For overleveraged Indian companies and non-performing assets-laden banks, the Rs 86,100-crore ($12.9 billion) buyout of Essar Oil by a consortium led by the Russian petroleum giant Rosneft couldn’t have been more timely, more so if it is a precursor to more such deals. For the Essar Group, the proceeds from the all-cash sale will help substantially pare its estimated Rs 100,000 crore-plus debts. That will, in turn, help the banks with large exposure to the group, including its struggling concerns like Essar Steel. For Rosneft, too, the transaction would give it ownership of a modern 20 million tonnes oil refinery, a deep draft port capable of handling almost thrice that quantity of liquid cargo, a 1,010 MW power plant and a network of over 2,700 fuel retail outlets. Apart from acquiring these assets — which would have otherwise taken many more billions and years to build — the Russian company also gets ready access to India’s 185 million tonnes petroleum products market that grew by 11.6 per cent in 2015-16.
But the significance of the Rosneft-Essar deal goes beyond the immediate players involved. Under the so-called debt restructuring mechanism, lenders were taking over management control of ailing companies with a view to sell these to new promoters and recover their dues. But now, a strong message is being sent out to promoters that in the event of debt pile-ups, they would have to forgo control of not just their loss-making, but even profit-making concerns. The Essar management was seemingly forced to divest its profitable oil business in order to clear unpaid loans owed by the group’s other operations, especially steel. The Jaypee Group has had to face a similar situation of selling cash-generating cement power plants to settle debts on account of its heavy investments in real estate, construction and infrastructure during the 2005-2012 boom period. Promoters in the normal course would resist such fire sales, but in this case the pressure from banks probably left them with little choice. The lenders were themselves forced to act because of the Reserve Bank of India’s diktat to clean up their balance sheets by March 2017.
The good thing in all this is that we are finally seeing some movement in the resolution of the Indian banking system’s bad debts problem. With big deleveraging deals now happening, it should set the stage for banks to be in a position to lend when credit demand recovers. And when they lend the next time, it should be accompanied by greater accountability — on their and their borrowers’ part.