Essar, Rosneft deal to close by next week

Essar has to close the deal by March 31st to save transaction from withholding tax

The Ruias of Essar group are racing against time to close the $13-billion sale of its Gujarat-based refinery to Russian oil major, Rosneft by as early as next week. The group has already received $300-million from the Russian company its stake in Essar Oil and expects rest of the proceeds with the deal closure which would help it to retire debt.

The closure of the deal before March 31st is important for the group as it has to save the transaction from withholding tax, which is coming into effect from April 1. As per new regulations, sale of shares from Mauritius-based entities would be taxed in India from next financial year.

When contacted, an Essar official said the deal will be completed by March-end and all the tax aspects would be dealt with in accordance with the tax laws in India at the time of completion of the transaction.

Another reason to close the deal before March 31st is that the group has huge debt liabilities on the books of its steel unit. The group has indicated that it would be able to shave half of its Rs 88,000 crore debt with the Rosneft transaction. Besides, according to a banker, the group is also on a deadline to sell around 24-26% stake for Rs 1,700-crore to Farallon Capital, a private equity firm, in its steel unit. These funds would be used to repay the debt on the books of its steel unit. The State Bank of India would be converting its loans into equity to get 30 per cent stake in the steel company.

With the Indian government and the Reserve Bank of India taking a tough stand on defaulters, many Indian promoters are forced to sell assets to repay banks.

Bank officials, however, said the steel company is likely to miss the deadline for sale of its stake in the steel unit. This is putting additional pressure on the group to close Rosneft transaction before the month-end.

At present lenders are working on estimate for haircut, additional investments and change in corporate governance clauses for enhancing control over the ailing steel company.

The enterprise value of the transaction also covers the debt on the books of Essar Oil worth $4.5 billion with equity value will be on or a little higher than $5.8 billion. Apart from Essar Oil's debt, the deal would also include Essar Oil's debt of $4.5 billion, about $2 billion debt with the port and also upto $3 billion dues to Iran for crude oil purchases. Essar Group's main lenders include State Bank of India, ICICI Bank and Standard Chartered Bank. VTB Bank has given a bridge loan to the Ruias to pay off the debt of existing banks.