The $13 billion sale by the Essar group of its oil business, including the port at Vadinar in Gujarat, to Russian energy major Rosneft is a landmark deal in more ways than one. Two years after the Reserve Bank of India initiated its crackdown on non-performing assets, the first dent has been made on a major indebted conglomerate with an estimated group exposure of over ₹1 lakh crore. There have been other fire sales of a smaller size by individual companies but the Essar Oil case is the first instance of a conglomerate selling off a healthy business to redeem a substantial part of the group debt. Never mind the spin — that the deal is part of their “philosophy to build a business, nurture it, create scale and then sell it” — the Ruias would like to put on the sale. The bottomline is that it is the outcome of pressure that has been exerted on the group by banks, under fire themselves from the RBI to clean up their books.

ICICI Bank, Axis Bank and SBI are said to be the ones with the largest exposure to the Essar group. Indeed, ICICI Bank’s CEO Chanda Kochhar is on record that the sale would mean that half of the bank’s exposure to the Essar group would now either be repaid or move out of the group to Rosneft. The two Mauritius-based promoter entities that hold 98 per cent of Essar Oil will be richer by about $5.9 billion (approx. ₹40,000 crore) after the deal and the expectation is that besides discharging debt this money will be used to infuse capital into the steel and power businesses, with estimated debts of ₹45,000 crore and ₹30,000 crore respectively. The hope is that the example set by Essar will be followed by other conglomerates drowned in debt.

The deal is notable also for the fact that for the first time since the oil companies were nationalised almost four decades ago, the industry will have a serious foreign player with operations integrated from refining to retailing. Though Shell has been retailing fuels, it does not have a refining presence in India. Rosneft will get a significant toe-hold in the fast-growing petroleum industry . The deal signifies the deepening commercial bonds between Russia and India. For the first time, a Russian entity will be investing significantly in India’s oil sector; the flow of investment has been in the other direction until now. The optics surrounding the fire sale — the announcement came during a bilateral summit in the presence of Prime Minister Narendra Modi and President Vladimir Putin — should not be lost sight of in terms of the message it sends out to the world, especially in the context of the other major deal between the two countries for a missile defence system. Finally, the deal is a milestone from a shareholder protection perspective too as Essar, as per its undertaking to SEBI, will have to compensate minority shareholders the difference between the valuation on delisting and now.

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