Essar Oil Sale Will Reduce Essar Group’s Debt By Rs 70,000 Crore
The Essar-Rosneft deal marks India’s largest inbound foreign direct investment till date.
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Russia's Rosneft PJSC-led consortium on Monday completed its $12.9-billion (around Rs 82,697 crore) acquisition of Essar Oil Ltd. – a transaction that the Ruia family termed as the biggest deleveraging deal to be closed in the country.
The buyers and the seller announced the completion of the deal in two separate announcements.
As part of the deal, Rosneft and a consortium of commodities trader Trafigura and private investment group United Capital Partners acquired 49.13 percent stake each in Essar Oil, Essar Group said in a statement. The Ruia family, which originally owned Essar Oil, would hold about 2 percent stake in the Trafigura-UCP consortium, effectively giving the Ruias an economic interest of around 1 percent.
The remaining 1.74 percent stake continues to be held by retail shareholders, who did not cash out during the delisting process completed in December 2015. The transaction includes sale of Essar Oil's refinery and retail assets worth $10.9 billion together with the Vadinar Port and related infrastructure assets worth $2 billion.
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Paring Debt
Sharing details of the debt to be repaid using the proceeds, a spokesperson for the Essar Group said that Essar Energy has used Rs 32,000 crore to repay debt at the holding company level. According to the corporate lending chief of a large private sector bank, this amount was paid in financial year 2015-16, when the deal was originally signed.
In addition, Rs 34,000 crore in debt has become non-Essar exposure as it has been transferred to the new owners of Essar Oil.
Indian banks had an exposure of Rs 40,000 crore to the group before the completion of the deal. State Bank of India, ICICI Bank Ltd. and Axis Bank are among the lenders that have maximum exposure to Essar.
The domestic lenders, which will include the Life Insurance Corp of India (LIC), will be paid Rs 4,000 crore to retire some portion of the debt, Ruia said. The remaining debt will continue to remain on Essar Oil’s balance sheet and the new owners will be liable to pay this amount.
The Essar Oil stake sale has halved ICICI Bank’s exposure to the Essar Group, said Chanda Kochhar, the private lender’s chief executive officer, in a separate press release.
The new owners will continue with the expansion of retail outlets to 6,000 from the current 3,500, said Tony Fountain, chairman and non-executive director of Essar Oil at a separate press conference. However, these outlets will continue to use the Essar brand name, for which the Essar Group will be paid a royalty.
Awaiting Clarification
According to Fountain, the new owners had paid a non-compete fee, as part of a long-term non-compete agreement with the Essar Group but did not clarify on the quantum of the fee. In his briefing, however, Ruia indicated that Essar Group could start a new refinery business if it chooses to do so.
Another issue that needs further clarification but was not adequately addressed by the two groups was the payment of withholding tax. Fountain stated that the new owners will not be paying this tax.
Paying Iran’s Dues
Essar Oil owes Iran about 2 billion euros for crude oil purchases, which will be paid by the company under its new owners. The entire amount is parked in an escrow account, and subject to necessary approvals, including a nod from the United Nations, the amount can be paid to Iran.
Announced by Prime Minister Narendra Modi in the presence of Russian President Vladimir Putin at the BRICS meeting in 2016, the deal went through some turbulence with India's central security agencies raising concerns regarding the proximity of Essar Oil's Vadinar port to Pakistan and nearby defence assets.