India’s top financial institution LIC wants its pound of flesh before it gives the green signal to the $13-billion Essar-Rosneft deal which would be the largest inflow of foreign direct investment into the country.
The state-owned life insurer has spelt out that it would issue a ‘no-objection certificate’ (NoC) only after Essar clears all dues. The covenants on LIC’s loan to Essar OilBSE -0.15 % require lender’s consent for change of management, said an LIC spokesman in response to ET’s email query.
LIC’s loan outstanding to Essar Oil is $125 million while its exposure to Essar Power is around Rs 1,500 crore. “We had received proposal from group companies for flexible restructuring and it was decided before considering (the) proposal… the company has to clear all the dues (sic),” said the LIC official.
The stand taken by LIC has put a question mark on whether the all-cash transaction will receive all the necessary approvals before March 31.
The deal was announced last October when Prime Minister Narendra Modi met President Vladimir Putin during a meeting of BRICS leaders in Goa.
According to an Essar spokesman, “Essar Oil and Essar Power have individually availed long-term facilities from LIC. These facilities cannot be linked.”
Bankers familiar with the situation told ET that LIC’s tough and somewhat unusual stance could be driven by fears that recovering loans from the power venture could be delayed once the deal with Rosneft goes through. “LIC may hold it as a bargaining chip, but it’s a small amount compared to the size of the deal. What if Essar Oil or Rosneft chooses to repay the loan to LIC,” said a senior official of the consortium bank.
Indeed, another banker said Essar is expected to indicate its willingness to prepay the Essar Oil loan. However, it’s “very unlikely” that the loan taken by the Essar’s power venture would be repaid immediately. “We are in discussions with LIC on the subject and have requested them accordingly. We are hopeful of obtaining their consent,” said the Essar official. He refused to share further details.
Sources said the Essar Group has put across the point that pressurising its power venture could worsen the situation in the energy sector which is battling macro headwinds due to unavailability of feedstock, low demand and volatile natural gas prices.
As per the deal, Essar Energy Holdings Ltd and Oil Bidco (Mauritius) Ltd — which control Essar Oil signed separate agreements for the 98% stake sale. Essar announced that Russian firm Rosneft would buy 49% stake in Essar Oil’s refinery, port and petrol pumps, while The Netherlands-based Trafigura Group Pte, one of the world’s biggest commodity trading companies, and Russian investment fund United Capital Partners would split another 49% equity equally. The balance 2% would be held by Ruias, the promoter family.
Indian banks with large exposure to the group are hoping that the deal, with an enterprise value of $12.9 billion, would eventually help Essar to prune its huge debt.
At the time of the announcement of the deal, Prashant Ruia, Essar Group director and a member of the promoter family, had said that the funds from the Rosneft deal would be utilised to bring about a significant reduction in group’s debt pegged at over Rs 80,000 crore.
“Rosneft is keen to enter India and Essar is the only available avenue. Paying off $125 million to LIC and another $44 million to some of the government-owned general insurance companies is not exactly a big deal. But LIC would be a loser if only the Essar Oil loan is paid back…the company is making money and may have a ratings upgrade once the deal closes. That would be losing a good asset,” said a senior banker familiar with the negotiations between LIC and Essar.
It would be interesting to track the outcome of the negotiation: whether LIC would finally soften its stance to approve the prestigious deal that has the blessings of the government or would choose to dig in its heels and seek repayment of loans disbursed to the power venture.