The government is in talks with European competition regulators to avoid breaching state aid rules that could hold up attempts to rescue the UK's steel industry.
The Department for Business, Innovation and Skills (BIS) announced last Thursday it would be willing to take a 25 per cent stake in Tata Steel's UK assets and offer "hundreds of millions of pounds worth of financial support on commercial terms", which would likely take the form of debt-refinancing.
By investing in the Tata sale on a commercial basis, the government would avoid upsetting European Commission (EC) regulations on state aid. A breach of such rules could force the competition regulator to launch an investigation and hold up the re-sale.
"We are in contact with the UK authorities at this stage," Ricardo Cardoso, spokesperson for the European Commission's competition office, told City A.M.
At this stage, the government's plan to invest a 25 per cent equity stake would not be the same as part-nationalisation.
However, if Tata is not able to find a buyer for its UK steelworks, the government could still provide support in the form of "rescue and restructuring aid" that would not need to be on commercial terms.
The EC would need to be notified of a proposed restructuring package setting out how to return the business to long-term viability, at which point the EC would be able to examine the plan - possibly requiring changes - before granting final approval.
Any non-commercial government support submitted to the EC would operate under a "one time, last time" principle, meaning that the no further restructuring aid could be provided to Tata if it was rejected.
"The steel crisis is an issue so big that the government can't break any rules," Chris Bryant, partner at BLP Law, has said.
"As a first option it seems they are likely to pursue buying a stake in Tata's assets on the market economy investor principle - on commercial terms. If this is not successful, the government could then - as a Plan B - put in an investment that was not on commercial terms, and the government would need to notify the European competition authorities. This could be in the form of part-nationalisation, in the form of loans or other funding through non-commercial terms."
Tata kicked off the formal process of selling its loss-making UK plants on 11 April, after its British business was thought to be losing nearly £1m per day.