Essar-Rosneft Deal: Analyzing Debt Reduction and Ownership Transfer

Understanding the Essar-Rosneft Deal of USD 12.9 Million: Debt Reduction and Ownership Transfer

The Essar-Rosneft deal has sent ripples through the global business arena with its intricacies and monumental financial implications. This transaction marks the sale of a staggering 98% stake in Essar Oil to Rosneft and the consortium of Trafigura-United Capital Partners (UCP). Below, we delve into the key elements and consequences of this complex deal:

A Synopsis of the Deal based on media reports:

Taking a cue from various sources such as Business Standard (BS), Economic Times (ET), Mint, and The Telegraph, we piece together the critical facets of this transaction:

1. Stake Transfer to Rosneft and UCP Consortium: The core of the deal entails the transfer of a 98% stake in Essar Oil to a consortium comprising Rosneft and Trafigura-UCP.
2. Financial Breakdown: The deal’s overall worth stands at an astounding $12.9 billion. Out of this total, approximately $5 billion in debt held at the group level of Essar will find resolution through this transaction. A further $6 billion in debt attributed to Essar Oil will be absorbed by the Rosneft consortium.
3. Debt Reduction and Restructuring: One of the pivotal outcomes of this transaction is the significant reduction in Essar Group’s debt. The debt load, originally pegged at Rs 70,000 crore, is poised to shrink to Rs 40,000 crore, subsequently putting a halt to plans for asset sales to alleviate debt.
4. Breaking Down the Debt Reduction: This reduction in debt can be dissected as follows:
   • Essar Energy’s Debt Repayment: An extensive portion of the debt reduction, equating to around Rs 32,000 crore, is earmarked for settling the dues owed by Essar Energy to lenders at the holding company level.
   • Transfer of Operating Company Debt: Another substantial chunk of approximately Rs 34,400 crore encompasses the debt associated with the operating companies under the Essar Group. These liabilities will now transition to the new owners.
   • Repayment to Indian Banks: Notably, roughly Rs 4,000 crore of the debt linked to three operating companies has been repaid to Indian banks, contributing to the overall debt reduction.

1. Repercussions for Essar Group: This deal signifies a substantial milestone as it effectively wipes out at least half of the debt that weighed on the Essar Group’s balance sheet. While the group has maintained a veil of secrecy around its precise debt figures, expert estimations placed the total debt close to Rs 1.3 trillion at the time when the deal was inked in October.
2. Impact on ICICI Bank: Chanda Kochhar, the Managing Director and Chief Executive of ICICI Bank, pointed out that “This transaction reduces ICICI Bank’s exposure to the Essar group by about 50%.” This implies a significant risk mitigation for the private lender. The group has also made partial repayments to ICICI Bank and Axis Bank for their loans to the holding company.
3. Essar Steel’s Predicament: It’s worth noting that Essar Steel was one of the twelve major defaulters identified by the Reserve Bank of India for early insolvency proceedings. On August 2nd, the National Company Law Tribunal’s Ahmedabad bench admitted the insolvency petition against Essar Steel. The company had outstanding debts of approximately Rs 45,000 crore, with Rs 31,671 crore classified as non-performing as of March 31, 2016. Notably, the majority of this debt, nearly 93%, was owed to a consortium of 22 creditors led by the State Bank of India.

4. The BRICS Summit Connection: The deal was inked in October of the preceding year, with the presence of both Prime Minister Narendra Modi and Russian President Vladimir Putin at the BRICS Summit. It is imperative to highlight that the deal was not without its challenges. The initial progress faced delays due to reservations from Essar’s lenders and reported concerns from Indian intelligence agencies.

Some points to analyse:

1. Original Notification allowing FDIs was Notification No. FEMA 20 /2000-RB dated 3rd May 2000. The automatic route permission was under Annexure B where entry 6 Mining was allowed only up to 74 %. In February 2016, this notification was amended and an amended Notification No.FEMA.362/2016-RB dated February 15, 2016 was issued. This included 100 % under automatic route to companies in private sector engaged in exploration and Govt owned companies up to 49%  ( if HPCL or BPCL/OIL/ONGC were to be privatised, only up to 49 % is allowed):

2. This way Rosneft PJSC and the consortium of Trafigura and UCP have acquired 49.13% each in Essar Oil, with the rest distributed among retail shareholders. Essar’s promoters, the Ruias, will hold 2% in the Trafigura-UCP consortium

3. Out of the total debt of Essar of Rs 1.3 trillion, only Rs 70,400 crores will get partly paid and partly taken over by the new EOL.

1. Rs 32,000 crores at the Essar Group Holdings level to settle the loans of the Group holding company including clearing the almost $3 billion dues to Iran for past crude purchase,” and Part of debt that the group owes to Russian lender VTB

2. $5 billion worth of Essar Oil’s debt will be taken over by Rosneft the new owner as domestic lenders led by SBI, ICICI Bank, Axis Bank and IDBI Bank have elected to stay with the Russian company

4. No new FDI inflow into the country. Though the deal is touted as the biggest foreign direct investment in India and Russia’s biggest outbound investment, it will immediately not lead to fresh investment flow. The transaction will bring down the Essar group’s debt by Rs 70,000 crore, to Rs 40,000 crore, and end plans to sell assets to pare debt.

5. The deal was signed at the BRICS meet. Signed by PM Modi and Russian President Putin. – There is no immediate information on the involvement of BRICS Bank headed by KV Kamat, ex-Chairman of ICICI Bank whose exposure has come down by half.

• • This transaction reduces ICICI Bank’s exposure to the Essar group by about 50%,” said Chanda Kochhar, managing director and chief executive of the private lender

My conclusions:

1. FEMA regulations amended specifically for Essar Oil

2. NO FDI into the country but funds flowing into an industrial house to pay Foreign debt of $ 3 B to Iran and another $2 Bln to VDF fund in Russia

3. Indian lenders don’t get cash except Rs 4,000 crores but agreed to a novation of $ 5.9 Billion from the new owners of EOL

4. Ownership transferred from Indian hands to Russian hands

This is like passing book entries.