be completed by end-August. By virtue of Essar Steel's 42 per cent shareholding in Essar Power, the sale will fetch the steel company around Rs 310 crore. The sale of 51 per cent stake in Essar Minerals to Stemcor of US is likely to fetch another Rs 180 crore.

Sources said FIshave questioned the maintainability of the Rs 720 crore ($ 170 million) memorandum of understanding signed between the Essar group and Marathon Power for the sale of the power plant. FIs are worried whether Essar will get ready cash before the July 13 deadline as just signing an MoU with Marathon cannot ensure fund flow. ``Who will bear the loss if the MoU gets into problems,'' FI sources said.

FIs are cautious about taking fresh exposure to the Essar group in their books. ICICI has already gone on record stating their inability to support another bail-out for the Essar group.

The sale of stake in Essar Power and Essar Minerals will take off around Rs 1,000 crore of debt from Essar Steel's books. The financial institutions currently have an exposure of Rs 2,550 crore in the group flagship.