Essar Roseneft deal – some questions

Chandrasekaran Ramadurai FCA

A quick look at the facts

• The sale of a 98 per cent stake in Essar Oil to Rosneft and the Trafigura-United Capital Partners (UCP) consortium
• Of the total deal amount of $12.9 billion, about $5 billion debt held at group level will get settled through this transaction and another $6 billion debt of Essar Oil will be taken by Rosneft consortium,
• 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.
• a break-up of the Rs 70,000 crore debt reduction at the group level
  • -Essar Energy’s repayment of Rs 32,000 crore to lenders at the holding company level and
  • Another Rs 34,400 crore of loan in the operating companies — Essar Oil, Vadinar Oil, and VPCL — which would now be transferred to the new owners.
  • Another Rs 4,000 core of the debt of three operating companies was also repaid to Indian banks.
• That would wipe off at least half the debt on Essar group’s balance sheet. While Essar has remained mum on overall debt, brokerages estimated its total debt at close to Rs 1.3 trillion at the time of signing the deal in October.
• “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.
• The group had also partly repaid ICICI Bank and Axis Bank’s loans to the holding company, the company said.
• The steel firm is one of 12 large defaulters identified by the Reserve Bank of India for early insolvency proceedings. On 2 August, the Ahmedabad bench of the National Company Law Tribunal had admitted the insolvency petition against Essar Steel. The firm owed lenders about Rs45, 000 crore, of which Rs 31,671 crore had become non-performing as of 31 March 2016. The company owes as much as 93% of this amount to a consortium of 22 creditors led by State Bank of India.
• The deal was signed in October last year in the presence of Prime Minister Narendra Modi and Russian President Vladimir Putin at the BRICS Summit but faced delays as Essar’s lenders had reservations and reported concerns of India’s 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.

6. 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.

References-

http://economictimes.indiatimes.com/industry/energy/oil-gas/ruias-shave-off-67-per-cent-of-rs-1-05-trillion-group-debt-with-eol-sale/articleshow/60161735.cms

http://www.business-standard.com/article/companies/new-essar-oil-owners-focus-on-assets-growth-117082101336_1.html

http://www.livemint.com/Companies/NpTKW7vHV2gUrWYLHZP06L/With-Rosneft-deal-Essar-reduces-debt-by-Rs70000-crore.html

https://www.telegraphindia.com/1170822/jsp/business/story_168457.jsp

(Author can be reached at [email protected])